Optimism Claims More Victims
Tom Bayles’s story yesterday in the Sarasota Herald Tribune makes the case for SEC-trained investigation of any broker baby boomers or seniors consider trusting with their nest egg. It’s a cautionary tale about retirees who chose to bypass professional help in choosing whom to trust and now face retirement without their life savings. Read the story if you have a minute. It comes with a complete cast of characters and is well worth your time.
The events described in Bayles’s story are typical and will recur hundreds of times this year. An excerpt from a scholarly paper in the American Journal of Psychiatry, written by Kristen J. Prentice, Ph.D., James M. Gold, Ph.D., and William T. Carpenter Jr., M.D. suggests why:
Risk perception research in healthy adults shows that . . . they frequently exhibit a bias known as “unrealistic optimism” in which individuals feel they are less likely than other people to experience unpleasant or harmful events in their lives but more likely to experience pleasant or beneficial events. Whether this bias is rooted in motivational distortions, such as an unwillingness to admit vulnerability, or in cognitive perceptual errors, such as a failure to grasp or apply probabilistic principles, has been debated in the literature.
Optimistic Bias in the Perception of Personal Risk: Patterns in Schizophrenia, American Journal of Psychiatry, March 2005 [emphasis added].
It is this optimism bias that has doomed generation after generation of retirees to lose in a matter of days or weeks what it took them decades to save. No one is willing to feel the vulnerability associated with believing that they could be the victim of investment fraud. They therefore place their trust in brokers or investment promoters who are naturally gifted at salesmanship-i.e., at convincing people to trust them-and rigorously trained in overcoming any objection the investor might raise. They read stories like tthe one Bayles wrote, and their first thought is that the investors must have been extraordinarily gullible.
Our securities regulators cannot keep pace with the volume of bad conduct. Bad brokers move from firm to firm, reaping victims as they go. Ponzi schemes last five to ten years and claim thousands of victims and tens of millions of dollars apiece. Yet the regulators are working as hard as they can with the resources they have.
There are two possible solutions-drastically higher budgets for the SEC, or private investor protection. A combination of the two would be ideal. Moving forward without either will mean that hundreds of thousands of retirees will regret the day they ever thought “it could never happen” to them.