In
Fruitland Park, Florida, a man
called 911 to report a harassing phone call he received. While on the phone, he
told the dispatcher he had big muscles and asked her if she was single. The
Orlando Sentinel reports that the dispatcher commented to the man that he
sounded dru.nk, and he hung up. However, he called back two more times and
asked if the dispatcher was single. Police found the man and arrested him for
making the bogus 911 calls. But, the man was not done. When police placed him
in handcuffs, he allegedly told an officer he wanted to head bu.tt the officer
and kill him. Then, he spit onto an officer’s head and said he would kill the
officer.
In
Uniontown, Pennsylvania, a man reported
to the police station to be fingerprinted for a charge of drun.ken driving he
received for causing an accident in January. According to the Associated Press,
he drove there, and was dru.nk.
In
Vigo, Galacia, Spain, a woman has
been claiming ownership of part of the sun since 2010 when she threatened to
bill solar power users. The 54-year-old registered the star in her name at a
notary office in Spain, before opening an eBay account selling square-metre
plots for one euro each. Two years later, eBay pulled her listings, saying they
violated its intangible goods policy, and her account was blocked. She
threatened to sue, and now one Spanish court has recognized her claim. According to sky
News, a trial will take place next month, with the woman demanding around
£7,500 for payments she says she has not received. She has rejected an attempt
by eBay to settle the case out of court.
In
Cape Coral, Florida, a man climbed
atop a marked sheriff’s office SUV and performed a dance routine to songs
including Hall & Oates’ “Rich Girl” and Supertramp’s “Goodbye
Stranger.” He was arrested on charges of disturbing the peace and criminal
mischief. He told deputies a “woman with fangs” came to his door and
told him a human sacrifice involving vampires was imminent. “Therefore, [he]
made the conscious decision to get the Sheriff of Nottingham to help him stop
the slaughter of small children,” the Cape Coral police report of the
April 7 incident states, according to UPI.
In
New York, New York, a man whose
first name is God has settled a lawsuit with a credit reporting agency that had
refused to recognize his name as legitimate. Under the agreement reached in
Brooklyn federal court, Equifax will enter the man’s name into its database,
the Associated Press reports. He now has an impressive 820 credit score. The
Russian native is a Brooklyn jewelry store owner who is named after his
grandfather. He says it’s a relatively common name in Russia.
In
Sargodha, Pakistan, eyewitnesses say
two alleged sui.cide bom.bers were sitting on benches in a street close to a
roundabout with vests on, and had a discussion that soon turned into an
altercation. BGR Media reports that during the fist fight, one of the vests
exploded, killing one of the suspected bom.bers and injuring the other. No one
else was injured.
In
Beijing, China, a man filed a lawsuit
against a television show actress who he says stared at him too intensely
through his TV set. The man claims the gaze caused him spiritual damage. The
Associated Press report about the lawsuit says regulations making it more
difficult for courts to reject lawsuits took effect May 1.
In St. Johnsbury, Vermont, a man showed up
on time for jury duty and joined other prospective jurors before the start of
the selection process. According to the Associated Press, deputies directed him
to an empty court room to meet with the judge. The judge told him he could be
held in contempt of court, but instructed him to leave, because he was wearing
a prisoner costume. The man said the juror instructions do not specify clothing
restrictions.
I bet this teacher, who is retiring this year, won’t be spending
retirement in a rocking chair.
Behavioral Finance Q&A with Shachar Kariv – Part 2
In the second half of a conversation with PLANSPONSOR, U.C.
Berkeley Economics Department Chair Shachar Kariv discusses the importance of
defining and driving “financial rationality” among workplace savers.
Shachar Kariv is the Benjamin N. Ward Professor of Economics
and the Economics Department Chair at the University of California, Berkeley.
Like other thought leaders, Kariv believes behavioral finance is redefining the
way people save and invest money, especially for retirement.
He admits retirement readiness and decision theory aren’t
exactly the standard fare for economists in his position—but the trillions of
dollars Americans have saved in the form of tax-qualified retirement assets
comprise a critical piece of the U.S. investing landscape, he says. Beyond
this, it is vital for a healthy economic future that Americans save enough to
take financial responsibility for themselves and their families in retirement.
Finally—unlike economic challenges that so commonly break
down by income quartile or political affiliation—everyone who hopes to retire
one day, at any income level, must confront the difficult task of giving up
resources today for the benefit of one’s future self.
Q: Why do you think
the fields of financial services and retirement planning are only now getting serious
about the role of behavioral psychology and decision architecture?
Well, these ideas have
been around for a long time, but they are becoming more important in a world
where financial services consumers drive their own choices and are presented
with so much more choice and control than they had in the past.
The underlying ideas
are not new. The first American Nobel Laureate in economics was the great Paul Samuelson, who worked for a long time out of the
Massachusetts Institute of Technology. In 1947 he wrote a book called Foundations
of Economic Analysis. Now, the titles of most books in our field tend to
oversell the content in the book—but this is an apt title for the work
Samuelson accomplished in his writing about modern economics and financial
decisionmaking.
It remains
foundational today—he basically laid the ground for what we talked about
earlier as the Theory of Revealed Preferences. He sketched out some of the earliest
models that we can use to see what people’s preferences are when it comes to
allocating risk—and he was big on the idea of letting the data reveal this, of
looking at people’s real historical choices and behaviors to distill or boil
down their true preferences.
