Accidental Economist
Behavioral investing guru Terry Odean's winding path to finance
If you're an investor who doesn't know of economist Terrance Odean, you may be surprised by how well he knows you. Odean has been making financial headlines with his findings that the typical discount brokerage investor isn't the rational analyst assumed by economic textbooks but an overconfident, self-destructive trading addict.
Those painful truths have thrust Odean, who just two years ago was an obscure, long-haired, and somewhat elderly graduate student, into the limelight of the media frenzy surrounding the stock market. Now sporting neatly trimmed shaggy hair and an "Isn't this a hoot?" grin, the assistant finance professor at the University of California-Davis answers almost daily calls from reporters. His studies are being accepted for publication in top academic journals. And he has won fans like William Goetzmann, director of the International Center for Finance at Yale University.
Attention getter. One reason for all of this: Odean is the only economist of this generation who has gathered a large amount of data on the behavior and profits of individual investors. That has thrust him into the center of some hot financial controversies.
And he is about to stir up more debate. In a study he's preparing with research partner Brad Barber, an associate finance professor at UC-Davis, Odean will report that people who become electronic traders generally have better than average investment profits. But when they switch to online trading, their profits fall far below average. Because online traders lose even more than the costs of commissions and trading fees, Odean suspects that online traders' early profits stemmed from luck, which turned sour as they traded more.
Another reason for the growing buzz around Odean: In a field dominated by technical drones who pump out mathematical models, Odean is a throwback to the era when economists were idealistic philosophers and eccentric characters. One of the latest bloomers in the history of economics, Odean took 49 years, hitchhikes through Europe, and a series of dead-end jobs before clambering onto the on-ramp to economic fame. "It was a circuitous route," Odean says with Minnesota-bred understatement. "I don't recommend it." Indeed, someone planning to change the way we look at investing would hardly enter, as Odean did, a Benedictine monastery at age 14 to study for the priesthood. Nor would he likely drop out of the monastery at 17, then out of college at 20. Most would also consider it poor career planning to quit a hard-won job as an actuary trainee after three boring days to drive a cab in Manhattan.
It wasn't until his 30s that Odean settled down to a computer programming job in San Francisco. He and a friend bought a year's worth of financial data to see if they could uncover new correlations. They did. The stock price of Mary Kay cosmetics (which has since been taken private), they found, predicted the price of gold. "That's when I realized the obvious," Odean laughs. "That you can come up with these [correlations] by pure chance. It wasn't time to quit our day jobs." But the experience paid off; it pushed Odean back to school to study statistics.
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