interdisciplinary research on consumer financial decision ... · headline john g. lynch, jr. 5 june...
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Headline
John G. Lynch, Jr.
5 June 2012 Center for Financial Security Workshop
Interdisciplinary Research on Consumer Financial Decision
Making
Thank you
• Michael & colleagues • Na3onal Endowment for Financial Educa3on
• Opinions expressed are my own and those of coauthors
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h@p://leeds.colorado.edu/event/bouldersummerconference
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Upcoming at Boulder Summer Conference June 24-‐26
Sunday • Shlomo Benartzi: Bridging the Gap from Academic Research to Prac3ce” Home Purchase and Financial Health
• Panel Discussion on Bridging Gap – Re3rement Research
• Helen Dean (UK Na3onal Employment Savings Trust) • Daniel Egan (Barclays Wealth / UCL) • Michael Liersch (Merrill Lynch)
– Mortgages and Home Ownership • Peter Carroll (U.S. Consumer Financial Protec3on Bureau) • Seth Carter (Al3source) • Janneke Ratcliffe (UNC Center for Community Capital)
Upcoming at Boulder Summer Conference June 24-‐26
Monday • Home Purchase and Financial Heath
– Moulton, Sydnor, Deggendorf • Deciding to Default
– Fox, Wilkinson-‐Ryan, Dokko • Role of Intermediaries in Debt Resolu3on
– Collins, Lawless, Soll • A Closer Look at CARD Act Disclosures
– Jones, Salisbury, Reid • Choosing How to Insure Health
– Atanasov, Johnson, Ginde
Upcoming at Boulder Summer Conference June 24-‐26
Tuesday • Heredity, Personality, and Financial Behavior
– Olivola, Kuhnen, Todd • Financial Literacy and Financial Educa3on
– Fernandes / Netemeyer, Wong, Hogarth • Valuing Annui3es
– Brown, Shu, Bateman • Bracke3ng and Inves3ng
– Koehler, Goldstein, Willis • Inves3ng in Times of Crisis
– Meyer, Weber, Payne
• Smart Disclosure: The Regulatory Future -‐-‐ Thaler
Agenda
• Domain of consumer financial decision making v. financial capability
• What’s happening across disciplines?
• A personal example of benefits of opera3ng out of the comfort zone
Financial Capability and Financial Decision Making
• Financial capability – Upstream… skills that eventually relate to behavior
• Financial decision making – Downstream … focus on causes that are more proximate to specific financial behaviors
Domain of Consumer Financial Decisions
• Consumer decisions are “financial” if: – Drama3c effects on consumer’s overall financial picture due to • Size of single expenditure or • Accumulated effects of repea3ng same pa@ern due to personal traits, abili3es, and habits
– Decision involves choice of financial products to enhance financial well-‐being
Decisions that Ma@er
• Student loans & inves3ng in human capital • Using and abusing credit cards • Buying a house • Choosing mortgages • Deciding which debts to pay • Deciding on savings priori3es, including re3rement • Invest at some risk to increase future wealth • Insurance to reduce risk • Paying for health care • All ma@ers with great personal, societal, and business consequences
Consumer Myopia
• At any given 3me consumers focus on small part of overall financial picture but do not appreciate interdependencies
• Decisions influenced by fascina3ng set of traits and skills, situa3onal factors, and social mo3ves
• Many players trying to nudge, influence, persuade, inform
Core Topics
• Nonlinear reasoning due to compound interest (MacKenzie & Liersch; Soll, Keeney, & Larrick; Stango & Zinman)
• Intertemporal tradeoffs between smaller sooner and larger later rewards & considera3on of opportunity costs (Atlas, Johnson, Payne; Bartels & Urminsky; Hirschfield et al; Soman & Cheema; Spiller; Wilcox, Block, Eisenstein)
• Role of emo3on vs reason (Galak, Small Stephen; Lee and Andada; Strahilevitz, Odean, Barber; Sussman & Olivola)
• Framing (Amar et al.; Soman & Cheema)
• Role of advisors and influence agents (Bolton, Bloom, and Cohen; Guarav, Cole, Tobacman; Schwarz, Luce, Ariely)
Focus on Classes of Remedies
• Educa3on • Informa3on disclosures
• Defaults and choice architecture • Financial products and advice from for-‐profit and not for profit en33es
Naturally Interdisciplinary
• All topics where mul3ple disciplines have something valuable to contribute that would not occur to a scholar in another discipline – Finance, Behavioral Finance, Economics, Behavioral Economics, Consumer Sciences, Marke3ng, Management, Psychology, Anthropology, Sociology, Human Ecology, Public Affairs, Educa3on, Law, etc.
