1 / 38 Over the Life Course J. Michael Collins University of Wisconsin-Madison 2013
2 / 38 Survey for Wisconsin www.usfinancialcapability.org - clickable map 55 percent of Wisconsinites are living paycheck-to-paycheck (same as US average) 57 percent of Wisconsinites do not have a rainy day fund to cover three months of unanticipated financial emergencies. (60 percent nationwide). 19 percent used payday loan or similar (24 percent nationwide). Average 3/5 financial literacy questions correctly (about average)
Figure: FINRA Survey 2009
4 / 38 Why? ->Life Course Perspective -> Inclusion/Access ->Goal: Economic Well-being
Figure: Model Kempson, Collard and Moore, Measuring financial capability: An exploratory study for the Services Authority, European Credit Research Institute, 2006.
6 / 38 Understanding Decisions in Context Goal = financial security (confidence in decisions) Choices = tradeoffs Save more = borrow more? Savings may not be goal; paying bills, debts, paying for needs Emergency savings = cash in pinch Spending on social mobility
10 / 38 Keeping Up in Modern Consumer Market Increased focus on household finance, mortgages and credit Long-term shift of personal financial decision making to the level of individual Accelerated use of technology in financial transactions Democratization of access to credit Special issues for low-income, people w/ disabilities, seniors Lack of experience in financial markets and financial decision-making
11 / 38 Improving Well Being Education in schools Workplace programs Public programs education for parents with children in Head Start Counseling /Advice Access to Services
Capacity Building Information Models Advice Models Mechanism Models Disclosures Print/Web Interactive Web Workshops One:One Technical expert (credentialed) Transactional guide (may have sales focus) Counseling (acute problem solving) Coaching Defaults Automatic Deposit Product constraints Reminders: Salience Monitoring Executive Attention 12 / 38
13 / 38 Role of Education Reduce the cost of acquiring information If people make better choices with more information Workshops, Seminars, Brochures, Websites etc. all can lower costs But, be careful about right outcomes
14 / 38 More Information = More Debt Use
15 / 38 Are we asking too much of financial education? Technical aspects (time value of money calculations) Definitions and terms Organizing information (on accounts and credit) Access to products with attention to low-income/underserved Planning and advice This applies to other behaviors of policy interest...
16 / 38 Anti-Obesity Limits of technical sciences... Vast efforts to address causes of high BMI Exercise, Diet, Weight Monitoring, Nutrition, Food Access, Counseling
17 / 38 Education has Limits Limits of technical sciences... Exercise, Monitoring, Nutrition, Food Access, Counseling
Looking Back Historically ownership is a means for building wealth 1998-2006: expansion Income relatively flat; home equity used for consumption 2006: rising defaults - lending driven 2008: more defaults - unemployment & negative equity driven 18 / 38
US Foreclosures 2000-2010 19 / 38 http://www.clevelandfed.org/research/commentary/2010/2010-15.cfm
20 / 38 Social Ecological Model Multilevel approaches Communitybased orgs Helping professionals Partnerships with financial sector Social Ecological Model PUBLIC POLICY COMMUNITY ORGANIZATIONAL INTERPERSONAL INDIVIDUAL
21 / 38 Life Course Approach Not just a class; not just in school Just in Time Decision making tools Linked to products, Life Events Peers, Couples, Generational Attention to Youth and Seniors
22 / 38 Emerging Teachable moments Focus on Goals Translating into impacts on future self Leverage peers and peer networks Ongoing reminders Coaching
23 / 38 Products Today: Prepaid debit cards Credit cards Insurance Short term debt for liquidity Electronic payments - 2013 SmartPhone Wallet
TYING ODYSSEUS TO THE MAST: EVIDENCE FROM A COMMITMENT SAVINGS PRODUCT IN THE PHILLIPINES - Nava Ashraf & Dean Karlan Knowing the temptations that lay ahead (the Sirens ) and that your resistance will be absent or futile, taking steps now to commit to a course of positive action will ensure you reach your intended destination Commitment device will ensure that you reach your savings target and its intended use (e.g., celebration or education) Estimated impact: 10-point increase in the probability of increasing one s savings and on increasing it by at least 20 percent.
30 / 38 Lessons for Independent Investors? Not missing much not using Advisors Focus on lowest costs Don t pay too much attention Don t seek out too many choices Predicting tax policies is either easy or impossible First order risks vs. Second order risks First order threats are death and disability Asset allocation is way down list Maintenance costs / simplicity matters Estate, probate and legal issues
31 / 38 Role of Advisors Complement: Advice most valuable for those with base level of knowledge De-biasing: identify and correcting the client s cognitive mistakes [Bluethgen et al. (2008) Decision-making is less cognitively taxing [Engelmann et al. (2009) Insecurity, stress and lack of confidence; reduce panic [Haslem (2008) Mediating Household Decisions: Couples use advisor to facilitate collaboration.
But Do Advisors Help? Conflict of interest (few pure fee only models) Studies show clients who use advisors pursue higher return, and higher risk investments, but costs of the advice outweigh gains (lower overall after-fee returns) [Chalmers and Reuter (2010) Hackethal, Haliassos, and Jappelli (2010)] Field audit: advisers promote investment strategies with higher fees, even if clients present preferences for lower costs approaches. [Mullainathan, Noeth, and Schoar (2012)] Time horizon mismatch Increasing use of automation by planners Main role: spousal mediation? Planning vs. product advice 32 / 38
35 / 38 Lifetime Savings Model Retirement is not about money Replacement rate fallacy Expectations, health & well-being are complex! Living too long is a real risk Costs of maintaining complicated investments Keeping trusts, wills, estates fresh Simplify, especially as we age Cognitive decline Fraud & Elder Abuse
37 / 38 Conclusions education may not be the solution to social problems No one size fits all solutions exist Imposing preferences for savings or spending impossible; subjective opinions may vary Wellness and Well-being approach Context matters Protecting assets Greatest asset is ability to earn income
38 / 38 Learning More J. Michael Collins jmcollins @ wisc.edu 608.616.0369 cfs.wisc.edu ssc.wisc.edu/~jmcollin/ Twitter: @jmcollinswisc