This column was inspired by a recent episode of “This American Life” on the topic of bad choices made by good people who should (and probably do) know better.
Malcolm Gladwell tells the story of how Wilt Chamberlain, one of the 20th century’s all-time best professional basketball players, found that he could double the success rate of his free-throw shots by shooting underhanded.
In the free-throw-shooting episode, released this week, Gladwell explores Wilt Chamberlain’s flirtation with the underhanded style. The method, also called “granny style” shooting, was favored by Rick Barry, a career 89.3% free-throw shooter. It helped Chamberlain shoot a career-best 61% from the line in 1961–62, the same season he sank 28 of 32 free throws in his record-setting 100-point game.
Much to Gladwell’s dismay, however, Chamberlain reverted to traditional foul shooting, his percentages predictably plunged again, and he later admitted that he felt “like a sissy” when he shot underhanded.
As a result, his teams undoubtedly lost games they would have otherwise won. Wilt should have known better, and his choice was costly.
He and his teammates probably made less money than they would have otherwise. He set an example to other players that might be paraphrased as “Looking cool is sometimes more important than scoring points.”
Gladwell’s underlying point is clear: Why would a Hall of Famer reject a proven, simple solution to his most obvious flaw when another Hall of Famer used the exact solution to historically great effect? And why have modern players largely followed Chamberlain’s footsteps rather than Barry’s?
The Chamberlain/Barry dichotomy leads naturally into an exploration of high-threshold vs. low-threshold personalities. In the simplest sense, a high-threshold personality (like Chamberlain) is more likely to allow a crowd to dictate behavior, while a low-threshold personality (like Barry) pursues the preferred course with less regard to social cost.
By the end of the episode, Gladwell finds himself “admiring” Barry’s willingness to shun hecklers and groupthink as he perfected the method that ultimately maximized his ability and value.
What bad choices cost us
Wilt knew the facts and chose to ignore them. Why do people knowingly make dumb choices? I’m no psychologist, but there are plenty of reasons. Chief among them may be that we let emotions (for example, an aversion to being called a sissy) overrule the facts.
Unfortunately, millions of investors who should know better still do things that are counterproductive. A major case in point: paying unnecessary expenses.
One simple fact is inescapable: Every unnecessary dollar you pay in investment expenses is a dollar that could have been yours to spend, but which instead will be spent by someone else.
Most savvy investors already know that the probability of long-term success is higher with index funds than with actively managed funds.
Low-cost index funds are likely to leave you more money in retirement, more money to leave to your heirs, more money after taxes, and more peace of mind along the way. They may also teach a better lesson to your kids — at least if they’re paying attention.
When emotion takes over
Speaking of letting emotions overrule other factors, I remember meeting with a couple whose son had taken a job with a brokerage firm. They wanted to help his career and gave him their business, even knowing this would boost their expenses (and reduce their son’s potential future inheritance).
For them, the relationship was more important than maximizing returns. I’m a parent too, and they understood what they were doing. I can’t label this a dumb decision. Still, from a purely financial standpoint, it was likely to be counterproductive.
Brokerage firms count on the emotional pull of friends and family when they hire young brokers.
I have a friend who tried to get a job with one of the country’s largest brokerage firms. Before he was hired, he was required to make a list of at least 250 friends and family members he thought he could solicit for new business.
When you give your business to your brother-in-law, you could be playing right into the hands of Wall Street.
The big boys
I’m always a bit suspicious when I hear investors complaining about the one-percent, the highest earners. People say they’re tired of seeing one-percenters get all the benefits while the rest of us work hard to meet our needs.
I don’t like disproportionate wealth any more than the next person. But when you give your business to a large brokerage firm, you’re helping a lot of one-percenters stay propped up on their lofty perches.
Instead, you could deprive those institutions of some of their riches — and do yourself a favor — by investing in low-cost index funds or ETFs.
Doing that may also help you avoid another pitfall: illegal (and sometimes fraudulent) behavior by big brokerage houses.
Merrill Lynch, owned by Bank of America, recently agreed to pay more than $400 million to settle charges brought by the Securities and Exchange Commission. The firm was accused of misusing customer cash and failing to safeguard customer securities.
According to the SEC, Merrill Lynch exposed customers to a potential “massive shortfall” if the company had failed to make profitable trades, which were financed with customers’ funds. This amounted to billions of dollars each week from 2009 to 2012. The firm also held as much as $58 billion in customer securities in a clearing account potentially exposed to liens by its clearing bank.
Nobody lives a perfectly rational life, including yours truly. We can all learn to do better.
I recommend you listen to the recent episode of “This American Life” that inspired this column. If you find it even half as interesting and enlightening as I did, you may discover ways to stop acting in counterproductive ways.
Richard Buck contributed to this article.