I enjoyed a recent David Brooks column, The New Humanism, that enjoyed most-emailed status for a couple days. Brooks says he's covered a number of public policy failures in his writing, and that they share a common cause.
I’ve come to believe that these failures spring from a single failure: reliance on an overly simplistic view of human nature. We have a prevailing view in our society — not only in the policy world, but in many spheres — that we are divided creatures. Reason, which is trustworthy, is separate from the emotions, which are suspect. Society progresses to the extent that reason can suppress the passions.
This has created a distortion in our culture. We emphasize things that are rational and conscious and are inarticulate about the processes down below. We are really good at talking about material things but bad at talking about emotion.
This is exactly the same failing that Betterment seeks to address.
The investing industry is broken.
Our investing industry is designed around policies and laws and products that assume rationality – when people are anything but rational in how they actually invest. If people were purely rational – like computers – they could take in massive data streams and make perfect decisions about how to invest. They wouldn’t be affected by panic or mania or investing fads.
But people aren’t purely rational.
The result – many people make costly mistakes that could be avoided if our investing products and policies took human behavior into account.
Betterment is the solution.
The keys to building a investing product that takes human behavior into account are:
- Set smart defaults
- Focus users on the most important information
- Take care of the important details automatically
We only offer smart investment options – with an appropriate allocation set for you by default when you sign up – and we focus our users on the most important questions of horizon and risk tolerance. Some people forget to properly diversify – so we take care of it automatically. Almost everyone doesn’t rebalance often enough – so we do it on schedule, automatically, every time.
It’s an investment that is make for to how the world REALLY IS, where people aren’t always on time and don’t always remember their anniversaries – much less when to rebalance.
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What is Betterment's approach to asset location? It's called Tax Coordination, and it's a built-in tax optimization strategy for retirement goals at Betterment.
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