MANKIW: NAIVE OR A SHILL?

I came across this little piece of drivel by a supposed wizard economist:

Comment on “Asset Returns and Economic Growth” by Baker, DeLong, andKrugman
N. Gregory Mankiw
Prepared for the Brookings Panel on Economic Activity
March 2005
The model reminds me of John Kenneth Galbraith’s view of the world. Households are not sufficiently intelligent to make portfolio decisions based on risk and return. Corporate managers are sufficiently immune to market forces that they divide up the economic pie however they see fit. If I took this model seriously, it would do more than inform my view of the equity premium. It would shake my faith in corporate capitalism! (page 3)

First of all, it's not a question of household intelligence but a question of behavior:

Experts Are at a Loss on Investing
Nobel winners and top academics fumble
the sorts of decisions Bush's Social Security overhaul plan
would ask average Americans to make.

By Peter G. Gosselin
LA Times Staff Writer
May 11, 2005

...a growing body of research shows that millions of Americans fail to get even the most elementary investment decisions right.

More than one-quarter of those eligible for employer-provided 401(k)s fail to sign up for them, according to the Federal Reserve. More than half of those who do sign up funnel their money either into overly conservative or overly aggressive investments, according to the Employee Benefit Research Institute, a Washington think tank sponsored by hundreds of companies.

Even more disconcerting, new research suggests that most people don't behave anything like the economically savvy men and women that free-market advocates and economic theorists claim they are. They often shut down in the face of many choices. They sometimes even fail to go after free money.


Here's someone a bit more realistic than Prof. Mankiw:

The Silent Scandal: 401(k)s and the Failure of Responsibility
by Robert Markman
Journal of Financial Planning

Reality #1

Most investors cannot or will not manage their own portfolios.

Reality #2

...the fact that there is little evidence that force-fed information
translates into substantially better results for most investors.

Reality #3

Survey after survey confirms that the shortage Americans feel most is not information, not education, but time!

Moving on to corporate managers, it's good to recall a warning by Adam Smith:

The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own..Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.
The Wealth of Nations, Book V, Part 3, Article 1

A modern instance of why Smith was correct:

Rachel Beck: Many execs not letting go of unearned compensation
NEW YORK (9/12/04, AP) -

It doesn't seem to matter that more than a thousand companies have restated earnings in recent years. Most of their executives are still holding on to bonus pay that it turns out they technically didn't earn. Why bonuses should be reclaimed should be easy to grasp. Executives were entitled to make additional compensation if their companies hit certain performance targets, but it has since been determined that they never met the required criteria. In fact, accounting errors spurred 1,156 earnings restatements between 2000 and 2003, according to Huron Consulting Group.