The 'folklore' of finance

WHEN most people think of folklore, they think of ancient stories passed down through the ages. The tales may be instructive, amusing or both, but few take them as entirely true. Still, they represent an oral tradition that once helped people make sense of the world.

After a nearly two-year study that aimed to answer the question, What does true investment success look like?, Suzanne Duncan, global head of research at State Street's Center for Applied Research, and her team found that the way individual and professional investors made investment decisions was so skewed that achieving both high returns and long-term objectives was nearly impossible.

They came up with a label for the beliefs that contributed to this failure: the folklore of finance. The study, released on Monday, found that people who were overconfident in their investing ability were unable to focus on their stated long-term goals when distracted by short-term noise in the markets. They had also come to distrust their advisers and lose interest in receiving professional investing help. It found that changing these behaviours in individual and professional investors was going to be very difficult.