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Behavioral Finance in Action

Psychological challenges in the financial advisor/client relationship, and strategies to solve them

By Shlomo Benartzi, Ph.D.

Professor, UCLA Anderson School of Management,

Chief Behavioral Economist, Allianz Global Investors

Center for Behavioral Finance

Part 1 – Introduction:Two Minds at Work


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Behavioral Finance in Action 1For financial professional use only.

Kahneman uses the framework of “two minds” to describe

the way people make decisions (Stanovich and West, 2000).

Each of us behaves as if we have an “intuitive” mind, which

forms rapid judgments with great ease and with no con-

scious input; “knowing” that a new acquaintance is going

to become a good friend on first meeting is one such judgment. We often speak of intuitions as “what comes

to mind.”

We also have a “reflective” mind, which is slow, analytical

and requires conscious effort. Financial advisors engage

this mind when they sit down with clients and calculate a

retirement framework based on their risk profile, current

circumstances and future goals.

Most decisions that people make are products of the intui-

tive mind, and they are usually accepted as valid by the

reflective mind, unless they are blatantly wrong (Klein and

Kahneman, 2009). Indeed, intuitive decisions are often

correct , some impressively so (Gladwell, 2006). However, it

is the errors of the intuitive mind, along with failures of the

reflective mind, that interest behavioral finance academ-

ics and have practical implications for how financial

advisors work with their clients.

Here’s an illustration of what is meant by intuitive mind,

and how it sometimes leads one astray. Take a look at

Diagram 1 below. If you haven’t seen it before you will

immediately see that the bottom line is longer than the

top line.

Introduction

Behavioral Finance: Two Minds at Work

Behavioral finance is an extension of behavioral economics, which uses psychological

insights to inform economic theory. When Daniel Kahneman was awarded the Nobel Prize

in economics in 2002 for his contribution to behavioral economics, he was only the second

psychologist to receive the economics prize. Part of Kahneman’s insight that led to the prize

was his recognition of the important role of emotion and intuition in people’s decisionmaking, which in certain circumstances leads to systematic and predictable errors

(Kahneman, 2003).

Diagram 1:


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Now take two small pieces of paper – two Post-It Notes

will work – and use them to cover the “fins” on the bottom

line. As those who are familiar with t he diagram already

know, you will discover that the lines are in fact the

same length.

You are the victim of an optical il lusion, the famous Müller-

Lyer illusion. The visual perception part of your mind is

tricked into seeing something that doesn’t exist, in thiscase because of the effect of the “fins.”

The remarkable thing about this and other optical illusions

is that even when you “know” the truth – that the lines are

the same length – you still “see” one as being longer than

the other. In the framework of the two minds, your reflec-

tive mind knows the lines are the same length, but your

intuitive mind sees them as being different. The output

of the intuitive mind is so powerful that it overrides any

attempt by the reflective mind to see the lines in any other

way. You can’t help yourself. Intuitive judgments tend to beheld with greater confidence, too – another factor making

them hard to override.

One of the insights that earned Ka hneman the Nobel Prize1

is that we humans are sometimes as susceptible to “cogni-

tive illusions” as we are to optical illusions. These illusions,

also known as biases, result from the use of heuristics, or,

more simply, mental shortcuts. For instance, people are

“supposed” to make decisions based on the logic and

1 Kahneman did all the important work that underpins behavioral economics

with his colleague Amos Tversky, who had died before the Nobel Prize was

awarded. Nobel Prizes are never awarded posthumously.

substance of transactions, not on how they are superfi-

cially described. When faced with a “choice” between

having cold cuts that are “ninety percent fat free” or “con-

taining ten percent fat,” people overwhelmingly select the

first option. Logically, the two are identical of course, but

people automatically respond negatively to “containing

fat” and positively to “fat free,” and choose accordingly.

This ubiquitous and powerful effect, the product of the

intuitive mind, is called “ framing” (Tversky a ndKahneman, 1974).

