:Fixed Point

A glance at the bookshelves reveals that baby-rearing theories change more often than the environment into which babies are born, and of course, far more frequently than humans evolve. Similarly there’s never a shortage of new investment guides from the latest tipsters. But just as bringing up a baby today should, fundamentally, be really no more different from bringing up a baby 1000 thousand years ago so the fundamentals of stock investing have barely changed. What explains the proliferation of advice?

Consider parenting first. Gina Ford divides parents violently but her books are unlikely to have any effect on a child’s behaviour’ active management of babies (or stocks) is of little value.

In Gina Ford’s case, the proof lies in the force of the disagreement between supporters and detractors - a disagreement that has seen parenting site mumsnet forced with closure - and also supports the view that parenting is largely a gene related. At this moment most parents are up in arms; how can a baby not be affected by how you treat it? Does that mean it’s OK to treat babies badly then? One encounters the same disbelief if you dare to suggest that active management is a waste of time.

Of course it’s not OK to treat a baby badly because it’s not OK to hurt others; love is not conditional on having the ability to change who you love. For the same reason, this doesn’t mean parents are redundant. We have a role in shaping the important effects that do have an impact on a child’s development, such as access to education, and especially the peer group. And loving is a selfish pleasure.

The proof that genes are more important is evident in the behaviour of parents themselves.

A lot of people try, but reject Gina Ford as not working. Other remain with it valiantly to produce ‘perfect’ babies. But this shows nothing. People who toil away with Ford’s methods obviously have a personal preference for those characteristics emphasised by her, such as strict routine. They may not necessarily enjoy fulfilling the routine, but they clearly have the (largely) inherited characteristics that favour routines over non-routines, otherwise the y would give up. Because they are inherited, their babies are likely to share the same preference. Parents (like me) who didn’t even consider Gina Ford are showing that their genetic endowment does not prefer routine to non-routine. My wife is similar so it’s unlikely that our baby has these genes.

The ultimate result then, is that parents with routine-preferring genes produce babies who prefer routines; the book has no effect except telling you, in case you didn’t know, whether your genes are fundamentally routine-preferring or not. Parents who fall away at Ford’s techniques because they don’t work, are simply proving that they (and their babies) don’t have strict routine-preferring genes. The damage to parents and babies is done if you’re not bringing up your child in a manner that is consistent with your own (and therefore your child’s) preferences.

But surely the book tells you what routine to use and how to implement it. Again not so. Many of the Gina babies I know of end up having meal and sleep times different to what the book suggests. That is, the babies follow a strict routine, but not really the one in the book.

As with investing, the theory will tell you that passive management in an index fund is the best strategy, yet most people clamber to make their infant portfolios outperform. Investors have faith in their advisors but fail to recognise that their advisors are either lucky, or just replicating a standar passive strategy dressed up as active.

The failure of parents and investors lies, I think, in over emphasis on short term volatility and the expense of long-term outcomes, and the consequent misplaced belief that active management can smooth the volatility over the long-term.

Parents stress over the day to day variable behaviour of their 3 month olds, especially when compared to other babies, but ignore the fact that all babies grow up to be remarkably similar children and adults. Active investors ignore the advice that stocks should be seen as a long-term investment that will almost certainly outperform other asset classes, and instead get all excited and disappointed by short term fluctuations such as we’ve seen last week. The excessive focus on the short term creates fear of an uncertain outcome and hence the demand for stability. In fact, as the economic psychology literature suggests, the myopia of investors may be responsible for the anomaly of the excessive risk premium (sub required) for stocks. Myopic parents may demand a similar premium to get a ‘better return’ from their infant holdings.

The lesson would be to throw away the books, go with the established theory and relax. It all turns out OK in the end.