March 25, 2014
Do Incentives Create Lax Loan Standards?
The answer to the above question is definitely “yes,” according to new research by professors Sumit Agarwal at the National University of Singapore and Itzhak Ben-David at Ohio State.
They examined 30,000 small business loans made in 2004 and 2005 to compare the loans made by salaried bank officers with those made by officers working under a commission system. The commissioned lenders were paid 80 percent of their former salary, plus commissions based on the number of loans they originated, their dollar amount, and how quickly they were approved.
Not surprisingly, the researchers found that commissioned officers, responding to these incentives, originated 31 percent more loans and the dollar amounts per loan were nearly 15 percent greater – they were also often larger than what their clients had requested. …Learn More
March 6, 2014
Delay Retiring: A ‘Smart’ Decision
If postponing retirement can improve one’s financial security in old age, why do so many people rush to retire when they reach age 62?
Much research has explored the financial and health reasons that explain why so few people choose to retire later. Taking a different tack, a new study found that individuals with higher cognition foresee a higher probability of working longer.
There were two steps to this research.
First, participants in an Internet survey were asked if they planned to continue working full-time after age 62 and, separately, if they expected to work past 65. Participants were between the ages of 45 and 61.
Next, the researchers measured each survey participant’s “crystallized intelligence,” which is the wisdom acquired with age. This type of intelligence helps to compensate for declining “fluid intelligence” – the ability to think quickly – which peaks in young adulthood. To measure their crystallized intelligence, participants took a standard psychology test in which they are shown pictures – perhaps a goat, maracas, a sextant (an astronomical instrument) – and asked to name them. …Learn More
March 4, 2014
New Book Spotlights Behavioral Finance
Did you know that an investor may be more likely to hold on to a money-loser if he bought it himself than if he inherited it? That people born with the “warrior gene” will take more risks? Or that trust is essential to whether individuals prepare for retirement?
A new edited volume, “Investor Behavior: the Psychology of Financial Planning and Investing,” is a thorough tour of the research on these and other aspects of behavioral finance. The book was compiled for financial planners, investment professionals, academics, and finance students and edited by two finance professors, H. Kent Baker of American University’s Kogod School of Business and Victor Ricciardi of Goucher College.
The field of behavioral finance is gaining traction as financial experts increasingly recognize that psychology, sociology, neurology and other fields may have something to say about why people behave the way they do around money.
Traditional theories explaining investor behavior, such as modern portfolio and utility theory, assume that people make “rational” choices. In contrast, the research covered in this new book tries to explain why financial decisions are not always rational, are often infused with emotion, and can be very predictable. Or, as 1978 Nobel laureate Herbert Simon once explained, orthodox finance’s “traditional paradigm did not describe the behavior of real people,” the book says. …Learn More
February 27, 2014
Why Some Retire, Others Persevere
When older workers are weighing whether to retire or carry on for a few more years, it’s unsurprising that the characteristics of their jobs are a big consideration:
- Higher pay keeps workers in the labor force longer.
- Workers who feel discriminated against are often the first to retire.
But personality also matters, says a team of researchers from the University of Southern California (USC) and the RAND Corporation who analyzed data from the Health and Retirement Study, an on-going survey of age 50-plus U.S. households.
Consider two types of personalities – highly active and engaged, and passive and reserved. The researchers found that higher wages are effective in persuading more passive people to continue working. But monetary rewards are, for highly active workers “a less important driving factor for the decision to remain in full-time employment,” said Marco Angrisani, one of the study’s co-authors from USC’s Center for Economic and Social Research. Active workers will continue to work, simply because they like it or feel compelled to keep busy. …Learn More
February 13, 2014
How Love Is Like Money
In this video, an expert in financial behavior explains the common errors in reasoning, whether people are thinking about love or money. Thoughts like:
• This time is different.
• I can change things.
• Wishing on a star.
• Being afraid of loss. Learn More
February 6, 2014
Lottery-like Prizes Spur Saving
Jessica Smith, mother of four, was never much of a saver. But a credit union that dispenses prizes has changed all that.
She now saves $150 every month out of her pay and bonus as a restaurant buffet manager. Each $25 deposited into her account gives her one more entry in a monthly drawing for cash prizes at the Communicating Arts Credit Union in Detroit.
Jessica Smith and her winnings.
By coincidence, she won three times last fall – a total of $100 in prizes. But in contrast to throwing money away on a lottery ticket with bad odds, she earns a little interest on her credit union account.
These so-called prize-linked accounts aren’t a new concept: one of the first appeared in 1694 in the United Kingdom to help people pay off war debts. Today in this country, nearly 18,000 individuals like Jessica participate in Save to Win programs. Launched in 2009, they’re offered at more than 60 credit unions in four states.
Michigan handed out $100,000 in prizes last year, including six $10,000 grand prizes; Nebraska, North Carolina, and Washington each gave out between $25,000 and $50,000 in a year. …Learn More
January 30, 2014
TV’s “Shameless” Takes on 401(k)s
In this video clip from “Shameless,” young adults may relate to Fiona’s reaction to “the 401(k) talk” by a manager who pops into Fiona’s cubicle.
This popular television dramedy, “Shameless,” is about the dysfunctional Gallagher family of Chicago, and oldest daughter Fiona (played by Emmy Rossum) does what she can to keep things together. But how to cope with the 500-page 401(k) binder her manager drops on her desk with a thud?
It’s been rare that 401(k)s are mentioned on television. So, why have retirement savings accounts entered our popular culture?Learn More