June 21, 2011
Unseen Risks Challenge Consumers
Financial-product complexity isn’t talked about on Capitol Hill, where Congress is arming itself for battle royale over the appointment of Harvard Law School professor Elizabeth Warren to head the new Consumer Financial Protection Bureau.
But some economics and business professors are sticking up for the financial consumer, who they say faces an “ever-widening set of financial options” and “dizzying amount of information.”
“Households are expected to make decisions about pension plan contributions and payouts, to choose from a wide array of credit instruments to fund everything from home purchase to short-term cash needs, and more generally to assume a greater level of responsibility for their financial well-being,” Harvard economists Brigitte Madrian and John Campbell, Harvard Law professor Howell Jackson, and Peter Tufano at the Harvard Business School wrote in a recent paper.
“There is growing evidence that consumers make avoidable financial mistakes” with “nontrivial financial consequences,” they said.
Published in the latest issue of the Journal of Economic Perspectives, the paper used three case studies to support their call for more creative regulation: mortgages, payday loans, and 401(k)s. …Learn More
June 16, 2011
Complexity Dogs Financial Consumers
There is a race between financial companies and their consumers, and the consumer is dead last.
It has become virtually impossible for regular folks to keep pace with Wall Street’s increasingly complex financial products or the confusing bells and whistles being attached to once-familiar products. Look no further than the “basic” checking account, which is no longer basic, according to a recent study by The Pew Charitable Trusts. And forget about deciphering “universal variable life insurance.”
Evidence of this complexity abounds in the personal finance section of The Wall Street Journal, which recently ran an article about the profusion of “draw-down” products to help retirees use their 401(k)s to lock in a steady stream of income. The newspaper also warned about the banking industry’s new push to sell “professional credit cards,” which aren’t subject to regulations that limit controversial billing practices.
Even with checking accounts, the devil is in the details. In “Hidden Risks: The Case for Safe and Transparent Checking Accounts,” Pew analyzed fees in 250 checking accounts – that’s how many were offered just by the nation’s 10 largest banking companies. Learn More
May 5, 2011
Choosing Financial Products:
Looks Do Matter
We like to think we’re rational about money. We go for the credit card or mortgage that has the lowest interest rate.
Think again. Our moods, emotions, and other reactions to aesthetic cues play a decisive role in financial decisions, according to innovative research by Suzanne Shu at UCLA and Claudia Townsend at the University of Miami.
“Everybody expects that it [aesthetics] is not going to influence them, so it’s extra surprising when it does,” Shu said in a recent interview.
The marketing professors’ results carry a message for anyone interested in financial literacy. Their research subjects thought twice about their decisions after receiving very subtle references to aesthetics. In other words, when people are alerted to their unconscious reactions to how something looks, they adjust their thinking to guard against being overly influenced by the aesthetics. …Learn More