We can see, then, that intuit ion is a powerful force. And

people typically place a great deal of faith in it. Kahneman’s

discovery that under certain circumstances intuition can

systematically lead to incorrect decisions and judgments

changed psychologists’ understanding of decision making,

and, ultimately, economists’, too.

Classical economics held that people are rational, self-

interested and have a firm grasp on self-control. Behavioraleconomics (and common sense) showed instead t hat we

are not as logical as we might think, we do care about

others, and we are not as disciplined as we would like to be.

It is not that people are irrational in the colloquial sense,

but that by the nature of how our intuitive mind works we

are susceptible to mental shortcuts that lead to erroneous

decisions. Our intuitive mind delivers the products of these

mental shortcuts to us, and we accept them. It’s hard to

help ourselves.


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Loss Aversion Is Fundamental

At the core of many of these powerful but erroneous

intuitions is people’s hyper-negative response to potential

loss, or “loss aversion,” as described by Prospect Theory

(Kahneman and Tversky, 1979). Simply put, losses loom

larger than equal-sized gains. Psychologically speaking,

the pain of losing $100 is approximately twice as great as

the pleasure of winning the same amount. For this reason,most people are prepared to enter a 50:50 gamble of losing

$100 on one hand, only if the sum to be won is at least $200.

Loss aversion is a fundamental part of being human, and

we are not alone in that. Yale economist M. Keith Chen did

some ingenious preference experiments with capuchin

monkeys in which they always finished up with one piece

of apple. They got there in different ways, however, which

affected the monkeys’ preferences. Sometimes the

monkeys started off with two pieces of apple, one of which

was taken away. At other times they started off with none,and were given one piece. The monkeys strongly preferred

the second scenario, and disliked the first, where one piece

of apple was taken from them (Chen, 2006).

Psychologists speculate that loss aversion makes sense in

terms of evolution and survival: better to be cautious and

give that saber-toothed tiger a wide berth rather than take

the risk of confronting it by yourself. Whatever its origin,

loss aversion affects many of our decisions, including

financial ones.

For instance, people have a tendency to hold on to losing

stocks too long. Selling a losing stock is extremely unpalat-

able because it brings the reality of loss very much to mind.

On the other hand, people often sell winning stocks too

soon because the act of selling a winning stock realizes

a gain, and that gives us pleasure. We feel pain when we

realize a loss and pleasure when we realize a gain. The

mistake people are making here is one of mental account-

ing: instead of looking at their portfolio “as a whole” theylook at each stock separately, and make decisions based on

these separately perceived realities.

Loss aversion also makes people reluctant to make

decisions for change because they focus on what they

could lose more than on what they might gain. This is

called “inertia,” or the status quo bias (Samuelson and

Zeckhauser, 1988).

Inertia is at play when people know they should be doing

certain things that are in their best interests (saving forretirement, dieting to lose weight, or exercising), but find it

hard to do today. Procrastination and lack of self-control

rule the day. However, people are usually willing to say they

will do the right thing at some point in the fut ure: “I’ll start

that exercise program next week, I promise!”

We make intuitive judgments

all the time, but it’s very hard for

us to tell which ones are right andwhich ones are wrong.”

Nicholas Barberis,

Yale School of Management


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“We make intuitive judgments all the time,” says Nicholas

Barberis,2 a behavioral finance researcher at the Yale

School of Management, “but it’s very hard for us to tell

which ones are right and which ones are wrong.” (See

Kahneman and Klein, 2009.) Behavioral finance research-

ers have identified many circumstances in which the

intuitive mind leads people to make money-related

mistakes. For this paper, we have worked with these

academic insights to develop techniques grounded inbehavioral finance that financial advisors can use to help

their clients discriminate between wise intuitions and

erroneous judgments.

