We make thousands of decisions every day. Do I cross the road now, or wait for the oncoming truck to pass? Should I eat fries or a salad for lunch? How much should I tip the cab driver? We usually make these decisions with almost no thought, using what psychologists call “heuristics” – rules of thumb that enable us to navigate our lives. Without these mental shortcuts, we would be paralyzed by the multitude of daily choices. But in certain circumstances, these shortcuts lead to predictable errors – predictable, that is, if we know what to watch out for. Did you know, for example, that we are naturally biased towards selling investments that are doing well for us, but holding on to those that are doing poorly? Or that we often select sub-optimal insurance payment plans, and routinely purchase insurance that we don’t even need? And why do so many of us fail to enroll in our employer’s corporate retirement plans, even when the employer offers to match our contributions? Behavioral finance is the study of these and dozens of other financial decision-making errors that can be avoided, if we are familiar with the biases that cause them. In this course, we examine these predictable errors, and discover where we are most susceptible to them. This course is intended to guide participants towards better financial choices. Learn how to improve your spending, saving, and investing decisions for the future.
Benefits of Saving Early
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Из курса от партнера Duke University
Behavioral Finance
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Week 3
In the final week of the course, we will see multiple examples of how mental heuristics can lead us to make predictably sub-optimal financial decisions, both individually and across the entire financial markets. We will also discuss the many ways in which you can now improve your financial decision-making because of your deeper understanding of the innate biases that have tripped you up in the past!
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Emma RasielAssociate Chair and Professor
Economics
Let's see how individuals out there in the working world
have done at this type of starting early to invest.
So, a group of researchers sent a survey to
a large sample of employees at a big firm.
And having got responses from the survey, they were then permitted on an anonymous
basis of course to match the survey responses
to the actual savings behavior of those salaried employees.
And out of every 100 employees that these researchers surveyed,
they found that 68 of each 100,
68% self-reported that they weren't saving enough for retirement.
They knew they weren't doing it but they didn't want to take it out of their
salary each month or each year for themselves.
They just had too hard a time doing it.
And out of those 100 employees, 24 of them self-reported that they were going
to start increasing how much they saved within at least the next couple of months.
Okay, they were determined that the next couple of
months that they got their paycheck they would start saving more,
now that they've been reminded that they needed to do so.
And guess how many of those 24 actually did that?
A stunning three.
We are not good at self control.
We've seen this over and over.
Even though many of us know that we should be saving more for
retirement, if it's not done for us, we don't do it.
We don't have the self-control to take that money out of our current income and
put it away on a regular basis for something 20 or 30 or
40 years down the road.
However, a couple of researchers have done a lot of work on exactly this issue,
and they have actually got some companies to change the default
on what those companies do in terms of retirement savings for their employees.
So here's the way it works at some of these companies, because these companies
now understand that our default is not to put money away on our own,
the company actually actively says we're automatically enrolling you
as you come into the company, your 401k investments are being made.
2% of your pay will be put in your 401k,
unless you choose for that not to happen.
Good old inertia kicks in again.
Everybody knows it's a good idea,
the monthly decision of whether to do it has been taken away, it's just being done.
And of course, those employees are given the option not to do so.
They can call a phone number to opt out of enrollment.
Do they make that cool?
Very, very few.
Let's see some of the statistics on this.
Here's a graft of outcomes of 401k participation
for some firms that have been compared that in other ways very,
very similar except that some of the firms are using the automatic opt in enrollment.
And some of the firms are using standard enrollment, where the employees
have to individually choose to have their money put in the retirement account.
And as we see over the first two years of the employees being in these two
different types of firms, about 80% of them stick with
the automatic enrollment if that's the default, whereas with standard
enrollment where employees need to choose to put money in the 401k,
they start at less than fewer than 20% of those employees are doing that.
Over time, more of them are starting to decide to do that, but
even after two years, there are not even close.
And remember what we saw earlier.
The earlier you start, however small an amount it is,
compound interest is going to build that for your retirement.
So let's also just check, looking back after firms out there have done this
automatic will enroll you right away unless you tell us not to, what
were employees responses to that after they had time to get use to the idea.
So here's what we found from the surveys done by these researchers.
In firms with standard 401k, where there is no automatic enrollment.
Two-thirds of employees say,
they should save more, but we've already seen that they don't.
Under automatic enrollment, only around 10% of
employees actively opt-out of the automatic enrollment and
that's consistent with what we saw on the last graph.
Which was more than 80% of employees
in automatic enroll firms are staying with the automatic enrollment.
Under the automatic enrollment plans, the HR offices,
the human resources officers are reporting that there are no complaints
from employees about any aspect of the auto enrollment plan and
in fact 97% of employees in these auto enrollment firms are positive.
They're in favor of the whole process because that decision that they
know is the right decision, but they don't have their own self control
is being taken away from them in a way that they're happy with.
Even among the workers who opt out of automatic enrollment,
almost 80% of them still think it's a good idea.
They must just have their own personal view about
why they personally don't want to do it.
At this point, even the US government is discussing adopting
auto-enrollment plans as the default.
Why?
Because one of the biggest payments the government is making and
one of the largest growing payments the government is making,
are the social security payments that you get when you retire.
Government would love to see more of us save more for
retirement, because then the needs for the government to help fund your retirement
through social programs would go down which would be a benefit for everyone.
It's in the government's interest for either us to take better control or
for firms to help us, give us a choice, but to help take that control for us.
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