personal finance

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1) Google’s PowerMeter is dead. Long live Google’s PowerMeter. Thoughts on why it didn’t take off here.

2) Choice overload at a young age. (See page 4 and markers)

3) Morningstar on “The Benefits of a Financial Nudge

4) FICO scores for medical adherence?

5) Early prognosis for tax receipt. It doesn’t much change how Americans feel about paying their taxes.

6) The Winner’s Curse in its most basic form: Spending $28 for a $25 gift card as part of an Ebay auction.

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Financial service professionals are some of the few people who want their typical customers to take the long view of consumption.

They want their rich customers, however, to take the REALLY long view.

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The Center for Retirement Research at Boston College releases an interesting new paper reminding us why more knowledge does not automatically mean better decision making. The paper looks at how annual social security statements affect people’s knowledge about social security and their decision about when to take it. About 15 years ago, the U.S. government began mailing a paper statement of a worker’s past earnings along with an estimate of their benefits at selected claiming ages. The purpose of the statement was to help workers make smarter decisions about retirement plans.

Looking at longitudinal survey data of workers aged 55-70, researcher Giovanni Mastrobuoni finds that the social security statement does increase worker knowledge about benefits. When asked to provide an estimate of how much social security they expect to receive, workers received a statement were more likely to provide a benefit estimate–and a more accurate one at that. (Note: The survey’s timing allows Mastrobuoni to distinguish between workers who had and had not received statements).

But when looking at how this knowledge affects their retirement plans, and whether to continue working another year or begin to collect social security, there is no clear evidence showing that people use it.

In short, it appears that the Statement does not improve individuals’ responsiveness to retirement incentives. This result could mean that people are behaving optimally before they receive the Statement or that the benefits they gain from reading the Statement are relatively small. Further research in this area is needed.

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Assorted links

1) Honey, they shrunk our consumer products.

2) Mitigating the “regret premium” – in general, people aren’t willing to exchange lottery tickets even with a bonus.

3) Follow up on Kirkland House post. Trayless cafeterias result in 25 percent less food waste, according to a study of 25 campuses by food services provider Aramark. Hat tip: Scott Talan.

4) Should you peel a banana like a monkey? Nudge blog reader Matthew Hook says yes.

5) Behavioral economists advising on yet-to-be-released personal finance software. Stay tuned.

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Assorted links

1) Celebrating the transparent Rx bottle.

2) Should your credit score take into account your savings habits?

3) Imagine eating a huge bowl of M&Ms…Still hungry?

4) Self-checkout lanes = fewer impulse purchases.

5) Marketing nudge – how opt-in box for emails dropped conversion rate by 17 percent. Explanations?

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Do you know if your decision makes a difference? Do you know which one is better for you?

Nudge is a book grounded in economics, which means it argues incentives are a powerful tool for shaping human behavior. Nudge is also a book ground in psychology, which means it does not assume that people always see incentives or fully understand their implications.

The New York Times reports on an interesting example of these two points: Debit cards that require either a customer signature or a PIN number. Different companies involved in the payment chain have conflicting preferences about which ones customers should use. Customers, of course, have their own preference — the debit card that leads to the lowest overall price for whatever product they are buying. The problem is that most don’t know which card that is.

Continue reading post here.

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Investors with an “overconfidence” bias often trade too much and manage their portfolio on a stock-by-stock basis—while assuming they can beat the market, which the University of Chicago’s Mr. Thaler says probably won’t happen.

Mr. Thaler recommends a little test for the presence of an overconfidence bias. “Write down 10 traits [such as ‘investment skill’ or ‘ability to make good stock picks’], then ask yourself how you rate compared to your co-workers. If you rate yourself above average on all of them, plead guilty,” he says.

From the Wall Street Journal

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In Australia, superannuation is a long-term savings and investment vehicle that, like the 401(k) in the U.S., provides tax-advantaged retirement benefits for individuals. Since summer 2005, a overwhelming majority of Australian workers have been able to choose an investment fund through superannuation. (Prior to 2005, fund selection was largely made by a trustee of some kind.) With more than 200 fund options to choose from, investors have been overwhelmed. (Just think how overwhelmed they would have been if they had lived in Sweden where a privatized version of social security yielded almost 800 fund options!) In a new report on the policy, the Australia Institute levels some harsh criticism.

The fact that fewer than ten per cent of workers actively choose a fund should not come as a surprise. Indeed, as little as four per cent of workers switch super funds each year and around half of this is ‘passive’ choice due to job change or fund closure. Because participation is compulsory, a great many fund members, and particularly those a long way from retirement, do not take a keen interest in their super. Being automatically enrolled in a retirement savings system is not conducive to active consumer decision-making.

