Harvard Economist Suggests Strategies for Addressing the Household Finance Challenge at World-Leading Behavioral Finance Conference Hosted by School
December 15, 2015
Henrik Cronqvist presenting research on social
Whether paying high interest on a payday advance loans, ignoring an employer’s matching 401(k) contribution or misunderstanding the “fine print” on a consumer disclosure form, many Americans are making expensive mistakes in their personal finances. Should government regulators step up their efforts to protect consumers, and if so, what strategies are most likely to succeed?
Harvard economist John Y. Campbell addressed that issue in his keynote talk, "Restoring Rational Choice in Household Finance: How Far Can We Go?" at the Sixth Miami Behavioral Finance Conference, hosted by the School of Business in early December.
Organized by the School’s George Korniotis, professor of finance, with program chair Alok Kumar, professor of finance, the conference brought together 110 faculty members and doctoral students from around the world to discuss the latest research in this evolving discipline.
“Our goal was to create a diverse program highlighting all aspects of behavioral finance, including both theoretical and empirical research,” said Korniotis. “Our conference is considered one of the best in the world, with more than half the 66 papers presented in the past five years published or forthcoming in leading academic journals.”
For example, Henrik Cronqvist, professor of finance, and Frank Yu, associate professor of finance, China Europe International Business School, presented a paper focusing on CEO behavior, “Shaped by Their Daughters: Executives, Female Socialization and Corporate Social Responsibility.”
“We found that male CEOs with a daughter have a stronger attachment to society at large and the well-being of stakeholders other than their shareholders,” said Cronqvist. “In fact, a male CEO with a daughter increases a firm's corporate social responsibility rating by about 11.9 percent.” Cronqvist and Yu also looked at the impact of a CEO having a son, and found there were no significant results.
John Campbell gives his keynote speech at the Sixth
In his keynote address, Campbell, the Morton L. and Carole S. Olshan Professor Economics at Harvard University, noted that government intervention in consumer finance is at “center stage” today following passage of the Pension Protection Act (PPA) of 2006, the CARD Act of 2009 and the Dodd-Frank Act of 2010, which established the Consumer Financial Protection Bureau.
“The complexity of financial products is increasing, and many people are not up to the task of making well-informed decisions,” Campbell said. “It’s important to note that the mistakes made by individual households may have broader consequences for society, such as contributing to wealth inequality or general mistrust of the nation’s financial system.”
Campbell noted that financial education can help consumers make better decisions, but there is little evidence this approach is effective. “Disclosures are a low-cost intervention, but they are hard to interpret and the effects can be undone by distracting marketing,” he said. “Therefore, we must go beyond ‘nudges’ and look at regulations that may be able to simplify choices for consumers, even though they add costs to the system. Academics can help by building behavioral welfare economics models that capture those tradeoffs, so interventions are based on evidence, rather than opinion.”