WASHINGTON — Harry M. Markowitz won the Nobel Prize in economics as the father of "modern portfolio theory," the idea that people shouldn't put all of their eggs in one basket, but should diversify their investments.
However, when it came to his own retirement investments, Markowitz practiced only a rudimentary version of what he preached. He split most of his money down the middle, put half in a stock fund and the other half in a conservative, low-interest investment.
"In retrospect, it would have been better to have been more in stocks when I was younger," the 77-year-old economist acknowledged.
At least Markowitz invested more wisely than some of his fellow Nobelists. Several of them concede that they have significant portions of their nest eggs in money market accounts, some of the lowest-returning investment vehicles available.
"I know it's utterly stupid," confessed George A. Akerlof, a UC Berkeley professor and 2001 winner of the Nobel Prize in economics.
As President Bush crisscrosses the country promoting his plan to overhaul Social Security, he argues that Americans are ready to trade in a portion of their traditional benefits for ownership and control over their own investment accounts. People have grown so comfortable with stocks and bonds, he asserts, that they can invest their way to more prosperous retirements by watching their quarterly statements, adjusting their portfolios and looking out for themselves.
But 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.
In committing investment errors such as these, ordinary Americans turn out to be in good company. Even some winners of the Nobel Prize in economics admit to making similar mistakes, either by failing to pay attention to their own retirement arrangements or by making faulty decisions when they do.
