Who Protects the Sheep from the Wolves of Wall Street? (My new book review)

 Throughout our lives, we make many financial decisions.  Should you buy shares in SpaceX or ChatGPT or Anthropic?  Should you buy a house now in downtown San Fran?  Should you borrow $ to pay to attend the University of Michigan? How much $ should you save for your retirement? How worried should you be about inflation over the next few decades?  How much credit card debt can you afford to have at any point in time?  How much insurance do you need?  How much of your monthly paycheck should you save?

A prudent person should anticipate that these are tough questions and should consult with trusted friends, perhaps AI and experienced elders before jumping in and making an irreversible choice.  When confronted with “known unknowns”, we should approach the opportunity/threat with caution and build in exit strategies (real options) so we can cut our losses if we end up realizing that we made a mistake. We are always learning and experimenting and the world keeps changing.  What life course helps us to try to achieve our medium term goals while retaining some flexibility?

I’ve written out this preamble because two prominent financial economists have published a Princeton Press book titled “Fixed” that argues that billions of people (in the developed and the developing world) are terrible at making financial decisions.  They argued that Wall Street and other sophisticated financial product suppliers are tricking lower income and middle income people into gambling with their scarce wealth and making decisions that they are likely to regret in the future.

Here is a link to the book and its pretty cover.

For those who enjoy a tough book review, here is a free copy of my review;

The authors embrace  a strong form of benevolent paternalism as they argue that Government Regulation is needed to protect “the sheep” (my words not their words) from the Wolves.  I argue that they ignore the power of basic ideas from the human capital and the financial literacy literature.  In every facet of life, we can invest in building up skill so that we can better achieve our own life goals when we participate in markets.  Financial markets are no different than the coffee market.  As more consumer/savers are more sophisticated consumers the financial market firms that offer good service will be rewarded and the Wolves will have to hide their fangs as they lose market share.

I claim that the entire field of household behavioral finance has a highly pessimistic view of people as having “fixed traits” that they cannot invest in to improve and update.   While researchers in this field wouldn’t dare to be politically incorrect and to say that similar to Huxley’s Brave New World that there are “Alphas” and “Betas”, this literature gets close to claiming that a large segment of society isn’t prepared to thrive in financial markets and that there are not early life skill investments that could address this challenge. 

I reject this pessimistic view.  All of us have the potential to grow and flourish, the key question is what early life investments help individuals to flourish as problem solvers?  Financial literacy is just application of such skills that include raw intelligence and self control.

My book review tackles this key debate. It is clear to me that labor economists and finance economists aren’t really speaking with each other.  The causes and consequences of skill formation offers a unified base for studying both labor markets and asset markets.