Moreover, he did
something even more interesting for the context of this conversation. He
suggested that many market participants—individuals and institutions—do not
actually have any consistent risk preferences to reveal. This will be familiar to your
plan sponsor and adviser readers. Some participants in plans are simply
incoherent about their own financial situation, so they are unable to rationally or consistently solve the various trade-offs at work in financial decisionmaking. This is one of the challenges the defined contribution
retirement planning model is running straight into today.
Q: Is it right to
assume that participants who struggle with defining their risk preferences will always do worse in the savings effort?
Not necessarily, and I’ll
explain. One of the attacks most commonly leveled against economists and
certain economic theories is that we make our judgements based on the assumption
that the financial choices people make are driven by their rationality. I think
this is unfair criticism, because any good economist knows people often rely on
emotions or they simply make an uninformed choice when it comes to their finances.
Solid economic theory takes this into account.
Another important
thing to keep in mind is that, as economists, we’re not talking about rationality
in the common usage—most people do not really know what economists mean when
they talk about “rationality.” They equate the rational choice with the objectively
best choice—but that is not what we are talking about in economics. The definition
of rationality for economists goes like this: “You are a rational financial
market participant if you have preferences that guide your behavior.”
You can see from this that
an individual might have a preference that works against his ultimate best interest—for
example he may take on less investment risk than he needs to have a good chance
of funding an adequate income replacement ratio in retirement—but by our
definition this does not mean he is irrational.
I think it is good in
general for people to have reasons underlying their economic decisions, but having
this element of rationality does not always or even generally mean that an
individual will make the right or the best decision based on their objective
circumstances. In fact, it can be more challenging to get a rational person on
track in the retirement savings effort than it is to get an irrational person
on track. If the former has strong psychological biases underlying his
reason-driven decisionmaking, it will be hard for a plan sponsor or adviser to
push him towards the more appropriate choice.
Q: Can you talk more
about how this applies to the daily work of plan sponsors and advisers?
As you know, a lot of the
ongoing theoretical work in behavioral finance and retirement plan services more
broadly is dedicated to some form of the rationality question—and whether participants should have decisions made for them. This is an area
where I am working with a firm called Capital Preferences to really build out a
sensible approach for addressing this thinking in the real world of retirement
plan administration. For us, the important step for plan sponsors and advisers
to take is to try and define how rational their plan participants are, and then
to think about what the answer might mean for important plan design decisions.
At Capital
Preferences, we are able to deliver this type of an insight because of the
careful construction of the "risk and ambiguity” games we use in place of
things like portfolio risk questionnaires. In our games, we ask individuals to
make a series of theoretical decisions, which are loosely structured like
retirement investments. Importantly, we structure the series questions in the game so that, if a
person is answering their questions in a rational way and according to a fixed
set of principals held in the mind, there should be a pattern in their answers
that bears this out.
I’ll give you an
example. If you were a rational financial decisionmaker and you told me in one
of these games that you preferred a given Portfolio A over another Portfolio B,
and then you went on to tell me that you also preferred Portfolio C over
Portfolio B, you should not then go on to tell me that you preferred Portfolio C
over Portfolio A. When we run a person through a series of these tests like
this, we very quickly start to see just how much inconsistency (i.e.,
irrationality) a given individual displays.
If I’m a financial
adviser or a plan sponsor, and I see that you answer all these questions
rationally, the question then becomes, does this person’s set of preferences
line up with what I believe is their best interest? If so—great—but if not, are
there steps I can take from a plan design or educational perspective that will
better align one’s preference with one’s best interest?
If a participant, on
the other hand, displays a lot of inconsistency, we have to ask how we can help
the individual better understand their own circumstances and their wants and
needs. Then we can turn to aligning their rationality and their best interest.
Q: Do you think the
movement of this thinking into the financial services mainstream will improve
the defined contribution retirement system and lead to more retirement wealth?
There are a few
observations we can make that would suggest improving economic rationality will
boost retirement plan performance in general. I explain this by first noting
that U.S. households with very similar demographic characteristics across
metrics like age, location, yearly income and the number of family members—they
tend to vary quite widely in terms of their current wealth and their perception
of financial well-being or anticipated hardship in retirement.
The question is, then,
how can we explain the wealth stratification when these families are working
off the same income base and presumably are facing the same expense demands? Outside of academia people are satisfied to say one’s
success in wealth accumulation will be determined by the quality of their financial
decisions—in the end the people that make higher quality financial decisions
will accumulate more wealth. This sounds like a good explanation—but academics like
myself, we want to go deeper. What does it actually mean to make financial decisions that
are of high quality?
It’s not a concept
that is very well defined at present—not least because people have very different
goals for how much money they would like to make and how much money they need
to be “happy” or “successful.” The key insight we have found after running many
of these risk and ambiguity analyses is that, even after we control for income
levels and other important factors, our measure of economic rationality helps
explain the wealth stratification in a way other factors can’t.
“The scientific way of saying this: ‘One standard deviation from the mean score of consistency with economic rationality in our experiments is associated with 15% more household wealth.’ In other words, the more consistency one displays in financial decision making, the better off we would expect them to be.”