When managing self-directed retirement accounts, most low-income people don’t do any management at all and inertia is the most predictable behaviour, said recent winner of the Nobel Prize for Economics, Robert Shiller, in an interview with Wonkblog.
Shiller was asked about the shift away from pension plans and towards defined contribution retirement plans like 401ks. Economic models don’t work:
Here’s where we made big mistakes. Here’s where the efficient markets hypothesis gets you into trouble. The idea that everyone will manage their 401k plan optimally is really not right. What was discovered by some of the behavioral finance research is people are inertial. They don’t do anything. If they have to sign up for the plan, they won’t do it. If they do sign up, they’ll put their money in whatever asset seems to be recommended and leave it there the rest of their lives. You would think it’s kind of obvious, that some people aren’t that interested in managing their portfolios.
Shiller floated the idea of subsidizing financial advice for low income people as a possible fix.
On Monday the Nobel prize in economics was awarded to Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University for work they published analyzing asset prices.
Image from Tom Stovall