SMarT: A Powerful Example

Richard Thaler of the University of Chicago and ShlomoBenartzi of UCLA 3 used some of the above psychological

insights in one of the earliest, and most successful, ap-

plications of behavioral finance, the Save More Tomorrow™

program (SMarT). The problem is widespread: An alarm-

ingly large proportion of employees fail to participate in

their company’s defined contribution retirement plan,

often forgoing matching funds (free money) from employ-

ers. SMarT effectively removes psychological obstacles to

saving in the short and longer term, and helps people

overcome them with very little effort on their part. SMarT

was designed around the psychological principles of

2 Nicholas Barberis is a member of the Academic Advisory Board of the Allianz

Global Investors Center for Behavioral Finance.

3 Shlomo Benartzi is the Chief Behavioral Economist for the Allianz

Global Investors Center for Behavioral Finance. Richard Thaler is a member

of the Center’s Academic Advisory Board.

inertia, loss aversion and immediate gratification and

will be described in detail in the following section,

Investor Paralysis.

In the first case study of SMarT, employees at a midsize

manufacturing company increased their contribution

to their retirement fund from 3.5 percent to 13.6 percent

of salary over a three-and-a-half-year period (Thaler and

Benartzi, 2004). This is a remarkable improvement insaving behavior. As a result, the program is now offered by

more than half of the large employers in the United States,

and a variant of the program was incorporated in the

Pension Protection Act of 2006 (Hewitt, 2010).

“The lesson of the experience with the SMarT program,

therefore, is general and powerful,” says Benartzi, “the

strategic application of a few key psychological principles

can dramatically improve people’s financial decisions.”

Financial advisors can take advantage of such insights

in their own practices to help their clients make better

decisions which, ultimately, should lead to better

financial outcomes.

The lesson of the experience

with the SMarT program…is general

and powerful: the strategic application

of a few key psychological principles

can dramatically improve people’s

financial decisions.”

Shlomo Benartzi,

UCLA Anderson School of Management


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The Path Ahead

In the Behavioral Finance in Action series, we present

three timely decision challenges and techniques from

the “behavioral toolbox” to solve them:

• Investor paralysis

• Lack of investor discipline

• A crisis of trust

We also present a tool in development that is designed

to address a fourth decision challenge:

• The disinclination to save.

These four challenges might seem diverse and unrelated at

first glance. But they are united by being, first, the product

of our intuitive minds; and, second, they are susceptible to

solution by the careful application of behavioral finance

tools based on a few simple, psychological principles.

BeFi-in-Action Framework

Two minds:

Intuitive mind (fast, automatic, effortless):

Can often lead to wise decisions,but sometimes leadssystematically to irrational,poor financial decisions.

Reflective mind (slow, conscious, effort ful):

Can lead to more thoughtful,rational decisions. Advisors canengage their clients’ reflectiveminds to improve outcomes bycorrecting the mistakes of theintuitive mind.


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M. Keith Chen et al., “How Basic Are Behav-

ioral Biases: Evidence from Capuchin Monkey

Trading Behavior,” Journal of Political

Economy , 114:3, pp 517 – 537 (2006).

Malcolm Gladwell, Blink: The Power of

Thinking Without Thinking, Hachette Book

Group USA, paperback, 2006.

Hewitt A ssociates, Hot Topics in Retirement ,

2010.

Daniel Kahneman, “Maps of Bounded Ratio-

nality: Psychology for Behavioral Economics,”

The American Economic Review , vol 93, no. 5,

pp 1449 – 1475 (2003).

Daniel Kahneman and Gary Klein, Conditions

for intuitive expertise: A failure to disagree.

American Psychologist , vol 64, no. 4, pp 515 –526 (2009).

Daniel Kahneman and Amos Tversky,

“Prospect Theory: An Analysis of Decisions

Under Risk,” Econometrica, vol 47, no. 2,

pp 263 – 291 (1979).

William Samuelson and Richard Zeckhauser,

Status Quo Bias in Decision Making, Journal of

Risk and Uncertainty , vol 1, pp 7 – 59 (1988).

Keith E. Stanovich and Richard F. West,

“Individual Differences in Reasoning:

Implications for the Rationality Debate,”

Behavioral and Brain Sciences, vol 23, no. 5,

pp 645 – 665 (2000).

