December 1, 2011
Card Minimums Cause Puzzling Behavior
What is it about the minimum payment on credit card statements that makes people act so crazy?
Two years ago, Neil Stewart, a psychologist at the University of Warwick in the United Kingdom, confirmed his own and some behavioral economists’ suspicions: when the minimum payment line was entirely deleted from statements, cardholders paid 70 percent more.
The holiday shopping season is in full swing, underscoring how important this initial finding was. Credit-card companies set their minimum payments extremely low, significantly increasing customers’ total payouts over the long term – paying the minimum causes interest costs to accumulate faster.
Stewart and his colleagues have now advanced his prior research by testing how card-carrying Americans and British would react to different levels of minimum payments. The result this time: the higher the minimum, the less people paid.
“We’re not entirely sure what’s going on in people’s heads,” said co-author Linda Salisbury, a professor in the Carroll School of Management at Boston College. The key, however, is a well-known psychological concept called “anchoring,” she said. …Learn More
November 29, 2011
401(k)s: Reaching Young Employees
Nearly one in three employees under age 35 has not enrolled in their 401(k) retirement plan, according to almost half of the major corporations surveyed recently by Northern Trust.
It’s “imperative” that young employees save more than they do, said Lee Freitag, senior product manager for defined contribution solutions at Northern Trust, which surveyed Altria Group, Microsoft, Walgreen and other U.S. companies.
Today’s young workers will rely more on 401(k) savings than any previous generation, he said, now that employer-funded pension plans are virtually extinct in corporate America. Yet many are sacrificing their prime savings years. To retire at age 70, for example, a 25-year-old must save only 7 percent of his or her income, earning investment income over 40 years. This compared with a steep 18 percent of income for someone who waits until age 45 to start saving and has fewer years to accrue investment returns.
So, how to reach these young adults when it counts? To them, retirement in their 60s is an abstraction – they do not naturally focus on it. According to preliminary research out of the Mason School of Business at the College of William & Mary, how employers communicate may be the key to boosting savings among recent entrants to the workforce, given their long time horizon until retirement.
“We may need to communicate with younger workers differently than older workers,” Nicole Votolato Montgomery, Lisa Szykman, and Julie Agnew write in their new paper.
Their research indicates that employers can help younger employees define the steps they should take – by making them more concrete. This is a different twist on the psychology of saving found in other psychological research – when college students in one experiment saw computer avatars of their older selves, they wanted to save for their old age. …Learn More
November 22, 2011
Game Highlights Tough Choices for Poor
In May, Squared Away’s very first post was about an eye-opening “game” in which players take on the role of someone who is poor. The player is assigned a job and a paycheck. Every financial decision ricochets through the monthly budget, often in unexpected ways. Lives, children, and work choices are affected – poverty even creates unique ethical decisions.
The game, Spent, is so powerful, because its creators interviewed clients of Urban Ministries of Durham in North Carolina, which operates a food pantry, clothing closet, and homeless shelter. A local advertising firm, McKinney, designed the game in conjunction with Urban Ministries.
To play Spent, click here.
To read more, click here.Learn More
November 16, 2011
Readers: Long-Term Care Policies Costly
One intention in introducing Squared Away this year was that it would become a forum for readers to share views about financial behavior, psychology, decision-making, products, education, and culture.
Some articles have been more successful than others in generating readers’ comments in the space provided at the end of each post. A post last week, “Long-Term Care: To Buy or Not to Buy,” was notable for the heat it generated.
It provided reasons the vast majority of the elderly do not purchase long-term care coverage from an insurance company. While the article, based on academic research, was about personal decision-making, readers focused on problems with the policies themselves:
Samantha Price noted:
Firstly, they are very expensive, so no one should be surprised why so many people are not buying. Secondly, many of the more affordable policies are issued by below-quality insurers, who have already shown their unreliability by being unable to pay their policyholders.
VG replied: …
November 15, 2011
Student Loans Derail Life Plans
Christi Longlois of New Orleans only slightly exaggerates when she says she and her partner “will be retired before we pay off our student loans.”
Longlois, who works at Tulane University, and Geneva Marney, who works at a non-profit, together owe $80,000 in student loans. Both in their 30s, they have more than 25 years of monthly payments ahead of them.
On their financial planner’s advice, they sold their house and began renting so they could make their $453 monthly loan payments, some of which funded Longlois’ graduate school, and pay their credit cards. They’d like to eventually send their infant twins to private school but don’t feel that’s very realistic.
In interviews with a dozen college seniors and young adults in their 30s, it became painfully clear that loan payments have blasted holes in many life plans – something their baby boomer parents didn’t even worry about. …Learn More
November 10, 2011
Are You Conscientious?
In a recent study of five personality traits, conscientiousness was the strongest determinant of an individual’s financial well-being.
Angela Lee Duckworth at the University of Pennsylvania and David Weir at the University of Michigan compared how people did on a personality test with their financial well-being after age 50. They examined the Big Five traits: conscientiousness, emotional stability, agreeableness, extroversion, and openness to experience.
Their finding about the power of conscientiousness adds to a spate of research combining psychology and economics to predict why people earn more, save more, or prepare for retirement. In another study, Australian researchers found that a child’s level of self-control, as early as age 3, can predict whether he or she will experience financial problems later in life.
So, what is conscientiousness and do you have it? I could tell you about it, but watch the video interview of Duckworth instead, on the University of Michigan Center for Retirement Research’s website.
Hint: is your desk clean?
Full disclosure: The research cited in this post was funded by a grant from the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog. The opinions and conclusions expressed are solely those of the blog’s author and do not represent the opinions or policy of SSA or any agency of the federal government.
November 8, 2011
Long-Term Care: To Buy or Not to Buy
Let’s face it: thinking about long-term care insurance, nursing homes and home health aides is depressing.
It’s no wonder that just 10 percent to 12 percent of America’s elderly population has purchased a long-term care policy.
More are thinking about it though: New research shows that 40 percent of people 50 years or older who were surveyed had “thought a lot about needing long-term care” if they were to become ill in old age.
This research delved into the factors driving individual decisions about whether to buy long-term care coverage – or not buy. The decision “depend(s) on a complex amalgam of many different factors,” concluded a conference paper based on research conducted by the NBER Retirement Research Center.
Here are some of the findings in the paper, by Jeffrey Brown at the University of Illinois, Gopi Shah Goda at Stanford University, and Kathleen McGarry at the University of California at Los Angeles: …Learn More