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leave. On average, investors cash out of funds at the startling rate of


% annually. [????] Perhaps they’ve been motivated to act by the latest

“important” daily news item on CNBC; all of Wall Street’s own incentives reinforce this myopic marketing. Investing on the fundamentals gets

waylaid in the process. Eveillard expressed his disdain thus: “When I’m in a good mood, I say that Wall Street is nothing but a big promotional

machine. When I’m not in a good mood, I say it’s a den of thieves.”74

Fertile opportunities for academic research do not stop with mutual funds. Corporate financial officers are caught in a vise created by

the need to offset low bond yields with above average stock performance in their pension funds here and now, lest the company’s reported earnings

drop. Ditto those hyperactive, leveraged hedge funds, which have swollen in all to about $800 billion in recent years and are similarly deprived of

whatever freedom they once had to think long-term. Under the growing competition, hedge funds have increasingly focused on chasing trends or

searching for small price discrepancies in the interstices of the market.75 These layers on layers and duplication of fund management are

frightfully expensive. Economists call them agency costs, meaning structures where the intermediaries are motivated to pursue their self-interest at

the expense of their clients.

Computers and libraries are not enough; economists need to get out more often. And the need is pressing. Companies are abandoning

defined benefit plans for defined contribution plans that, whatever the particular version, shift investment risk to the worker. And as the country

contemplates privatizing Social Security, Wall Street may salivate but workers everywhere will have to face a complex challenge. And no matter

what the plan, people are increasingly aware of the need to invest for the “golden years.”

October 4, 2004.


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