Tag Archives: finance

Optimism as Incentive

Much has been writ­ten on the (ir)rationality of pur­chas­ing lot­tery tick­ets (Eliez­er Yudkowsky’s view­point is par­tic­u­larly fine), but little has been said on applic­a­tions of these biases that could improve the fin­ances of all of those who buy a tick­et.

Now beha­vi­our­al eco­nom­ists are attempt­ing to boost the his­tor­ic­ally poor house­hold sav­ings rate by using our lot­tery-like optim­ism as an incent­ive to save:

Psy­cho­lo­gists have long known that people tend to over­es­tim­ate the odds of rare events. Apply­ing that beha­vi­or­al insight, fin­ance pro­fess­or Peter Tufano of Har­vard Busi­ness School has devised a clev­er pro­gram called “Save to Win.” Launched earli­er this year for mem­bers of eight cred­it uni­ons in Michigan, it is a cross between a cer­ti­fic­ate of depos­it and a raffle tick­et. Mem­bers who put $25 or more into a Save to Win one-year CD* are entered into a monthly “sav­ings raffle” for prizes up to $400, plus one annu­al draw­ing for a $100,000 jack­pot. […]

In 25 weeks, the pro­gram has attrac­ted about $3.1 mil­lion in new depos­its, often from people who have nev­er been able to set money aside.

via Tech­dirt

* CD = Cer­ti­fic­ate of Depos­it (sim­il­ar to a sav­ings account).

Charitable Donations: The Problem of Restricted Funds

By donat­ing funds to dis­aster-spe­cif­ic char­it­able organ­isa­tions and cam­paigns we restrict the use of our funds to the relief of that prob­lem only. This can cause long-last­ing issues for char­it­ies and world­wide dis­aster recov­ery efforts in the future.

To ensure the char­it­able help best, the char­it­able should ensure they give unres­tric­ted funds that are not ear­marked for spe­cif­ic dis­asters.

[Médecins Sans Frontières] has already received enough money over the past three days to keep its Haiti mis­sion run­ning for the best part of the next dec­ade. MSF is behav­ing as eth­ic­ally as it can, and has determ­ined that the vast major­ity of the spike in dona­tions that it’s received in the past few days was inten­ded to be spent in Haiti. It will there­fore ear­mark that money for Haiti, and try to spend it there over the com­ing years, even as oth­er mis­sions, else­where in the world, are still in des­per­ate need of resources. […]

The last time there was a dis­aster on this scale was the Asi­an tsunami, five years ago. And for all its best efforts, the Red Cross has still only spent 83% of its $3.21 bil­lion tsunami budget — which means that it has over half a bil­lion dol­lars left to spend. Not to put too fine a point on it, but that’s money which could be spent in Haiti, if it wer­en’t for the fact that it was ear­marked. […]

If a char­ity is worth sup­port­ing, then it’s worth sup­port­ing with unres­tric­ted funds. Because the last thing any­body wants to see in a couple of years’ time is an unseemly tussle over what happened to today’s Haiti dona­tions, even as oth­er inter­na­tion­al tra­gedies receive much less pub­lic atten­tion.

When Money Buys Happiness (or Not)

After dis­cuss­ing con­sumer sig­nalling and Geof­frey Miller­’s Spent in his Find­ings column (men­tioned pre­vi­ously), read­ers of John Tier­ney’s Lab were asked,

List the ten most expens­ive things (products, ser­vices or exper­i­ences) that you have ever paid for (includ­ing houses, cars, uni­ver­sity degrees, mar­riage cere­mon­ies, divorce set­tle­ments and taxes). Then, list the ten items that you have ever bought that gave you the most hap­pi­ness. Count how many items appear on both lists.

Dis­miss­ing for a moment the self-selec­tion of the par­ti­cipants and the small sample size, the responses to the ques­tion are quite intriguing, show­ing you what con­sumer items are worth their cost in terms of ‘hap­pi­ness’, and what items aren’t.

  • Expens­ive items that don’t sig­ni­fic­antly con­trib­ute to hap­pi­ness: mar­riage cere­mon­ies, most cars, boats.
  • Inex­pens­ive items that do sig­ni­fic­antly con­trib­ute to hap­pi­ness: meals with friends, alco­hol, books, music, qual­ity beds, pets, bicycles.
  • Items that are both (expens­ive and con­trib­ut­ory to over­all hap­pi­ness): edu­ca­tion, hous­ing, for­eign travel, elec­tron­ics and sports cars.

Dr Miller­’s ana­lys­is of the exper­i­ment’s trends is worth read­ing, as is this pre­vi­ous post on the link between money and hap­pi­ness.

The Problems with Saving

In 2007 the aver­age Amer­ic­an saved 0.6% of their income. By Feb­ru­ary of this year that had ris­en to more than 4%, but in the 1980s it was 10%.

With this in mind, Tim Har­ford asks why are we such awful savers, and what can we do to improve the situ­ation?

Beha­vi­or­al eco­nom­ists […] have uncovered three reas­ons why people find it so dif­fi­cult to save. The first is tempta­tion: Although we often later regret it, we just can­’t res­ist spend­ing. The second is lack of under­stand­ing: Our brains can­’t quite grasp the prof­it­ab­il­ity of sav­ing. The third is optim­ism: We believe that everything will work out, even if we don’t save.

The solu­tion offered to counter tempta­tion sounds very sim­il­ar to the beha­viour Ram­it encour­ages in his read­ers:

[Research­ers at UCL] found that ima­gin­ing a future pur­chase is almost as good as get­ting it. For example, when we day­dream about buy­ing a new car, our brains respond in much the same way as when we actu­ally make the pur­chase.

We can har­ness this buzz to our bene­fit by dis­card­ing vague ideas of “sav­ing for a rainy day” and focus­ing instead on par­tic­u­lar items we need or want. […] Rein­force this con­nec­tion in your mind by open­ing a dif­fer­ent sav­ings account devoted to each of your goals: one for a new car, one for a vaca­tion, one for a child’s col­lege tuition fees.

Trends in Counterfeit Currency

Bruce Schnei­er com­ments on the grow­ing pre­val­ence of low-tech cur­rency coun­ter­feit­ing: “Coun­ter­feits are becom­ing easi­er to detect while people are becom­ing less skilled in detect­ing it”.

Part of the prob­lem, Green said, is that the gov­ern­ment has changed the money so much to foil coun­ter­feit­ing. With all the new bills out there, cit­izens and even many police officers don’t know what they’re sup­posed to look like.

Moreover, many people see paper money less because they use cred­it or deb­it cards.

The res­ult: Ink-jet coun­ter­feit­ing accoun­ted for 60 per­cent of $103 mil­lion in fake money removed from cir­cu­la­tion from Octo­ber 2007 to August 2008, the Secret Ser­vice reports. In 1995, the fig­ure was less than 1 per­cent.

It seem­s the EUR­i­on con­stel­la­tion isn’t doing its job well enough.