Richard Thaler and Shlomo Benartzi,

“Save More Tomorrow: Using Behavioral

Economics to Increase Employee Saving,”

Journal of Political Economy , vol 112, no. 1,

pt 2, pp S164 – S187 (2004).

Amos Tversky and Daniel Kahneman,

“Judgment Under Uncertainty: Heuristics

and Biases,” Science, vol 185, pp 1124 – 1131

(1974).

References


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Part 2 – Overcoming Investor Paralysis:Invest More Tomorrow


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What is the cure for this paralysis? University of Chicago

behavioral economist Richard Thaler prescribes this:

“Devise a plan that you will actually be able to implement,

even when confronted with the inevitable distractions

and temptations.”

The question, of course, is, “What would such a plan look

like?” Here we offer a solution based on the success of the

Save More Tomorrow™ (SMarT) program. SMarT is a

savings enhancement plan that utilizes an understanding

of the psychological obstacles people face when trying to

save more money. Some of the key psychological hurdles

here are also at play in preventing people from getting back

into the market. We therefore suggest a relatively simple

idea that draws on the principles of SMarT. Let’s call it

“Invest More Tomorrow.”

Here we briefly describe SMarT to illustrate the psycho-

logical factors at play. We then present the Invest More

Tomorrow strategy, outlining the actions financial

advisors can take to implement it.

Save More Tomorrow

The SMarT program is designed to help people achieve

what they say they want to, by working around the psycho-

logical factors (indicated in italics) that stand in their way(Thaler and Benartzi, 2004). There are four ingredients

to the program:

1. Employees are invited to pre-commit to increase their

saving rate in the future. Because of procra stination,

most people find it easier to imagine doing the right

things in the future, similar to our New Year resolutions

to start exercising and dieting next year.

2. For those employees who do enroll, their first increase

in savings coincides with a pay raise so that their take-

home pay does not go down. This avoids triggering themind’s hypersensitivity to loss, or loss aversion.

3. The contribution rate continues to increase automati-

cally with each successive pay raise until a previously

agreed upon ceiling is reached. Here, inertia is working

in people’s best interest, ensuring that people stay in

the plan and the contribution rate increases.

Overcoming Investor Paralysis:Invest More Tomorrow

The psychological fallout of the financial crisis that erupted late in 2008 was profound.

As often happens in circumstances like these, investment paralysis has been ubiquitous.

Record amounts of cash are still sitting on the sidelines, with people alternating between

the fear that the bear market has not really gone away and the potential ignominy of missing

out on a new bull market. It is not just investors who are paralyzed. Financial advisors,

being human too, are weighing the risk of being wrong against the chance of being right.

And this sometimes leads to a kind of paralysis of their own.


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4. Employees may opt out of the plan at any time they

choose, though experience shows that people rarely do.

This provision makes them more comfortable about

joining in the first place.

SMarT has been a striking success, almost quadrupling the

average contribution rate from 3.5 to 13.6 percent of salary

over a three-year period when first applied in 1998. This

illustrates that having the right psychology applied judiciously in a financial domain can dramatically

improve outcomes.

Invest More Tomorrow

There are sufficient important similarities between the

reluctance to enter the market and the inability to contrib-ute adequately to defined contribution plans to make a

similar solution feasible. There are two parts to the Invest

More Tomorrow strategy: first, overcoming the fear of

seeing the value of the portfolio decline, or loss aversion;

and second, overcoming the strong tendency to put off

until tomorrow what one should be doing today, or

procrastination.

Overcoming loss aversion

By far the most important psychological factor in investor

paralysis is loss aversion. When people see the value of

their portfolio decline, their intuitive mind reacts nega-

tively, and they experience psychological pain. And, says

Thaler, “people are even more averse to the prospect of

future losses when they have experienced loss in the recent

past, as most people did during the 2008 financial crisis.”

