SNAP JUDGMENT

By David E. Adler (FT Press)

The past year has been a living laboratory for behavioral economists. Widespread panic? Observable. Herd instincts? No doubt. Overwhelmed, paralyzed investors? Righty-o. It's a perfect time to read Snap Judgment and share it with clients.

Adler, a Financial Planning contributor, compares the efficacy of people's standard decision making process, which basically entails trusting their instincts, and the more intellectual process people ideally undergo when they make important money decisions. As we know from brutal experience, humans have made too many instinctive decisions and paid the price. What's more, when evaluating an array of choices, past performance does not predict future results—as Adler illustrates with examples from the NFL draft as well as mutual funds.

Adler examines annuities, hedge funds, equity analysis, market timing and more in light of what we now know about perception and the brain. Basically, our makeup conspires against our making good financial choices; as Adler writes, "money is a drug." But with some self-awareness, investors can and do learn to step back, ponder and make good choices, And if not, they can pay financial planners to do it for them.