Posts Tagged "psychology"

A messy desk covered with pens, pencils, paper, and coffee stains.

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.

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Three older people laughing in rocking chairs.

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

Occupy Wall Street protesters holding an American flag and a sign reading "We are the 99%"

How Rich is Rich?

Occupy Wall Street protesters have made their feelings known about the widening U.S. wealth gap.

So, what do the rest of us think?

A Harvard Business School professor – Michael Norton – and a behavioral economist – Dan Ariely – teamed up to ask people their preferences when it comes to the distribution of wealth. They found that Americans of all types and political affiliations “vastly underestimated” the magnitude of the difference between rich and poor in this country.

At a time many people are suffering in the slowing economy and languishing job market, it’s interesting to see a comparison between what Americans believe about U.S. wealth distribution and the reality they inhabit.

The American rags to riches myth endures – young adults are inspired by it; immigrants come here to pursue it; and millions play state lotteries every year in hopes of hitting the jackpot. Not surprisingly, the authors found that both rich and poor said some level of inequality is okay.

“This is an admirable part of America,” Norton said in a recent interview with Squared Away. “It’s just that people overestimate the extent to which it happens.” …Learn More

Three cartoon piggy banks.

One Savings Goal Better Than Many

Saving money. No financial behavior is more important in this era of DIY retirement planning. And yet few things are more difficult for more people.

To prod low-income people to save a little, foundations and the government design clever financial products or incentives – some work, some don’t. Academic researchers divine psychological tricks or behavioral mechanisms that might spur saving. Automatic enrollment in employer-supported 401(k)s is one such success story.

A different solution to the savings conundrum comes from two marketing professors at the University of Toronto. Experimenting on subjects around the world – residents of a small town in India, Canadian college students, parents in Hong Kong – they found that individuals are more successful savers if they identify and work toward a single goal. Setting multiple, competing goals – college, retirement, summer vacation, a new kitchen, and the Christmas fund – was less effective and even counterproductive.

“When people have multiple goals, they cannot decide which one is more important,” said author Min Zhao, whose paper with Dilip Soman is forthcoming in December’s Journal of Marketing Research. “They say, ‘I cannot decide. Maybe I’ll just do this later, and I might not do anything.’ ” …Learn More

A man pulling open his dress shirt (Superman-Style) revealing a bullseye on his chest.

Fraud Victims Can Be Profiled

Which profile describes the most common victim of investment frauds like Bernie Madoff’s?

a. Tech-savvy young adult
b. Man over 50 earning high income
c. Elderly widow on fixed income

Widow, you say? That’s the stereotype, said Laura Carstensen, founder of Stanford University’s new Research Center on the Prevention of Financial Fraud.

“The old woman who’s demented and living on her own, and the guy who knocks on her door and sells her the policy – that does exist, but it doesn’t represent older people,” she said. Older people who have a history of long-standing relationships are often better at determining who they can trust, she said.

The correct answer is b: Man over 50 earning high income.

Fraudsters feed successful men’s egos by appealing to their investment savvy, enticing them to get into a deal others might not understand. By building up their egos, a fraudster ensures that the victim isn’t thinking clearly when he agrees to invest, said Doug Shadel, a member of the Stanford Center’s board who co-authored the AARP Foundation National Fraud Victim Study.Learn More

An arrow curving upwards (left to right) over the top of increasingly tall graph bars.

The Power of Compound Interest

Every entrant to the workforce should be subjected to the same questions posed to California undergraduates in a new experiment about how well people understand compound interest.

Better to show the math than to explain it. Franny and Zooey just started working. Franny immediately begins depositing $100 per month – $1,200 every year – into her new retirement account, which pays 10 percent interest annually. Zooey doesn’t start saving for 20 years, but he puts in $300 every month — $3,600 annually — and also earns 10 percent interest.

In 40 years, Franny retires with $584,222 in her account – more than double Zooey’s $226,809.

Asked to calculate these future savings on their own, 90 percent of the undergraduates had vastly underestimated the totals in the experiment by Craig McKenzie at University of California, San Diego and Michael Liersch at New York University. Yet, this mathematical calculation is central to the financial well-being of most Americans. In 2009, more than half of all households were at risk of not having sufficient assets to retire, according to Boston College’s Center for Retirement Research, which hosts this blog. …Learn More

Journal to Spotlight Financial Behavior

JMR logo

The Journal of Marketing Research (JMR) will devote a special issue to interdisciplinary research on the hot topic of financial decision–making and behavior.

The issue is a smorgasbord of 15 articles on behavioral, marketing, economic, and psychological research on various financial activities, from borrowing money to establishing trust in financial transactions.

The November issue’s guest editor-in-chief, John G. Lynch, a psychologist who “wandered into marketing and consumer decision-making,” said the interdisciplinary approach advances everyone’s understanding of complex financial decisions.

“A given field understands a part of the answer. But we’re missing the larger whole,” he said. The special issue “would bring people together to read each other’s work and have an effect of causing more cross-fertilization.”

Squared Away plans to cover some JMR articles in a series of blog posts in coming weeks. Here’s a preview: …Learn More