The rational investor is dead

-- | 10/01/2019

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Glenn Freeman: But you do actually have some serious themes running through there. I mean, investor disclosure was something that – you had some great slides that you put up showing disclaimers. I quite liked your disclaimer too that was…

Julian Morrow: Thank you. It's the longest and most thorough. Disclosure is a really interesting challenge. On the one hand, we all have an inherent belief that it's important. What tends to happen often though is that there's disclosure without clarity and simplicity and that becomes confusing in itself. So, I think, disclosure needs to be coupled with clear and effective communication which it often doesn't and that's why we are used to disclaimers being small print. And essentially, if the words are in that small print, then the purpose, the impulse to convey something is there but the intent to actually communicate it, is questionable. At the same time, we got to be aware of the fact that (mere) disclosure is not going to be enough to protect investors and that's because the idea – and I quoted ASIC submission to Senate inquiry on financial services – you know, the idea of the rational investor is there. The science is in…

Freeman: Who actually doesn't exist.

Morrow: That's right. And assuming that it does, or kidding ourselves that we are purely rational is just a license for making a mistake.

Freeman: Yeah. That was the other serious part – the other theme that you had through there was about investors needing to be aware of their own mortality…

Morrow: Well, limitations and biases and just – we're all human and prone to making errors. There's a tendency sometimes with very sophisticated analytical technology and things like that to think that is somehow taken out of the system, but it's very rare that it actually is. With the rise of AI and things like that the computers will get better. I was reading a book recently which said that AI doesn't have to be perfect. It just has to be better than humans, and that's a pretty low bar.

But there's still an operator in most cases and the litanies of examples where the interplay of technology and humanity has sort of been a bit of a mask, to make people think that there aren't just normal human flows at play, while there's thousands of pages of them, including in the interim report of the Royal Commission.

This report appeared on 2021 Morningstar Australasia Pty Limited

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