Behavioral Finance

January 2011

A growing literature shows how consumers make mistakes in a variety of different settings pertinent to financial decision-making. Using data from a randomized experiment in Chile, we show how different ways of presenting pension management fees shape consumer choices, and how responses to pension fee information varies by level of financial literacy. Our results indicate that, in choosing pension funds, those with lower levels of education, income, and financial literacy rely more on employers, friends, and coworkers, than on fundamentals.

November 2010

Advisors need to understand the way investors think about decisions and the process through which decisions are made. Evidence from experimental research in behavioral finance indicates that investors often have limited computational ability and/or limited attention implying that investors will have difficulty making optimal choices when information requires complex processing, such as aggregating risks across investments or time.

December 2008

Despite agreement among experts that many consumers should place a high value on life annuities and related products that insure against longevity risk, few consumers voluntarily annuitize their retirement savings. This brief summarizes evidence that consumers’ aversion to annuities is not a fully rational phenomenon. Research finds that framing, i.e., how financial products are presented to consumers, can significantly affect respondents’ preferences among competing products.

November 2008

This paper examines the two sets of factors controlled by a worker and affecting a person’s Social Security benefit. The first set of factors affect a worker’s base benefit, known as the Primary Insurance Amount (PIA), and include years of coverage in the Social Security system and an individual’s history of taxable earnings under the Social Security system. The second set of factors pertain to changes in the primary insurance amount, including early retirement reductions, delayed retirement credits, the earnings test, and the tax on benefits.

October 2008

This paper examines two studies of investment risk taking among higher education employees in their institution-sponsored retirement savings plans. Risk taking is a complex psychological and behavioral process. The first study examined direct correlates of risk taking. The second study modeled the mediated effects of dispositions, opportunity perception, experience, inertia, and demographics, and the direct effects of an attitudinal risk preference and knowledge of investment principles on risk taking in retirement savings.

August 2008

This two phase study examined how to motivate women to save for retirement. The quantitative first phase validated findings regarding the existence of distinct personality types among women regarding retirement saving. In the second phase, focus groups were conducted with the five retirement personality types to identify messages that might motivate them to invest for retirement. Focus groups revealed more similarities than differences across personality types; there may actually be greater differences between married and single women.

May 2008

This paper examines how supplemental retirement savings decisions of higher education faculty are influenced by the generosity and structure of an individual’s primary retirement plan. Standard economic models of saving predict than an extra dollar contributed to an employee’s primary defined contribution account will reduced the supplemental savings of that employee by one dollar, regardless of the source (employer or employee) of the pension contribution. A behavioral perspective suggests that people may treat them differently, however.

May 2008

There are several factors that prevent employees from taking advantage of employer-provided pension plans. In this project, a social marketing approach was used to develop a comprehensive, cost-effective plan to improve participation in and contribution to Supplementary Retirement Accounts (SRAs.) By specifically targeting subgroups, the project was able to help identify and overcome key obstacles to savings.

April 2008

A growing body of research suggests that savings decisions are affected by a wide range of influences that play no role in a conventional neoclassical model of savings behavior, including framing effects, default effects, and inattention.