Friday, July 4, 2008

Inexperience of youth feeds bubbles

(Globe & Mail StreetWise) There's long been a sneaking suspicion that one of the finance game's fundamental problems is the primacy of youth, and its corollary, inexperience. Experienced folks don't tend to stick around too long, thanks to the stress and the massive payouts that come with any success at all, and many a banker and fund manager is gone to the lake or a second career well before 50.

Now, somebody's proved it, at least part way. Two professors who looked at the technology bubble found evidence that younger fund managers tended to exhibit some of the main behaviours that inflated that particular round of speculation.

"Using age as a proxy for managers' investment experience, we find that around the peak of the technology bubble, mutual funds run by younger managers are more heavily invested in technology stocks, relative to their style benchmarks, than their older colleagues," the authors wrote. "Furthermore, young managers, but not old managers, exhibit trend-chasing behavior in their technology stock investments. As a result, young managers increase their technology holdings during the run-up, and decrease them during the downturn. Both results are in line with the behavior of inexperienced investors in experimental asset markets."

This time around in the real-estate and lending bubble, anecdotal evidence suggests that youth played a role again, as many of the structured product whizzes who created demand for all those loans were far from grey-haired.

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