• How do we fit in and talk with each other?
Benefits of Interdisciplinary Dialogue
• Levels of analysis: – markets (econ), Individuals (psych), dyad or social groups (sociology), culture (anthro)
• Sage: Siing at the public policy children’s table
• Public policy the special domain of lawyers and their economist friends – Point predic3ons and a story
• How can other social sciences have a seat at the table? Fleischer’s advice.
My Own Experience
• Rand BeFi Conference – – Presen3ng mortgage recommender system; Barney Frank aide says “we’re puing our money on financial literacy”
• Boulder Summer Conference • NEFE Quarter Century conference
– Phillips: Given mixed evidence and cost considera3ons, maybe now is not the 3me to con3nue to press for state mandates
– Here3c in a room of believers
Effects of Financial Literacy on Downstream Financial Behaviors
• with Daniel Fernandes Erasmus University& Rick Netemeyer, Univ. of Virginia
• NEFE funded project to do meta-‐analysis of when and why financial literacy affects financial behaviors
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Our Guiding Hypothesis
• There are two kinds of studies in this literature 1. Experimental & Quasi-‐Experimental studies of
effects of educa3onal interven'ons on financial behaviors
2. Correla3onal / econometric studies that measure financial literacy of consumers by some test & predict some downstream financial behavior
• We expect that first kind will show weak effects compared to second kind
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Meta-‐Analysis Results
• Manipulated educa3onal interven3ons v measured financial literacy
• Interven3on characteris3cs ma@er – Dose size (hours of instruc3on) – Delay between interven3on and behavior – Bigger interven3ons start with larger effects but decay faster with 3me
– Consequently, even large interven3ons like high school courses have very small effects at a long delay
• Why bigger effects of measured literacy?
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Why?
• Q: If manipulated literacy interven3ons have such weak effects, why the stronger predic3ve effects of measured literacy?
• A1: Measured literacy is a mediator: MY > (XMY) • A2: We don’t really know what measured literacy is
measuring. No proper psychometric development of popular measures
• A3: Perhaps measured literacy is correlated with other omi@ed traits that are true drivers of financial behaviors
• A4: Educa3onal efforts haven’t yet explored full poten3al of interven3ons
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Study Two • Predict financial behaviors by demographics, literacy, other traits • The consumer financial behaviors of Study Two were:
– 1) a yes or no measure of “saving for an emergency fund” (Lusardi and Mitchell 2006, 2007, 2009);
– 2) a yes or no measure of “figuring out how much savings is needed for re3rement” (Lusardi and Mitchell 2006, 2007, 2009);
– 3) a ra3ng of “How do you think banks or credit card companies would rate your credit?” 1 =Very Poor, 10 = Excellent” shown by Lynch et al. (2010) to correlate .85 with credit scores;
– 4) three mul3ple-‐choice items used by Mandell and Klein (2009) and Hilgert et al. (2003) assessing nega3ve financial behaviors of bouncing checks, late credit card payments, and minimal credit card payments. Summed three items for score from 3 to 13.
– 5) four yes/no ques3ons about performing posi3ve investment / savings behaviors summed to form an score ranging from 0 to 4 (Lusardi and Tufano 2009);
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Study 2 Hierarchical Model Comparisons
• Model 1: Financial Behavior = f(Demographics) • Model 2: Financial Behavior = f(Demographics, Financial Literacy) – Replicate extant findings in the literature
• Model 3: Financial Behavior = f(Demographics, Financial Literacy, 4 correlated traits)
• Confidence in info search, propensity to plan, willingness to take financial risk, numeracy
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What Does It Mean?
• For 4 of 5 financial behaviors studied, might literacy’s effect in Model 2 be due to correla3on with other omi@ed traits?
• Under that interpreta3on, weak effects of financial educa3on in meta-‐analysis may be because the wrong skills are emphasized – Don’t focus on impar3ng specific vocabulary and objec3ve knowledge
– Build propensity to plan – Build subjec3ve knowledge & confidence & financial self-‐efficacy (Hader, Sood, & Fox)
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Role of Financial Educa3on in Toolkit
• Economists have three main tools: More choices; Be@er informa3on; Incen3ves to perform desired behaviors
• Financial Literacy is a “be@er info” remedy – What’s the half-‐life? – Just in /me financial educa/on?
• Nudge / defaults when consumers homogeneous • JIT Financial educa3on + ac3ve choice when needs heterogeneous
• 2 problems for future work – What to teach – When to teach it? How to teach it close to the point of decision
• What do our findings imply for school-‐based financial ed?
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Thank you!
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