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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.  


Private Saving and Public Policy

The evidence presented in this paper supports the view that many Americans, particularly those without a college education, save too little. Our analysis also indicates that it should be possible to increase total personal saving among lower income households by encouraging the formation and expansion of private pension plans. It is doubtful that favorable tax treatment of capital income would stimulate significant additional saving by this group. Conversely, the expansion of private pensions would probably have little effect on saving by higher income households.

How Do Urology Residents Manage Personal Finances?

We examine personal financial management among residents to answer three research questions: do residents make reasonable financial choices; why do some residents not save; and what steps can be taken to improve residents’ personal financial decisions. Portions of the Federal Reserve Board’s Survey of Consumer Finances were modified and piloted to elicit demographic, expense, saving, and income data. The final questionnaire was completed by 151 urology residents at 20 programs. A significant minority of residents appear not to make reasonable financial choices.

What Accounts for the Variation in Retirement Saving Across U.S. Households?

Even among households with similar socioeconomic characteristics, saving and wealth vary considerably. Life-cycle models attribute this variation to differences in time preference rates, risk tolerance, exposure to uncertainty, relative tastes for work and leisure at advanced ages, and income replacement rates. These factors have testable implications concerning the relation between accumulated wealth and the shape of the consumption profile. Using the Panel Study of Income Dynamics and the Consumer Expenditure Survey, we find little support for these implications.

Are Life Insurance Holdings Related to Financial Vulnerabilities?

Using the 1995 Survey of Consumer Finances and an elaborate life-cycle model, we quantify the potential financial impact of each individual's death on his or her survivors and measure the degree to which life insurance moderates these consequences. Life insurance is essentially uncorrelated with financial vulnerability at every stage of the life cycle. As a result, the impact of insurance among at-risk households is modest, and substantial uninsured vulnerabilities are widespread, particularly among younger couples.

How Do Residents Manage Personal Finances?

We examined three research questions: How do residents’ debts and savings compare to the general public? How do surgical residents’ financial choices compare to other residents? How may institutions help residents’ personal financial decisions? The Survey of Consumer Finances was modified and piloted tested to elicit financial information. The instrument was completed by 612 residents at 8 programs. Only 60% of residents budgeted expenses, and 25% and 10% maintained cash balances <$611 and unpaid credit card balances >$10,000, respectively.

Saving and Life Insurance Holdings at Boston University – a Unique Case Study

We examine the saving and insurance behavior of 386 Boston University (BU) employees who volunteered to receive financial planning based on a detailed life-cycle financial planning algorithm. The correlation between the saving and insurance prescriptions and the actual decisions made by BU employees is very weak in the case of saving and essentially zero in the case of life insurance. Many employees spend far more and save far less than they should, while some under-spend and over-save. The same holds for life insurance. The degree of under-insurance is particularly acute.


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