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Financial Competence

An important branch of research on the quality of financial decision making, including many of the older papers listed below, explores the limits of household financial sophistication, documenting (i) deficiencies in the knowledge and skills necessary for sound financial planning, (ii) the pervasive failure to consult financial experts or use planning tools, (iii) the superficiality of decision processes, and (iv) the prevalence of ostensibly problematic choice patterns.

More recently, my work has attacked these issues through the lens of Behavioral Welfare Economics. My aim has been to develop objective and rigorous methods for determining when financial choices are “bad,” and to measure the associated welfare losses, without imposing someone else’s preferences. These methods facilitate welfare evaluations of various policy interventions such as financial education.  


Social Security Benefits: An Empirical Study of Expectations and Realizations

I employ data drawn from the Retirement History Survey to study the accuracy of pre-retirement expectations concerning social security benefits. The major findings of this study are as follows. First, survey responses to questions about expected benefits are reasonably noisy. However, when one properly filters out the noise, reported forecasts appear to explain roughly 60% of the variance in realizations. Second, consumers do not form expectations on the basis of all available information.

Evaluating Deliberative Competence: A Simple Method with an Application to Financial Choice

We introduce a method for experimentally evaluating interventions designed to improve the quality of choices in settings where people imperfectly comprehend consequences. Among other virtues, our method yields an intuitive sufficient statistic for welfare that admits formal interpretations even when consumers suffer from biases outside the scope of analysis. We use it to study a financial education intervention, which we find improves the quality of decisions only when it incorporates practice and feedback, contrary to the implications of analyses based on conventional efficacy metrics.

Peer Advice on Financial Decisions: A Case of the Blind Leading the Blind?

Previous research shows that many people seek financial advice from non-experts, and that peer interactions influence financial decisions. We investigate whether such influences are beneficial, harmful, or simply haphazard. In our laboratory experiment, face-to-face communication with a randomly assigned peer significantly improves the quality of private decisions, measured by subjects' ability to choose as if they properly understand their opportunity sets. Subjects do not merely mimic those who know better, but also make better private decisions in novel tasks.


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