Elk, Wall Street Bankers and the Average Investor

Economists may learn more from Charles Darwin than Adam Smith from now on, writes Cornell's Robert H. Frank.

Frank points to the elk. Mutations have resulted in male elk with antlers spreading five feet or more. These weapons of broad destruction help in fights with other males for mates – but they place the elk in deadly peril the first time predators chase him into the woods. (Could that help explain why the Eastern Elk, portrayed here by Audubon, is now extinct?)

Frank doesn't quite single out Wall Street bankers and their financial engineers as similarly maladapted, but one gets the picture: The ability of many to make lots of money individually did not assure their collective survival.

Even average folks may be ill-adapted to the investment world, as demonstrated by Mark Hulbert. We've evolved enough to see the theoretical advantages of timing the market, but not enough to realize we can't actually do it.

Hulbert cites a Morningstar study of the giant Growth Fund of America. In the bear-ridden 12 months through May, an investor holding the fund would have lost 31.4 percent. But "the actual return for the average investor in the fund was worse: down 32.7 percent.… The reason for this bigger loss was that the average investor had more dollars invested in the fund when it was declining than when it was rising."

The gap of 1.3 percentage points echoes the findings of an earlier, broader study. From 1991 through 2004, the tendency of mutual-fund investors to buy high and sell low reduced their average returns by 1.6 percentage points a year.

As for the presumably sophisticated investors who put money in hedge funds, Hulbert points to a study showing that market timing costs them a bundle: "The dollar-weighted return of the average hedge fund is 4 percentage points a year below its time-weighted return."