If behavioral finance has been such a revelation, why aren’t we seeing effects in the investment space?
You’re looking in the wrong places. Such mechanisms as auto-enrollment and Save More Tomorrow have had significant impact by getting many individuals into and increasing their savings in corporate pension plans in the United States. They have even influenced national approaches, such as with NEST in the United Kingdom.
Nevertheless, I still have to ask about the relationship between financial advisors, plan sponsors and their clients. What has the impact been there?
I acknowledge that more can be done. I don’t think behavioral finance has had the results that it can have – but it’s a developing field. This is one reason why we created the Center for Behavioral Finance and are working on tools to assist in this area. We’ve already released a white paper and you’ll see more insights and solutions in the future.
For the Center for Behavioral Finance to succeed, what does it need to achieve?
It will be about providing financial advisors and plan sponsors with an understanding of why people make mistakes with their money, and providing them with the tools they need to help their clients in making better choices. The ultimate goal is to improve financial outcomes for people.
If a skeptic were to ask you, “Isn’t this just like ‘financial education’ a few years back, another trendy topic for academics and the industry to push their own interests?” how would you respond?
I’d say that’s not a constructive view. Financial education plays an important role in allowing people to take financial control of their lives. But recent studies have shown that financial understanding remains appallingly low and results will be a long time coming. Behavioral finance can provide immediate support and mechanisms to help people improve their financial future and their lives.