Market Psychology

A 60/40 portfolio left alone through five good years for stocks ends at 75% stocks, 25% bonds. Nobody chose 75/25; it is what doing nothing produced. In retirement plans the effect is large: when Madrian & Shea (2001) studied a firm that switched to automatic enrolment, participation among new hires went from 37% to 86%, and most kept the default contribution.

• Inaction is sometimes optimal: trading costs and taxes make small adjustments not worth it (see Rebalancing in Risk & Portfolio).
• A default can be a quiet recommendation; following it is not always bias.
• The same force can be used for good — automatic escalation of savings works because people stay put (Thaler & Benartzi 2004).

w0 = np.array([0.60, 0.40])                       # target: 60% stocks, 40% bonds
r = np.array([[0.20, 0.02], [0.15, 0.03], [0.25, -0.01], [0.10, 0.04], [0.18, 0.02]])   # five years, made up
grown = w0 * np.prod(1 + r, axis=0)
w_now = grown / grown.sum()                      # what you hold after five years of doing nothing

Assumes import numpy as np and import pandas as pd. Each snippet carries its own example numbers; the comments say which are made up.