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Since the Great Depression, the U.S. government has insured bank deposits up to $100,000 per account. So why, last week, were so many people standing in line at IndyMac, the California bank that failed under the crush of bad subprime loans? Fear, uncertainty, loss aversion, a propensity for herd behavior – behavioral economists have seen this all this before. A seminal paper on herd behavior in non-market contexts (Banerjee 1992) argued that herd behavior can occur when private information is not shared publicly. Individuals with private information act, leading to information cascades as others follow their lead, with the result being a socially suboptimal outcome.

In the case of IndyMac, no one had – or has – any private inside information about the collapse of the Federal Deposit Insurance Corporation, and yet public notices about bank deposit insurance did not keep people at home. Of course, everyone in line might have simply wanted enough money to pay a mortgage and food for a month, or had assets greater than $100,000, which meant all of their money wouldn’t have been insured. But what are the odds?

The Washington Post points out an interesting distinction between how people see the failures of human institutions like IndyMac versus the physical destruction caused by natural events like hurricanes.

People are often more fearful of man-made events than they are of natural ones. “We are rather blase about nature,” said Paul Slovic, the founder of Decision Research, an Oregon nonprofit group that studies human behavior and advises governments. “We think it’s generally benign even though we get clobbered by it over and over again. That’s why after a big storm we go back and rebuild on the spot.”

He continued: “But we are quite the opposite for certain types of risk that are human-caused, particularly if they involve something new or mysterious. We react very strongly to that. . . . If people see signs of incompetence or that the system is not being regulated or controlled, that is very worrisome.”

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Roger Lowenstein nicely distinguishes Hillary Clinton and Barack Obama’s policy and philosophical differences about how to help people save more money.

Clinton has proposed a national 401(k) under which the government would match up to the first $500 to $1,000 that a worker sets aside. The intent is to kick-start poor and middle-class people, who do not have the income to take advantage of tax deductions and whose savings rate is especially low. “The tax system is upside down when it comes to savings,” says Gene Sperling, Clinton’s economic adviser. “We give the most incentive to those who need it least.” (Only 5 to 7 percent of savings deductions go to people on the bottom half of the income ladder, Sperling says.)

The Clinton proposal mixes egalitarian values with free-market orthodoxy. It assumes that if you give people an incentive to save, they will. Indeed, economic theory holds that most folks will do the math, figure out how much they need to save for the future and act on it now. But experience has shown otherwise. Actual people (as distinct from the textbook variety) are not necessarily so responsible. Many Americans do not take advantage of 401(k)s. They also do lots of other silly things with their finances, like taking mortgages they can’t afford.

Obama’s remedy for human irrationality is to use the government to force a choice on people — but a choice in which inertia would tilt the outcome toward greater savings. Obama wants to require employers to automatically enroll workers in 401(k) plans at a savings rate of 3 percent. Employees would be free to opt out (or to choose a higher savings rate). Obama would also provide a federal match, but a smaller one than Clinton. His central idea, backed by new research but strongly at odds with traditional mainstream economics, is that changing the default option will encourage as much saving as providing a financial incentive. In other words, if people have to opt out of plans rather than in, they will end up saving more. Obama is sympathetic because it jibes with his experience as a community organizer, when he found that people did not apply for grants or programs for which they were eligible.

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