Behavior

October 4, 2011

Saving money. No financial behavior is more important in this era of DIY retirement planning. And yet few things are more difficult for more people.

To prod low-income people to save a little, foundations and the government design clever financial products or incentives – some work, some don’t. Academic researchers divine psychological tricks or behavioral mechanisms that might spur saving. Automatic enrollment in employer-supported 401(k)s is one such success story.

A different solution to the savings conundrum comes from two marketing professors at the University of Toronto. Experimenting on subjects around the world – residents of a small town in India, Canadian college students, parents in Hong Kong – they found that individuals are more successful savers if they identify and work toward a single goal. Setting multiple, competing goals – college, retirement, summer vacation, a new kitchen, and the Christmas fund – was less effective and even counterproductive.

“When people have multiple goals, they cannot decide which one is more important,” said author Min Zhao, whose paper with Dilip Soman is forthcoming in December’s Journal of Marketing Research. “They say, ‘I cannot decide. Maybe I’ll just do this later, and I might not do anything.’ ” …Learn More

Field Work

September 20, 2011

Which profile describes the most common victim of investment frauds like Bernie Madoff’s?

a. Tech-savvy young adult
b. Man over 50 earning high income
c. Elderly widow on fixed income

Widow, you say? That’s the stereotype, said Laura Carstensen, founder of Stanford University’s new Research Center on the Prevention of Financial Fraud.

“The old woman who’s demented and living on her own, and the guy who knocks on her door and sells her the policy – that does exist, but it doesn’t represent older people,” she said. Older people who have a history of long-standing relationships are often better at determining who they can trust, she said.

The correct answer is b: Man over 50 earning high income.

Fraudsters feed successful men’s egos by appealing to their investment savvy, enticing them to get into a deal others might not understand. By building up their egos, a fraudster ensures that the victim isn’t thinking clearly when he agrees to invest, said Doug Shadel, a member of the Stanford Center’s board who co-authored the AARP Foundation National Fraud Victim Study.Learn More

Research

September 8, 2011

Every entrant to the workforce should be subjected to the same questions posed to California undergraduates in a new experiment about how well people understand compound interest.

Better to show the math than to explain it. Franny and Zooey just started working. Franny immediately begins depositing $100 per month – $1,200 every year – into her new retirement account, which pays 10 percent interest annually. Zooey doesn’t start saving for 20 years, but he puts in $300 every month — $3,600 annually — and also earns 10 percent interest.

In 40 years, Franny retires with $584,222 in her account – more than double Zooey’s $226,809.

Asked to calculate these future savings on their own, 90 percent of the undergraduates had vastly underestimated the totals in the experiment by Craig McKenzie at University of California, San Diego and Michael Liersch at New York University. Yet, this mathematical calculation is central to the financial well-being of most Americans. In 2009, more than half of all households were at risk of not having sufficient assets to retire, according to Boston College’s Center for Retirement Research, which hosts this blog. …Learn More

September 6, 2011

The Journal of Marketing Research (JMR) will devote a special issue to interdisciplinary research on the hot topic of financial decision–making and behavior.

The issue is a smorgasbord of 15 articles on behavioral, marketing, economic, and psychological research on various financial activities, from borrowing money to establishing trust in financial transactions.

The November issue’s guest editor-in-chief, John G. Lynch, a psychologist who “wandered into marketing and consumer decision-making,” said the interdisciplinary approach advances everyone’s understanding of complex financial decisions.

“A given field understands a part of the answer. But we’re missing the larger whole,” he said. The special issue “would bring people together to read each other’s work and have an effect of causing more cross-fertilization.”

Squared Away plans to cover some JMR articles in a series of blog posts in coming weeks. Here’s a preview: …Learn More

Money Culture

August 30, 2011

Are Americans suffering from financial-decision fatigue?

After the relative calm of rising financial markets though the 1980s and 1990s, Americans have lived through a series of booms and busts. First came the Internet boom of the late 1990s, which busted. Then the real estate market took off just as “emerging markets” plummeted. That was only a prelude to the worst financial-market collapse since the Great Depression. The stock market is now bouncing around like a bungee jumper.

Roiling markets in recent years have spurred decision after decision – about retirement, home buying, downsizing, mortgage refinancing, spending on large purchases such as a car, and where to find a good job.

Investors are advised to stick with a long-term plan and not react to every market fluctuation. In reality, there’s a history of research showing that dramatic gains and losses do cause people to change their behavior. Many Americans decided to abandon the stock market after the 2008-2009 decline, which pummeled 401(k) balances.

Researchers at Boston College’s Center for Retirement Research (CRR), which hosts this blog, identified a related set of decisions. The Center surveyed people who had lost 10 percent or more of their retirement savings: 57 percent decided to delay retirement, save more money, or both.Learn More

Research

August 11, 2011

With the Standard & Poor’s 500 stock index down 13 percent in three weeks, new research confirms what many people believe to be true: emotions drive investment decisions that can lead to costly mistakes.

In a forthcoming paper in the Journal of Market Research, three business professors were able to show for the first time that an investor’s prior experience with buying and selling a company’s stock – not cold, hard analysis – is what determines whether he or she would repurchase that same stock at a later date. When the entire market plunges hundreds of points, as it has this week, the tendency to be led by one’s emotions is only magnified.

Money-losing stocks are “associated with disappointment and regret,” the researchers wrote. “Simple reinforcement learning deters them from repeating the behavior that previously caused pain.”

Their paper, “Once Burned, Twice Shy,” adds to a growing literature that attempts to clarify the psychology of financial behavior. It’s a twist on one classic study that determined that people feel the pain of financial losses – or “regret” – far more acutely than they feel the joy of gains. Other studies have firmly established that investors more often sell winning stocks than losing stocks. … Learn More

July 26, 2011

There’s something about getting a will together, checking in on one’s retirement fund, or finally paying down that credit card that causes the procrastination gene to kick in.

In this recent video on CBS, Harvard behavioral economist David Laibson explains the reason for this tendency: “present bias.” Humans put more weight on the present than on the future, so it’s easier to delay the hard work until later. No surprise that’s true for financial tasks, which can be overwhelming, emotional, complex, or unpleasant.

“We humans have wonderful intentions about what we’re going to do,” he explains in this video. But when the time comes to do it, “We decide once again to push it further into the future.”

Laibson uses a simple example from a well-known 1980s experiment in which researchers asked people at Amsterdam workplaces whether they would want a healthy fruit snack, an indulgent chocolate bar, or potato chips next week. Most chose fruit.

On the day they were to receive the snack, the researchers said they lost the workers’ previous selection and asked them to pick again. The preferences flipped, and most chose chocolate.

Laibson goes on to apply the fruit/chocolate concept to financial decisions. The video was recorded last month, but the topic – human behavior – never gets old for Squared Away.Learn More