Planning Advice from Nobel Laureate Kenneth Arrow

The boring truth of financial analysis and portfolio management is that the majority of our days are spent visiting with clients, reading, reading, reading, and when required, making decisions. Years ago it would have included quite a bit of time on a calculator, but thanks to the low cost of computers and software, most of the number crunching can now be completed with the push of button.

Using a computer to save time is a joy, but I am afraid that the reliance on the power of technology will cause a great deal of harm to individual investors. My reasoning is very simple. We have never been, nor will we ever be, able to tell the future. Yet we forget that fact when a salesman, advisor, or counselor suggests otherwise, mesmerizing us with massive amounts of data, mathematical probabilities, and multiple graphs so easily created with the help of today’s technology. When overloaded with information, especially information provided to us by someone we believe is trustworthy, we will take shortcuts. We will accept the validity of the data and believe the predictive message that the trusted party is presenting.

This reality of human behavior is the reason I wanted to share with you some advice from Nobel Laureate Kenneth Arrow. Dr. Arrow jointly won the Nobel Memorial Prize in Economic Sciences with John Hicks in 1972. He passed away last year. I wish I could say that I met Dr. Arrow, or even corresponded with him during his life and let him know how he had greatly influenced our management of portfolios over the years, but unfortunately I did not.

Years ago, during a rather difficult time for me as a value manager, the great technology bubble of the late nineties occurred. It seemed as though peoples’ decision processing hadn’t changed for hundreds of years… they still reacted just like the Europeans did to the price of tulip bulbs centuries earlier. Because I would not play the game myself, and would not advise our clients to play the game, our business suffered. Some of our clients decided we were out of touch with reality and took their funds elsewhere.