Tax Incentives
- a way in which govt tried to get people to save
- Research by Chetty however showed that $1 of tax subsidy had the impact of increasing saving by 1 cents (1%)
what was really happening is that the top 15% of savvy investors were simply moving their existing savings into more tax efficient funds. Did not result in more savings just a movement of savings
Financial Education
study by Laibson, Bernatz et al. showed that financial education left participants more informed but this didn’t actually increase savings
- “in contrast, changing the defaults allowing people to opt out of future savings, rather than opt-in had much bigger impacts on medium to long run saving behaviour” - Halpern
- providing better information and generic advice had not worked
Credit cards
credit cards affect our consumption as delay the pain and have minimum amount to repay
- research has shown that when a credit card statement had a 2% minimum payment people repaid an average £99 of a £435 bill
- when there was no minimum repayment, repayment was higher (anchors)
- if credit card companies could be persuaded to change the minimum repayment or at least show different repayment amounts, this would reduce the impact of the low minimum anchor
Self-control credit cards
- Ariely had the idea of this where you can set your own limits for spending per category
- if you went over your self-imposed limit then the card could be rejected or there could be a cooling off period or any overspending could result in an email to a spouse or parent
- great for consumer but not for companies trying to maximise profits
Gambling
annual gambling losses in the UK over $18 billion
gambling companies makes money because we arent good at evaluating probabilities
- In an experiment where football fans asked to forecast probability of a game:
charlton to win, lose or draw
charlton to win, BTTS (there are 6 permutations)
- when asked to add up probabilities of first one, they added up to 67%
- for first goalscorer they were even worse adding uo to 250%
- can explain how complex gambles are priced so unfairly and advertised so frequently
In the US & Canada some casinos offered gamblers self-exclusion programmes which is an agreement the gambler signs that they are banned from venues
- study in Quebec found those that signed had reduced gambling urges and felt more in control
- deposit limits on gambling sites
Credit-crisis
no. of sub-prime US borrowers took out mortgages they couldn’t afford
- low socio-economic families also paid more for their mortgages. African American borrowers paid an additional $425 for their loans
- further loans taken out by brokers were more expensive than those taken out directly with banks
the only advice from those from low income families get is from those looking to make money from them
- there is a basic conflict of interest and the opportunity for such brokers to take advantage of the Financial illiteracy of borrowers
what can be done about illiteracy of borrowers?
democratise finance and provide free and impartial financial advice to low income citizens
- follow German example:
every time someone signs a mortgage, there has to be a notary present, an independent qualified person who makes sure the mortgagee understands all the facts
- increases transparency and simplifies documentation costs
In the EU it was made compulsory for firms to display their APRs to allow consumers to compare products
- this however led to increased ability of consumers to identify which was the cheapest mortgage from 48%-70%
examples of saving nudges
- development of behavioural apps that can help us with self-control and saving e.g Chip, Squirrel
- Keep the change program by Bank of America
rounded up cc transactions and placed into separate saving accounts and even provided matched funding for this up to $250 (Monzo)
resulted in savings of $400mill in first 2 years
worked because of mental accounting
(treated money in. the savings account as savings rather than being fungible)
Basis for saving nudges
- we suffer from hyperbolic discounting
- economic predators take advantage of us
- frictionless paying
- high levels of debt becoming a social nor,
- Growing inequality that is linked to over consumption
Pensions
we don’t have a Long understanding of pensions and find it hard to save for
changes in pension from defined benefit to defined contribution makes understanding them hard
- we suffer from present bias, making it difficult to focus on retirement now
Push vs shove to force pensions
In australia, law forces employees to save towards pensions. Required to contribute 9% of total income
- unable to draw money from retirement savings until they retire
- Hard rather than soft paternalism, its a mandate not a nudge
Value judgements and pensions
is trading off the the right to chose vs what you believe is right for citizens a good thing?
- in 2013 pension assets in Australia $1.5 trillion whereas in the US with population x14 as large only $2.8 trillion
Thaler says if you do decide on a mandate you need to be very confident that the option is in nearly everyone’s best interest
people may want to opt out to pay off student debt or if they have a short life expectancy
Pension committee in the UK
noted in 2003 - 4.6 million had not joined their employer based pension fund
- this was irrational as joining has significant benefits for employees, both in terms of tax deductions for contributions and also because employers match fund contributions
Changing the default for pensions
if you get a letter saying a change in law and you have been opted into the company’s pension fund but can opt out if you want
90% decided not to opt out
- simple change led to more than 5 million extra UK workers saving for their pensions
Pension Act 2008
requires employers to automatically enrolled workers over 22 into relevant workplace pensions from 2012
- resulting in a £15bn a year increase in saving
The Save More Tomorrow plan - Thaler & Bernatzi
when joining a pension fund, participants will set contribution rates (salary prepared to pop in)
problem is that young participants set contribution rates very low and never adjust it, stay with the status quo
- people find it easier to place self-control restrictions in the future rather than now (hyperbolic discounting)
- loss aversion - people hate to see their pay checks go down
- inertia - once a decision has been made people stick to it
so decided to place higher contributions when salaries were raised - reduction of a gain
experiment on uni students on pension funds
equity funds provide high risk, high returns
bond funds provide lower risk, lower returns
most students chose funds that had a mix of bonds and equities rather than just bonds or just equities
- shows that set of funds on offer can greatly affect the choices we make
Bernatzi and Thaler examined saving plans of 120 companies in the US and found that the more stock funds the plan offered, the greater the percentage of participants money went into stocks
What can pension funds do?
offer “lifestyle” funds that are already diversified for the employee and which blend stocks and equities in a way that reflect risks own a way that is very transparent and similar
e.g conservative, moderate and aggressive lifestyle funds
conservative for those about to retire with mostly bonds, moderate has split of bonds and equities and aggressive heavily weighted towards equities
- another option is to offer target requirement date funds
- fund would then select the degree of risk, moving to a more conservative approach as the target date gets nearer
