Could Behavioral Finance Play a Role in Boosting Our Economic Health?

(Page 2 of 2)

out considered less of a bogeyman by the general public. Although industry innovation may have brought us synthetic CDOs and sub-prime mortgages, it also led to automatic 401k enrollment at many places of employment. She calls automatic 401k enrollment “probably the most successful tool ever to modify financial behavior.”

Andres, who has a background in retirement planning, experienced the challenges of modifying financial behavior firsthand during discussions with her former clients, and she’s deeply concerned about what will happen when entire generations of Americans hit retirement age with empty bank accounts. “I had engineers, even, saying, ‘Here’s $15,000 I have saved for retirement and that’s it.’”

Andres also sees structural issues at play here, especially when it comes to the role of government and employers in retirement saving. “There are big questions we haven’t addressed, and I do think we’re in for a bit of a crisis,” she says.

Andres, whose group hasn’t yet met with President Trump, says the federal Consumer Financial Protection Bureau had been working on a “more behaviorally driven” definition of financial health, which could then inform future policymaking. But that was before the election last November; since then, she’s not sure what’s been happening at the federal level. Regardless, she says she’ll spend 2018 spreading the gospel about her organization and its mission to improve the country’s economic behavior with the help of financial institutions.

“I hope that [CFPB] work will survive,” she says. “In general, our members are not clear on what a Trump Administration will mean. We’re starting to see more industry innovation, but the government will have a big role to play.”

 

A Conversation with Robert Shiller
Michigan native, Nobel Laureate, and Yale economics professor Robert Shiller was a keynote speaker at U-M’s behavioral finance symposium, and his research has changed the way economists study markets and behavioral finance. He is perhaps best known for his landmark book “Irrational Exuberance,” which was first published in 2000. He was seen as a Cassandra when the stock market crashed just weeks after “Irrational Exuberance” hit bookshelves arguing that the market was overvalued, an unpopular viewpoint at the time.
In Shiller’s opinion, the potential crises facing the nation when Generation X hits retirement with only minuscule amounts of savings, or an automated society displaces the human workforce, might simply be the newest manifestations of the world’s never-ending Darwinian struggle.
“As you’re trying to prevent this problem [of artificial intelligence displacing workers], it’s fighting the laws of nature,” Shiller says. “We should set up a national policy now [saying] that we won’t let this happen in our country, and maybe that will help us create something like a universal basic income in the future. I think a lot of people are worried about it. I talked about this in my book—[uncertainty about the future] could boost prices of long-term assets. Maybe that’s part of the reason the stock market is high.”
Shiller is currently working on a book that expands on a presidential lecture he recently gave regarding the current behavioral narratives driving our economy and stock market. He is worried about the Trump administration’s ability to protect consumers from the predations of financial institutions, and earlier this year, he joined other Nobel laureates in signing an open letter to the president and Congress urging them to strengthen the role of science in national policymaking.
He doesn’t see why the federal government couldn’t create an ad campaign modeling healthy financial behavior the same way the government did 30 years ago to educate citizens about the perils of drunk driving.
“We can advocate that,” he says. “The usual reaction to some [financial] abuse was to require that they put language in the contract, and Elizabeth Warren is famous for pointing out that the contracts themselves are in a sense abusive, so your standard credit card contract—how many people read that and think, well everyone else is signing it, so I’ll sign it. But it has language in it that is buried, so you have to read carefully to find it, about raising your rates if you miss a payment. People get stuck, and it doesn’t warn you that you can get caught.”
His advice for young investors with questions about retirement savings? “There’s a book by Ian Ayres arguing that young people should leverage up and borrow to buy stocks because, for them, any investment they make is really a small fraction of their lifetime wealth, so in order to keep a proper portfolio, they should be leveraging. If you’re planning on buying a house and need a down payment, maybe don’t put that in the stock market.”

Single PageCurrently on Page: 1 2 previous page

Sarah Schmid Stevenson is the Custom Content Editor for Xconomy Insight. You can reach her at 313-570-9823 or sschmid@xconomy.com. Follow @

Trending on Xconomy