MyMoney Resources - Researcher

Doorways to Dreams Fund (D2D) is working to develop and test video games attractive to low-income and minority adults that will provide training in critical financial skills to improve financial decision-making. During the last year, D2D has conceived, developed and delivered the third and fourth titles in its growing library of financial literacy casual video games: Farm Blitz and Bite Club. In Farm Blitz, players take on the role of a farmer who must harvest crops to generate earnings, manage debt, save money, and weather unexpected emergencies. Farm Blitz is designed to focus players' attention on how high-interest, short term debt can undermine efforts to build long term savings. Bite Club, which is inspired by one of the most popular casual games of all time, Diner Dash, offers players a simulated game experience in which they face the real-world tension between managing debt payments and current spending needs on the one hand, and saving for the long-term goal of retirement on the other. Players manage a "day club" for vampires and must pay off student and credit card debt, buy club upgrades, and save for retirement one of three retirement outcomes. Like D2D's other financial entertainment titles, Farm Blitz and Bite Club were made with and for low-income adults and evaluation is integrated into the development process. Following development, D2D completed preliminary effectiveness testing with 84 low-income adults across six locations in the US. While only small samples, each game generated a significant increase in financial skills self-confidence and knowledge.

This study surveyed thousands of Americans about their knowledge of retirement planning in general and Social Security in particular. It found that most Americans feel ill prepared for retirement and have a very low level of understanding of how the Social Security system works, when they should start claiming, and how much they are likely to receive in benefits. Respondents expressed a high level of trust in the Social Security Administration and would like more guidance from the agency on how to improve their retirement planning.

We study retirement savings decisions and outcomes in Oregon University System’s Optional Retirement Plan (ORP). During our sample period, 32% of ORP participants choose to invest through HIGH, which markets itself as providing personal face-to-face financial service. The other participants choose to invest through three lower-service providers, with 51% investing through LOW. Consistent with lower levels of financial literacy driving demand for financial advisors, we find that younger, less highly educated, and less highly paid employees are more likely to invest through HIGH. When we compare the investment strategies and performance of HIGH and LOW investors, several differences emerge. Consistent with financial advisors impacting asset allocation, HIGH investors allocate their retirement contributions across a larger number of investments, are less likely to remain fully invested in the default investment option, and less likely to change their equity allocation during the recent financial crisis. On the other hand, HIGH investors' portfolios are significantly riskier, and underperform by approximately 2 percent per year on a risk-adjusted basis. Although we cannot conclude that those investing through a financial advisor would have been better off investing on their own, we can conclude that access to financial advisors is a costly and imperfect substitute for financial literacy.

Abstract: The boom in the subprime mortgage market yielded many loans with high LTV ratios. From a large proprietary database on subprime mortgages, we find that choice of mortgage rate type is not linear in loan sizes. A fixed rate mortgage contract is a popular choice when loan size, measured by LTV ratio, is small. As LTV ratio increases, borrowers become more likely to choose adjustable rate mortgage contracts. However, when LTV reaches a certain level, borrowers start to switch back to fixed rate contracts. For these high LTV loans, fixed rate mortgages dominate borrowers' choices. We present a very simple model that explains this "nonlinear" pattern in mortgage instrument choice. The model shows that the choice of mortgage rate type depends on two opposing effects: a "term structure" effect and an "interest rate volatility" effect. When the loan size is small, the term structure effect dominates: rising LTV ratios making ARM loans less costly, and more attractive. However, when the loan size is large enough, the interest volatility effect dominates: rising LTV ratios making FRM loans less costly and preferable. We present strong empirical evidence in support of the model predictions.

This project examines how employer-provided financial education for newly hired workers affects participation in retirement savings plans. The investigators partnered with six large employers to explore what financial education is currently offered to new hires. Each employer provided individual data on workers hired in 2008 and 2009. This report assesses the impact of information and delivery methods on participation and contribution rates. Several findings emerge. There is strong evidence that employees respond to match incentives. Therefore, the date when the employer match begins should be an important "teachable moment" for employers to reach out to employees. The investigators found that auto-enroll programs do increase retirement savings plan participation. Moreover, there is little decay in the participation rates over time. However, workers who were automatically enrolled have contribution rates that are concentrated at the default level and therefore many workers who were automatically enrolled are not taking full advantage of the employer match. The researchers also found that opt-in plans have lower enrollment rates for lower-income, younger, and female workers. However, among the employers using an opt-out default there are no significant differences in plan participation between these groups. Finally, there is some suggestive evidence that for workers hired during the time period when the stock market was at its lowest point, plan participation was not only initially lower but is still lower today. The research thus far provides important insights into the role of defaults and information in workers' decisions to participate in voluntary retirement savings plans.

Abstract: We propose a novel approach to estimate household income uncertainty at various future horizons and characterize how the estimated uncertainty evolves over the life cycle. We measure income uncertainty as the variance of linear forecast errors conditional on information available to households prior to observing the realized income. This approach is semiparametric because we impose essentially no restrictions on the statistical properties of the forecast errors. Relative to previous studies, we find lower and less persistent income uncertainties that call for a life cycle consumption profile with a less pronounced hump.

Prior research has demonstrated that defaults have a powerful influence on economic outcomes in a wide range of settings because individuals often passively accept default options. This paper examines the degree to which defaults become less powerful as they become more extreme. We study a firm with a defined contribution retirement savings plan in which employees are automatically enrolled at a 12% contribution rate, a rate that is considerably higher than those studied in previous work. In addition, the default contribution rate is suboptimal for all employees because the firm only matches employee contributions between 12% and 18% of pay. Approximately one-quarter of employees at this firm remain at the default contribution rate after twelve months of tenure, while the comparable fraction for firms with more modest defaults is more than 60%. We also find that employees who remain at the default contribution rate after twelve months of tenure have lower incomes than would be predicted by the incomes of employees who actively choose neighboring contribution rates. This evidence suggests that defaults are more influential for low-income employees than for high-income employees because low-income individuals generally face higher barriers to active decision-making.

This annotated bibliography provides 52 abstracts of a representative sample of scholarly articles on the subject of the behavioral characteristics of U.S. investors, along with a glossary defining 72 terms commonly used in the literature on this topic. The researcher conducted searches in JSTOR, EBSCO, and ProQuest, selecting for inclusion in this bibliography articles from academic journals such as American Economic Review, American Journal of Economics and Sociology, Brookings Papers on Economic Activity, CPA Journal, European Financial Management, Financial Management, Journal of Economic Perspectives, Journal of Consumer Affairs, Journal of Finance, Journal of Financial and Quantitative Analysis, Journal of Portfolio Management, Quarterly Journal of Economics, Review of Economics and Statistics, Review of Financial Studies, Stanford Law Review, and Tax Policy and the Economy. This annotated bibliography is a companion piece to a review report on common investor mistakes and factors underlying the decision to invest.

Drawing on a comprehensive review of academic journal articles, the report reviews patterns of investor behavior that may be suboptimal and factors that may lead to such patterns. role of behavioral finance from the perspective of prospect theory, overconfidence and human sentiment, as well as explanations for a reluctance to invest including financial literacy and trust. It also discusses retirement saving inadequacy and reviews a series of common investment mistakes as well as behavioral patterns related to annuity and growth investing. This report is a companion piece to an annotated bibliography on the behavioral characteristics of investors.

Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or “cash”) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $21 and the highest-income household ($150,000 or more annually) receives $750 every year. We build and calibrate a model of consumer payment choice to compute the effects of merchant fees and card rewards on consumer welfare. Reducing merchant fees and card rewards would likely increase consumer welfare.