Nudge: Improving Decisions About Health, Wealth, and Happiness by Cass R. Sunstein & Richard H. Thaler

Author:Cass R. Sunstein & Richard H. Thaler [Sunstein, Cass R.]
Language: eng
Format: mobi
Publisher: Yale University Press
Published: 2008-04-08T03:00:00+00:00

Did Active Choosers Make Good Choices?

Were people made better off by choosing their own portfolios? Of course, we do not have any way of knowing the preferences of individual participants, and we also do not know what assets they may be holding outside the social security system, so it is not possible for us to say anything definitive about how good a job they did picking a portfolio. But we can nonetheless learn a lot by comparing the portfolios people actively constructed with the default fund on dimensions that sensible investors should value—such as fees, risk, and performance. To make a long story short, the active choosers didn’t do so great.

The default fund appears to have been chosen with some care (see Table 9.1). The asset allocation is 65 percent foreign (that is, non-Swedish) stocks, 17 percent Swedish stocks, 10 percent fixed-income securities (bonds), 4 percent hedge funds, and 4 percent private equity. Across all asset classes, 60 percent of the funds are managed passively, meaning that the portfolio managers are simply buying an index of stocks and not trying to beat the market. One good thing about index funds is that they are cheap. The fees they charge investors are much lower than those charged by funds that try to beat the market. These low fees for the index funds helped keep the costs in the default fund very low, 0.17 percent. (This means that for every $100 invested, the investor is charged 17 cents per year.) Overall, most experts would consider this fund to be very well designed.

Table 9.1

Comparison of the default fund and the mean actively chosen portfolio

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