7 ways we're getting taken

7 ways we're getting taken

In spite of the hype about financial literacy, the programs all have a fatal flaw: Wall Street doesn't want smart investors. Wall Street makes its billions off investors who are clueless.

Here's how a leading neuroeconomist, Richard Thaler of the University of Chicago, put it: Wall Street "needs investors who are irrational, woefully uninformed, endowed with strange preferences or, for some other reason, willing to hold overpriced assets."

Bottom line: The last thing Wall Street wants is 95 million investors wise to Wall Street's con games. Wall Street revenues would drop substantially if financial literacy really did work.

Like a chess master, Wall Street will always be several steps ahead of the Main Street investor. Here are tools that stack the deck:

•              Commission brokerage plans that work to Wall Street's advantage.

•              Cleverly crafted marketing and sales systems that mislead naive investors.

•              Favorable Securities and Exchange Commission regulations won by Wall Street lobbyists.

•              Deceptive portfolio alternatives, practices and advice that skim fees.

•              Systemic data manipulation with stocks, bonds, mutual funds and derivatives.

•              Psychological profiles of investors that are used against them.

•              High-frequency trading algorithms that run circles around individual investors by making thousands of trades in hundreds of milliseconds.

Want more reasons? Read Kahneman's new book, "Thinking, Fast and Slow." Kahneman won the Nobel Prize in economics a decade ago by disproving Wall Street's two-century-old assumption that investors are rational decision-makers. We aren't.

What is behavioral investing?

And unfortunately nothing's changed since his historic Nobel Prize. Wall Street's gotten far more devious in running the same old con game at its old, broken-down casino. And America's 95 million irrational investors are still walking right into the casino's traps.

Kahneman says Wall Street pros "are able to extract a considerable amount of wealth from amateurs." And yet, "few stock pickers, if any, have the skill needed to beat the market consistently, year after year."

In a recent piece that appeared in The New York Times Magazine, Kahneman wrote that even though mutual funds are run by highly experienced stock traders, the evidence from "more than 50 years of research" proves the stock-picking skills of fund managers is "more like rolling dice than like playing poker. At least two out of every three mutual funds underperform the overall market in any given year."

Worse, "this is true for nearly all stock pickers, whether they know it or not, and most do not." Traders believe they are "making sensible, educated guesses," but their "educated guesses are not more accurate than blind guesses."

Kahneman examined this "illusion of skill" firsthand when he worked with a group of investment advisers in a firm that provided financial advice and other services to wealthy clients. He accumulated eight years of data on "25 anonymous wealth advisers," data also used to set year-end bonuses.

Kahneman did a series of 28 year-to-year correlations for the advisers. And what did he find? "There was 'zero' correlation in adviser performance. . . . The results resembled what you would expect from a dice-rolling contest, not a game of skill."

Not only did the managers of this wealth-management firm seem "unaware of the game that its stock pickers were playing . . . the advisers themselves felt they were competent professionals performing a task that was difficult but not impossible."

Later, Kahneman told the firm's directors that when it came to building portfolios, it was rewarding luck as if it were skill. This should have been shocking news to them, Kahneman noted, but it was not. He realized "that both our findings and their implications were quickly swept under the rug and that life in the firm went on just as before."

In fact, over the years Kahneman's research has led him to conclude that all across Wall Street the "illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry."

My reading of Kahneman's work over the past decade is that the brains of Main Street investors are and always will be irrational, prone to denying reality.

Even with occasional brief flashes of insight and reason, you can be certain Wall Street's army of financial mercenaries are working 24/7 to manipulate you in these seven secret ways. They really don't want savvy investors.

So don't be fooled by those well-intentioned financial-literacy programs. Wall Street owns the casino. The house always wins. You play, you lose.