(See Thaler and Johnson, 1990.) Under these circumstanc-

es, people become much more reluctant than usual to take

risks. In other words, investor paralysis now.

How can this be overcome? By means of what we can call

“fuzzy mental accounting.” Prospect Theory, which recog-

nized the cogency of loss aversion, showed that in judging

gains and losses, people are exquisitely sensitive to what is

called the “reference point” (Kahneman and Tversky, 1979).If an investor were to put all their cash into the market in

one single transaction, then that amount of money would

become the reference point. Any movement of the market

that increased or decreased the value of the investment,

above or below the reference point, would then be very

easily calculated. And the intuitive mind would respond

very negatively to losses.

If, however, a client were to invest a specific proportion of

his portfolio, say 25 percent, at regular intervals, such as

every three months, then there is no readily obvious refer-

ence point. There is no single figure against which to

measure performance. In which case, loss aversion is

much less likely to kick in.

People are even more averseto the prospect of future losses

when they have experienced loss

in the recent past, as most people

did during the 2008 financial crisis.”

Richard Thaler,University of Chicago,

Booth School of Business


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Suppose the investments made in the first entry into the

market under this strategy were initially to lose value.

The client is likely to say, “Oh, I only invested a small

portion of my cash, and now I see an opportunity to buy

cheap with my next purchase.” The intuitive mind isn’t

spooked, and the reflective mind can be engaged to

consciously turn a potentially aversive situation into

an opportunity.

This investment strategy is well known, of course, as dollar

cost averaging. But people have now seen that dollar cost

averaging can’t protect against losses when the entire

market collapses, as it recently did. While they were more

willing to try it in the past they are afraid to do so now.

They may, however, be willing to contemplate doing it in

the future. Which brings us to procrastination, the second

barrier to breaking through investor paralysis.

Overcoming procrastination

SMarT worked around procrastination by asking people

to commit to increasing their contribution rate many

months in advance. Pre-commitment is important,

because it is psychologically palatable, and is linked to

the desired action actually taking place rather than just

a vague promise.

In the same way, a financial advisor could ask his/her clientif he/she is willing to commit to going into the market at

some specific point in the future. If the answer is yes, then

the question becomes, “OK, when do you think market con-

ditions will be favorable to take that initial step?” This puts

the timing of the strategy in the hands of the client, rather

than having it imposed. As a result, the client feels both in

control and committed to the agreed-upon action. With a

specific answer to that question, the Invest More Tomorrow

strategy becomes an informal agreement between finan-

cial advisor and client.

Pre-commitment to begin investing at a specific point in

the future is the key psychological element here, because it

doesn’t trigger the intuitive mind’s aversion to doing what

is right today. Procrastination is conquered, and the

periodic investment program begins.

Although the strateg y as envisaged at present is not on

autopilot like SMarT (the agreed-upon purchases still

have to be made), pre-commitment engages the benefit

of inertia: it is not a question of whether to buy at that point

in time, but rather what to buy. The Invest More Tomorrow

strategy is a relatively simple overlay on the existing

investment plans financial advisors have worked out

with their clients. Its purpose is to overcome investor

paralysis so that those plans can go into effect rather

than remaining stalled.


is a simple strategy that provides

an action framework that eases

anxiety for both clients and

financial advisors by attending

to the psychology underlying

investor paralysis.”

John Payne,Fuqua School of Business,

Duke University


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Observes Duke University Business School professor John

Payne1: “Invest More Tomorrow is a simple strategy that

provides an action framework that eases anxiety for both

clients and financial advisors by attending to the psychol-

ogy underlying investor paralysis.”

1 John Payne is a member of the Academic Advisory Board of the Allianz



BeFi-in-Action:

1. Invite clients to pre-commit to begininvesting at a specific time in thefuture and ask them to set the datefor that action.

2. Work with clients to agree on the size

and frequency of periodic investments.

3. Decide in advance on the nature ofassets to be purchased.


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pp 263 – 291 (1979).

