Archive for the ‘Gender and Savings’ Category

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Executive Paternalism

August 18, 2008

Improvements in public policy can gently coax people to save more money. But many of the important day-to-day savings decisions happen in the workplace. This post speaks to the libertarian paternalistic executive, an executive who would like to help their employees save more money, but does not want to infringe on their rights to do with their money as they please or to implement policies that will cost their company a lot of money. Here are a few ideas that will accomplish that.

  1. Implement the provisions of the Pension Protection Act  that now make it much easier for you to automatically enroll new employees in your 401(K) plan and to set default asset allocation of the plan to a lifecycle fund rather than a cash account. 
  2. Scrutinize the fees that your financial service provider charges for offering products in your plan. Pay particular attention to the annual management fees. Seemingly small differences in annual management fees can make big differences in the amount of money your employees have when they retire. 
  3. Limit the number of investment options in your 401(K). You don’t need that many options to allow employees to construct a diverse portfolio. Too many options will confuse them and often delay their asset allocation choice, leaving them with whatever default option is contained in the plan.
  4. Target women for financial educational seminars. Women are more likely to listen to financial advice than men. They also face more large financial decisions in their golden years because of their longevity relative to men.
  5. Be careful with your own conspicuous consumption. That consumption may put pressure on subordinates to mimic you, and thereby demonstrate that they have the same tastes as you. People tend to view others with similar tastes as smarter than those with tastes that are far afield from their own. Your employees want to look smart in your eyes. It is easier for them if they do not have to spend a lot of money signalling that they think like you do.

These are just a few ideas.  If you have additional ideas you are more than welcome to post them.

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Men are Better Savers, Women are Better Investors

July 12, 2008

Women are better investors than men. I’ve written about this topic previously in this blog, and  I’ve also provided material to media outlets that have issues of gender and finance as one of the primary focuses of their communication.

But the story of men, women and money is much more complicated than one blog post or short article. And I want to briefly address another piece of the puzzle today. Yes, women are better investors, but they are also “worse” spenders in sense that they are more likely to be spendthrifts than men. That is one conclusion of a recently published paper,  “Tightwads and Spendthrifts”, but the kernel of this particular result has been known at a practical level to marketers for quite some time.  Women are better at, and enjoy, shopping more than men because of an evolutionary propensity to remember where objects are located, or are hidden. This is particularly true in the case of food. In early societies men hunted, and developed skills (physical strength, spacial geometry) that helped them in their daily activities as hunters. Women gathered — food mostly. They are better at it today because their own and their offprings’ survival depended on this skill for thousands of years.

But much like men’s hunting instincts help make them inferior investors to women, women’s gathering instincts can wreck the budget as well. They are good at shopping and so they enjoy it. And enjoying shopping too much….well we all know where that leads.

So how does this knowledge lead to practical advice for household finance. Well, current research certainly suggests that for couples, in more cases than not, it would be better for men to handle the day-to-day budgets and then once money is set aside as savings for women to do the investing. The interesting part of this advice is that it runs counter to what I, and I suspect many of us, have observed is the case with married couples that we know (women set the budget, men invest the savings). These more traditional roles appear to be at odds with healthy household finances.

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Venus, Mars and Savings

May 27, 2008

In the fine tradition of lazy Summer vacations, usthrift blog takes a break from policy today to talk about more important things — like the mysterious differences between men and women.  But, don’t despair — it’s in the context of savings!

In his bestselling book Men are From Mars, Women are From Venus, psychotherapist John Gray uses extended metaphors and hyperbole to describe some basic psychological differences between men and women.  When men face a problem they tend to “retreat to the cave” where they sort out their problems in solitude. Women “go to the well” where they find other women and emotional support. Women and men bring different emotional and psychological tool kits to try to fix the tough problems that life throws at them.  And in our modern world of houses and running water, rather than caves and wells, how to invest your hard-earned money is one of the more important and persistent problems many people face.  How well you handle it will have enormous consequences for your financial well-being and even more basic than that, your happiness.  And chances are, if you are woman, you go about this task with considerably more effectiveness than men — even if you don’t realize it.

                Men have two psychological characteristics that play havoc on their ability to invest money.  First, they are overconfident in their own ability. This is not a characteristic confined to finance. They are overconfident in their ability with regards to almost anything. Evolutionary psychologists, those who study how our thinking patterns have evolved over time, have speculated that this tendency towards overconfidence arose because of the tasks men performed in early human societies. Men hunted, and when hunting it improves your survival chances if you are very confident when face-to-face with a wild animal.  Today we each face the market rather than wild animals. But, unlike the hunt, men’s overconfidence often dooms them in this situation. They tend to trade stocks more actively because they are convinced they know what the next hot stock will be, what is likely to go up and what is likely to go down. In so doing they incur all of the transaction costs associated with trading (commissions, taxes, bid-ask spreads) but do not pick stocks any better than the woman in the office next to theirs.  That woman will typically be less confident in her own abilities, including finance, trade stocks less often and in so doing generate risk-adjusted returns that are superior to her male counterpart.  Even in the more sedate world of mutual fund investing, women seem to have a better ability to pick good funds because they concentrate on the fees a fund charges rather than what fund happens to be hot at any given moment.  And so we have what amounts to a stark paradox in investing: Men think they know what they are doing but often don’t and women think they don’t know what they are doing but often do.

                We all know the stories about the guy who won’t stop to ask for directions and the woman who changes her mind at the drop of a hat. When similar situations occur in our own lives we look to these stories to convince ourselves that what we are observing is just normal behavior. These gender-specific stereotypes exist partially because there is some kernel of truth buried in a perhaps-humorous story.  Men are, in fact, stubborn and protective of their belief that they are knowledgeable about a particular subject, in this case how to get somewhere.  Women do, in fact, change their minds more often than men.  But the interesting part of this tendency to change their minds is why it occurs. It happens because women are better than men at listening to the thoughts and advice of others and changing their own views in light of those thoughts. If you never listen to anyone else, it’s pretty clear you aren’t going to change your mind very often. That is true whether you think you know where you are going, and can’t bear the thought that someone at the gas station will tell you that you were wrong, or whether you are facing a decision about how to plan for your financial well-being in retirement. Women are more likely to listen to and act on financial advice than men. If a company has a retirement planning seminar for their employees we can be very confident of two things. Women will think they need the seminar more than men will. Women will be more likely to use in the information obtained in the seminar to make better financial decisions.

                So, are women just better investors than men? Yes, they are. Women bring an emotional and psychological tool kit that is better adapted to decision making in modern financial markets.  They listen, consider alternatives carefully, change their minds when necessary and generally lack the hubris that leads men astray.

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