Global Economy: The Typical Investor Myth

TEL AVIV, Israel—Amram Aharoni has a serious résumé, but he has the mien of a comedian. On Sunday at the Globes' Israel Business Conference, Aharoni, who teaches investment theory and finance at the Herzliya Interdisciplinary Center, ran through his many qualifications—degrees from Tel Aviv University, a doctorate in finance from New York University, many years of experience in the financial sector—before throwing up his hands. "I'm supposed to be a specialist in the capital markets, but I want to confess that many times I know nothing. How can I not foresee the future and any junior analyst can tell me what's going to happen?" In laying out the modern case against active asset management, Aharoni name-checked the efficient markets hypothesis, Nassim Nicholas Taleb's The Black Swan, and ran through a bunch of gems from the behavioralist playbook (like those surveys that show most people think they're above-average drivers). Aharoni assembled a series of analysts' quotes making foolish and wrong short-term market projections, and displayed a chart showing that out of a few dozen Israeli investment funds, only three beat their benchmark indices over eight years.

And then … he turned over the session to a panel of six Israeli economists and asset managers who offered opinions on what would happen next in the markets and where people should put their money.

The conference's schedule was full of boldface names, including Prime Minister Benjamin Netanyahu, technology entrepreneurs, and Israeli business leaders. But the name on everybody's lips in this session was someone I had never heard of: a Mrs. Cohen from Hadera—G'veret Cohen m'Hadera, in Hebrew. How would she react to the news? Where is she putting her money now? Given the knowledge that it's tough to beat the market, should she just invest in index funds? Is she buying bonds, or gold, or avoiding the dollar? And whatshould she be doing?

Now, Mrs. Cohen from Hadera is not like Mr. Buffett from Omaha—that is, an Israeli version of America's most-watched investor. In fact, there is no Mrs. Cohen from Hadera—a midsized and generally nondescript city in Israel's center. Hadera is an oldish city on the coast, between Tel Aviv and Haifa, that was first settled in the late 19th century. It's not one of the high-end suburbs of Tel Aviv, like Herzliya. But neither is it a depressed development town like Afula or Sderot. Not too urban, not too rural. Not sophisticated in any way, but not rustic. It's nondescript. As for Mrs. Cohen: Cohen is among the most popular last names in Israel. The name marks a person here as Jewish, obviously. But in this ethnically diverse country, in which last names can be instant markers of socioeconomic and cultural status, Cohen is generic. Somebody named Cohen could hail from Russia, Poland, Germany, Syria, Yemen, North Africa, or Brooklyn. He or she could be a fifth-generation Jerusalemite or a new immigrant.

It frequently seems as if tiny Israel has one of everything—one 18-hole golf course, one ski resort, one big freshwater lake. And it's got one prototypical investor/consumer: Mrs. Cohen from Hadera. She's a housewife, manager of her home's finances; she's skeptical, careful, conservative yet susceptible to advice and prone to fads, but ultimately influential to the direction and performance of the domestic capital markets.

Of course, Mrs. Cohen isn't an isolated phenomenon. Japan has Mrs. Watanabe, the prototypical housewife/investor who has the ability to move markets and from whom professionals take their cues. (In recent years, Mrs. Watanabe has been jumping online, trading stocks and currencies with abandon.) Ironically, the United States, which likely has the largest individual investor base in the world, doesn't seem to have a prototypical Mr. or Mrs. Investor. (We do have Warren Buffett, but he's hardly typical.)

This is one of the ironies of modern finance. The global markets are not run by and for housewives in middling cities. They're run by and for (overwhelmingly male) suit-wearing urbanites in financial centers around the globe. Central bankers, private equity and hedge fund managers, institutional investors of varying sizes, and CEOs determine the flow of capital and the day-to-day movement of markets. And much of the marketing of financial services and products is pitched at men—you're far more likely to see a TV ad for a mutual fund company while watching a golf tournament than while watching, say, Oprah. Yet a certain amount of high-level investment discussion revolves around the psychology, desires, and behavior of a typical housewife.

Yes, retail investors matter. And the willingness of individuals to spend can affect the fundamentals of the consumer-oriented companies that populate stock indices. But the experience of the last several years, and the debacles that have sapped confidence from Wall Street to Dubai, suggest that they are along for the ride, not driving the train.