By Ed McCarthy
A basic principle of economics is that people are rational and make decisions that maximize their utility. It’s common sense: Why
would they do otherwise? That assumption facilitates economic models, but reality
proves otherwise. People can and will do
irrational things with their finances.
Behavioral economics (also called behavioral finance) addresses these irrational
aspects. David Zuckerman, CFP, CIMA,
principal with Zuckerman Capital Management LLC in Los Angeles has been studying
behavioral economics for 10 years. Although
his college major was traditional economics, he found that the longer he worked as a
financial advisor, the more inconstancies he
spotted between clients’ behavior and what
traditional economics posited they would do.
“The further I got into my career, the more
I realized people are not rational and many
of the biases embedded in the human psyche
drive people to irrational decisions,” he says.
“I wanted to delve a bit deeper into that and
find out more about why there’s such a dis-
connect between reality, where people do not
make rational decisions, and the traditional
economic theory that holds people always
Behavioral finance isn’t just an interesting
academic subject — it has useful implica-
tions for understanding retirees’ behavior
and how their decision-making processes can
help or hurt their finances. Because retirees
can’t hit the financial reset button as easily
as younger people, it might not be possible
for older clients to recover from their self-
imposed mistakes. Here’s what you need to
know to keep retired clients on track.
People can and will do irrational things ...