Richard Thaler and Shlomo Benartzi,

“Save More Tomorrow: Using Behavioral

Economics to Increase Employee Saving,”

Journal of Political Economy , vol 112, no. 1,pt 2, pp S164 – S187 (2004).

Richard Thaler and Eric Johnson, “Gambling

with the House Money and Trying to Break

Even,” Management Science, vol 36, no. 6,

pp 643 – 660 (1990).

References


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Part 3 – Reining in Lack of Investor Discipline:The Ulysses Strategy


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According to standard economic theory, people make in-

vestment decisions based on a rational analysis of the

present value and future prospects of equities. It is clear

from his advice to investors, however, that the Oracle of

Omaha recognizes that factors other than rational analysis

are sometimes at play.

Buffett understands from his years of experience that in-

vestors often buy high and sell low. They also often buy thewrong stocks, sell the wrong stocks and, in normal times,

do far too much buying and selling. Academic insights

from Behavioral Finance help explain why people behave

the way they do, and they offer practical solutions to finan-

cial advisors to help their clients make better investment

decisions. The idea is that people are not being stupid,

they are just human.

Here, we introduce The Ulysses Strategy, which engages

the reflective mind for rational short- and long-term

investment strategies, thereby avoiding the errors thatthe intuitive mind is otherwise prone to make.

More Than Just Fear and Greed

Financial advisors are well aware of the herd mentality of

humans, which sometimes leads individual investors to

buy high and sell low, by plunging into rising markets and

fleeing when markets fall (Bikhchandani et al., 1992; Gal-

braith, 1993). But there are other psychological issues at

play in the behavior of individual investors, beyond fear

and greed, impulses that flow from the intuitive mind.

Overconfidence is as strong an urge in humans as the herd

instinct. It leads people to believe they can outperform the

market, and seduces them to trade stocks at an irrationally

high rate. It’s a costly path to follow. One study of 66,465

individual investors over a six-year period in the United

States found that the average investor turned over 75

percent of his/her portfolio each year. Transaction costs

associated with this excessive trading reduced net perfor-

mance by 3.7 percent compared with the market as a

whole. Investors who traded most (in the top quintile) dideven worse: these people turned over their portfolios more

than twice each year, and as a result suffered a 10.3 percent

reduction in net performance (Barber and Odean, 2000;

see also Daniel et al.,1998). This is the expenses trap that

Buffett mentioned in his letter.

Reining in Lack of Investor Discipline:The Ulysses Strategy

In characteristically provocative manner, Warren Buffett had this advice for investors

in his 2004 Chairman’s Letter: “Investors should remember that excitement and expenses

are their enemies. And if they insist on trying to time their participation in equities, they

should try to be fearful when others are greedy and greedy only when others are fearful.”


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A separate study of transact ions in 19 major international

stock markets produced equally salutary warnings against

the urge to beat the market by too frequently buying and

selling securities. Between 1973 and 2004, the average

“penalty” for repeated buying and selling as opposed to a

buy-and-hold strategy in these markets was 1.5 percent

(Dichev, 2007).

Faced with thousands of possibilities, individual investorsare ill-equipped to make rational decisions about which

stocks to buy. Most people simply don’t have the t ime or

expertise to find fairly valued stocks or under-valued

stocks. As a substitute for appropriate analysis, many

people unconsciously fall back on a simple rule of thumb,

or heuristic: What stocks are in t he news? Buy them.

Apparently, it matters not at all why a company happens to

be in the news – the launch of a new product, large one-day

moves on the market (up or down), even a scandal involv-

ing the CEO – these stocks are bought disproportionately

by individual investors (Barber and Odean, 2008). This is

the intuitive mind taking t he easy way to making a choice,

one that, if ful ly engaged, the reflective mind might reject.

Inevitably, attention-driven buying pushes prices beyond

true value, and investors once again do less well than

they expect.

The intuitive mind is at work in the very common mistakes

people make in selling stocks they already own. The

rational investor would sell losers and hold on to winners.

