The 2017 Behavioral Finance Symposium, held September 14-15 at the University of Michigan, brought together prominent scholars, policymakers, and practitioners for two days of dialogue about ways to apply insights from the behavioral sciences, which examine how people make decisions in the real world, to tackle pressing social problems in the financial sector. During the two-day symposium, more than a dozen panelists addressed a broad range of challenges, including how to encourage people to improve their retirement savings and investment practices, how to help entrepreneurs create more sustainable small businesses, and how to reform financial industry practices to create a more ethical financial system.
The symposium kicked off with a keynote address by Nobel laureate and Yale economist Robert J. Shiller (see video), who spoke about “narrative finance”—the stories, or narratives, people create to explain financial events—and how those stories can help us understand, and can sometimes even cause, economic fluctuations like recessions. “The human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing,” Shiller has written. “Stories motivate and connect activities to deeply felt values and needs. Narratives ‘go viral’ and spread far, even worldwide, with economic impact.”
Following Dr. Shiller’s remarks, panels on consumer financial protection (see video), investor protection (see video), and small business development (see video) presented a range of new and old ideas for solving social problems. Starting from behavioral finance’s core premise that individuals are prone to making costly errors due to mental biases, the panels highlighted problems—and proposed solutions—to a host of challenges individuals and businesses experience. For example, data shows that more than one-third of Americans have no bank account or are not adequately served by their bank; that a majority can’t absorb an unexpected expense of $400 or more without a credit card and a year of recovery; and that the overwhelming majority are unprepared for retirement. Some behaviorally-informed nudges proposed by the presenters included suggestions for improving access to banking, particularly for women and low-income communities, and suggestions for redesigning financial products based on input from users.
Drawing on research from the Center for Financial Services Innovation’s financial diaries project, which tracks the financial habits of 250 families, Ford School alumna Karen Biddle Andres noted that 27 percent of all American households reported having less than $1,000 saved for retirement—and 43 percent of all households (in all income brackets) described themselves as struggling to pay bills and credit payments. This struggle is more acute for low-income people who are unbanked or underbanked. Looking globally, Women’s World Banking CEO Mary Ellen Iskendarian pointed to research in India which showed that women were not setting up accounts with financial institutions because the first step involved giving the account representatives (all men) their cell phone numbers. University of Georgia law professor Mehrsa Baradaran proposed another option for serving the unbanked or underbanked—allowing the post office to provide debit cards.
Rather than focus on “financial education programs,” which uniformly do not work said Steve Wendel of Morningstar, we need to develop individualized systems based on how people behave. Fifth Third Bank’s Tim Spence provided an example of a high-tech offering to do this: an app that allows customers to pay off student loan debt faster by automatically rounding up all debit card purchases to the next dollar, and then applying it, $5 at a time, to outstanding loans. Such an approach recognizes that people are sensitive to large payments, said Spence, but relatively insensitive to small ones. Fifth Third reported that the program could help customers shave off as much as three years of payments.
In a panel on investor protections, Phyllis Borzi (former assistant secretary of the U.S. labor department), Jeroen Nieboer (UK Financial Conduct Authority), and James Choi (Yale University), were unanimous in rejecting “disclosure only” policies. Instead, they explored how behavioral insights could be used to enhance disclosure statements for investors and to strengthen relationships between key participants in investment decision-making. The point of this discussion was perhaps more poignantly made on the following day, when symposium attendees participated in an interactive game designed by ideas42 (a behavioral science research and design organization) that tested what happens when clients and financial advisors have misaligned incentives.
At the end of the first day, the focus shifted from the individual to the small business owner. Panelists including the Ford School’s own Justin Wolfers, India’s IFMR Trust CEO Bindu Ananth, Harvard’s Shawn Cole, and Fundera’s Brayden McCarthy examined issues plaguing small businesses, both domestically and abroad, and how behavioral research findings have helped create stronger and more sustainable small businesses.
The symposium’s second day began with a keynote address by Diana Farrell of the JPMorgan Chase Institute (see video), followed by a panel on macro-market stability (see video). Farrell highlighted how the JPMorgan Chase Institute, JP Morgan’s global think tank, has been able to use anonymized consumer data to glean new insights into how consumers make decisions in response to changing financial circumstances. In one surprising analysis, the think tank found that when homeowners learned their mortgage payments were about to go down due to lower interest rates, they immediately increased their spending by 9 percent. When their mortgage payments did go down, they increased their spending even more, by 15 percent. They ended up spending more money than they were going to “save” from the lower mortgage payments.
The symposium concluded with a macroeconomic panel that included Andrew Caplin of New York University, Claire Hill of the University of Minnesota Law School, John Leahy of the Ford School, and Joseph Tracy of the Federal Reserve Bank of Dallas. In a wide ranging discussion that spanned housing, emotion, and other big picture issues. the panelists explored how behavioral insights can lead to smarter regulation and to policies that create a more stable macroeconomic environment.
The 2017 Behavioral Finance Symposium provided the panelists and guests with an opportunity to reflect on how recent research has helped scholars and policymakers glean important insights into how individuals act in the real world—and how these decisions shape the larger macroeconomic environments. But it also helped establish a future-focused agenda for creative solutions to the thorny financial problems faced by everyday Americans and the financial system as a whole.
The symposium was organized by the University of Michigan’s Center on Finance, Law, and Policy, and ideas42, a nonprofit behavioral design firm based in New York. It was sponsored by Omidyar Network, the Alfred P. Sloan Foundation, the Ford School of Public Policy, the Ross School of Business, and Michigan Law.
--Summary by Andrew Norwich (JD ’17)