Choice of Fund has also been largely unsuccessful in lowering the number of multiple accounts, one of the most serious problems for superannuation policy-makers. In fact, the number of accounts per employee has actually increased, suggesting that choice has not ‘empowered’ consumers to take even the most basic action to improve their superannuation arrangements. Three years on, the failure to promote consumer-centred competition has resulted in considerable waste across the super system. Average fees levied by fund managers have not fallen, remaining at around 1.25 per cent of funds under management (equating to around one per cent of GDP), and significant fee and performance variations persist between not-for-profit funds and for-profit (retail) funds. Moreover, it is estimated that Australians pay around $2.4 billion a year in commissions on superannuation assets, including $862 million on their compulsory superannuation contributions. Financial outcomes for workers can vary considerably depending on the fund that their employer nominates as the default fund.

Read the full paper for six design principles for a default rule, including a somewhat controversial argument that default options should “focus especially on the needs of people who are a long way from retirement, or whose accumulated benefits are relatively modest,” because of the poor decisions that people make in situations where the effects are not felt until well into the future. Because of the complexity of investment decisions, and the number of amatuers among all age groups, the default rule should be issue No. 1 for a choice architect regardless of whether the employee is 23 or 63.

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From former CBO director and soon to be Office of Management and Budget director Peter Orszag.

The overall share of 401(k) participants with 90 percent or more of their assets invested in company stock is more like .47*7.3=3.4 percent. It’s still too high…The good news is that the trend is towards less investment in company stock. For example, in 1999 EBRI estimated that 19.1 percent of all 401(k) assets were held in company stock…By 2006, that share had fallen to 11.1 percent.

The figure below, which shows this decline, comes from the Employee Benefit Research Institute. The company stock figures are the second batch of bars from the left.


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From a new paper by Eldar Shafir, Michael Barr, Sendhil Mullainathan. Some of the highlights are below. OK, so they aren’t all behavioral economists. Mullainathan is. Barr is a law professor and Shafir is a psychology professor.

1. Full information disclosure to debias home mortgage borrowers.

Useful information that Shafir, Barr, and Mullainathan have in mind includes disclosing the borrower’s credit score, and the borrower’s qualifications for the all of the lender’s mortgage products.

2. A new standard for truth in lending.

We propose that policy makers consider shifting away from sole reliance on a rules based, ex ante regulatory structure for disclosure embodied in (the Truth in Lending Act) and toward integration of an ex-post, standards-based disclosure requirement as well.

3. A “sticky” opt-out home mortgage system.

We propose that a default be established with increased liability exposure for deviations that harm consumers…In our model, lenders would be required to offer eligible borrowers a standard mortgage (or set of mortgages), such as a fixed rate, self-amortizing 30 year mortgage loan, according to reasonable underwriting standards.

4. Restructuring the relationship between brokers and borrowers.

An alternative approach to addressing the problem of market incentives to exploit behavioral biases would be to focus directly on restructuring brokers’ duties to borrowers and reforming compensation schemes that provide incentives to brokers to mislead borrowers. Mortgage brokers have dominated the subprime market.

5. Using framing and salience to improve credit card disclosures.

See something like RECAP, proposed in Nudge.

6. An opt-out payment plan for credit cards.

Consumers would be required automatically to make the payment necessary to pay off their existing balance over a relatively short period of time unless the customer affirmatively opted-out of such a payment plan and chose an alternative payment plan with a longer (or shorter) payment term.

7. An opt-out credit card.

Consumers would be offered credit cards that meet the definition of “safe.” They could opt for another kind of credit card, but only after meaningful disclosure. And credit card firms would face increased liability risk if the disclosure is found to have been unreasonable.

8. Regulation of credit card late fees.

Under our proposal, firms could deter consumers from paying late or going over their credit card limits with whatever fees they deemed appropriate, but the bulk of such fees would be placed in a public trust to be used for financial education and assistance to troubled borrowers…Firm incentives to over-charge for late payments and over-limit borrowing would be removed, while firms would retain incentives appropriately to deter these consumer failures.

9. A tax credit for banks offering safe and affordable accounts.

Market forces weaken or break down entirely with respect to encouraging saving for low income households. This is simply because the administrative costs of collecting small value deposits are high in relation to banks’ potential earnings on the relatively small amounts saved, unless the bank can charge high fees; with sufficiently high fees, however, it is not clear that utilizing a bank account makes economic sense for LMI households.

10. An opt-out bank account for tax refunds.

Low-income households without bank accounts would have their tax refunds automatically deposited into a new account, similar to something like the SAFE-T account that residents could draw on. (H&R Block offers a similar product.)

Watch a video about the paper, sponsored by the New America foundation, below:



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