Americans Inconsistent on Financial Risk

A new paper in the American Economic Review (abstract; PDF), summarized here, finds that Americans aren't very consistent when thinking about financial risk. Liran Einav, Amy Finkelstein, Iuliana Pascu, and Mark R. Cullen, analyzing how people choose health insurance and 401(k) plans, found that "at most 30 percent of us make consistent decisions about financial risk across a variety of areas."  Their data set includes 13,000 Alcoa employees:

Because employees were making decisions in both the health-care and retirement domains, the researchers had the opportunity to see how the same individuals handled different types of choices. Or, as Finkelstein puts it, the economists could ask: “Does someone who’s willing to pay extra money to get comprehensive health insurance, who doesn’t seem willing to bear much financial exposure in a medical domain, also tend to be the one who, relative to their peers, invests more of their 401(k) in [safer] bonds rather than stocks?”

My Target-Date Fund Is Bigger Than Yours

We've banged the drum quite a bit on the need for greater financial literacy. If you care about such things, you might want to take a look at a new working paper by Pierluigi Balduzzi and Jonathan Reuter called "Heterogeneity in Target-Date Funds and the Pension Protection Act of 2006" (abstract; PDF).

That isn't the sexiest title ever, and if you don't care at all about personal finance or investing then you probably shouldn't go near it. But if you care even a little bit, the paper has some interesting lessons even beyond the fairly narrow focus of Target-Date Funds. A Target-Date Fund is, in a nutshell, a mutual fund whose asset allocation automatically shifts over time as the target date approaches.

Financial Literacy Solutions, Information-Design Edition

In our latest podcast, “What Do Hand-Washing and Financial Illiteracy Have in Common?” we talked about America's financial literacy problem, a topic we’ve written about before. In the podcast, two Council of Economic Advisers chairmen discuss the role of financial illiteracy in the recession. And economist Annamaria Lusardi and legal scholar Lauren Willis offer their solutions to the problem.

Two designers, Tristan Cook and Thomas Nelson of Humans in Design, also have a pitch.

Credit Scores: Do Nice Guys Finish Last?

A new study takes advantage of the increasing (and somewhat controversial) use of credit scores as a tool for evaluating job candidates to examine whether scores are affected by how nice you are. Jeremy Bernerth, Daniel Whitman, Shannon Taylor and H. Jack Walker found that while there is a positive relationship between "conscientiousness and FICO scores, there is a negative relationship between agreeableness and FICO scores":

The finding that credit scores accounted for a substantial proportion of variance in externally rated performance variables gives some credence to the practice of using credit scores as a screening tool. However, null findings between credit scores and workplace deviance call into question claims that employees with poor credit will engage in behaviors intended to harm the organization (Gallagher, 2006; Oppler et al., 2008).

Financial (Il)Literacy Among the Young

We blogged a while back about the sad state of financial literacy in this country. This has been diligently investigated by Annamaria Lusardi and Olivia S. Mitchell, who insert a few financial questions in government longitudinal surveys. Here's an example.

When It Comes to Saving, Who Would You Listen to: My Wife or Milton Friedman?

My response when Money magazine asked for the best advice I had ever received about personal finance: When I was a first-year assistant professor at the University of Chicago, my friend and department chair, Jose Scheinkman, relayed the advice Milton Friedman had given him 20 years earlier, “Don’t save too much.” The logic was simple: […]