But this is not what individual investors commonly do:

They sell winners too early and losers too late. This error is

called the disposition effect.

This is how it works for investors. An individual who owns

a stock that has appreciated significantly faces a choice:hold or sell. If they sell, they lock in a gain, and they feel

good about that. But by selling they forfeit any possibility

of further price appreciation and accept the certainty of

paying taxes on their profit. If a stock has lost value,

however, the investor faces the prospect of admitting a loss

if they sell, and that feels very bad. Loss aversion kicks in

and most investors choose instead to hold on to the stock.

They now face the possibility of further deterioration in

price, and the certainty of passing up tax advantages if

they were to sell, which is what they perhaps should do.

The disposition effect is the result of mental accounting.

The rational investor would be interested in the overall

return of their portfolio, and be content to say, “You win

some, you lose some, but overall it’s doing well.” Instead,

the typical investor treats the portfolio as a series of invest-

ing “episodes.” A winning stock offers the opportunity to

sell, and so lock in a gain, and the investor experiences the

pleasure of that gain. They sell. This is a positive investing

episode. A losing stock offers the prospect of incurring a

loss, and experiencing the pain that goes with it. They hold,

and in so doing avoid a negative investing episode

(Barberis and Xiong, 2010).

Stock markets often move

in response to many factorsunrelated to true value.”

Shlomo Benartzi,



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Stock markets often move in response to many factors

unrelated to true value. For instance, a commercial plane

crash in the United States that kills 75 people or more

typically causes the N YSE briefly to shed around $60 billion

in value. This reduction in market value contrasts with the

actual economic cost of such incidents (incurred by the

airline and insurance companies) of around $1 billion

(Kaplanski and Levy, 2010). In countries where soccer is a

major sport, a loss by the national team leads to a signifi-cant decline in that country’s stock market (Edmans et al.,

2007). And weather – gloom or shine – has been found

variously to affect stock markets, too (Laughran and

Schultz, 2004; Hirshleifer and Shumway, 2003).

Investor mood associated with irrational fear of plane

crashes or the ignominy of one’s national team losing,

is apparently at work here. The resulting dark mood causes

investors to view future economic conditions more

pessimistically, so t hey favor selling rather than buying.

As you have seen here, and as Columbia School of Business

professor Kent Daniel1 observes, “The evidence that

investor emotions are inf luencing prices of securities is

1 Kent Daniel is a member of the Academic Advisory Board of the Allianz


becoming overwhelming.” No less a figure than former

Fed chairman Alan Greenspan admitted as much while

appearing before the House Committee on Oversight and

Government Reform in October 2008. He said of the idea of

self-correcting markets: “The whole intellectual edifice …

collapsed in the summer last year.” The challenge for be-

havioral finance is to find ways to help people not go with

the crowd, and not be susceptible to the errors of the intui-

tive mind. Here we offer such a solution.

The Ulysses Strategy

The phrase “Ulysses contract” refers to a decision made

in the present to bind oneself to a particular course of

action in the future. It derives from a strategy t hat Ulysses

adopted on his journey home from the Trojan wars,which took him and his ship’s crew close to the Sirenusian

islands. The islands were famous for being home to the

Sirens, whose songs were so irresistibly seductive that

seamen felt impelled to fling themselves into the waters,

in an attempt to reach the Sirens. No seaman ever survived,

so no living human knew the nature of the Sirens’ songs.

Ulysses wanted to be the first human to hear the songs,

and survive. He instructed his crew to fill their ears with

beeswax, to block out the sound, and then tie him securely

to the mast and to ignore his pleas to be released, should

he do so. The plan worked. Ulysses heard the Sirens’ songs,

the crewmen ignored his entreaties to be untied and when

they were out of earshot, he gave a pre-arranged signal to

The evidence that investor

emotions are influencing prices of

securities is becoming overwhelming.”

Kent Daniel,

Graduate School of Business,

Columbia University


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take out the ear plugs and release him. Ulysses had com-

mitted himself to a rational course of action at a neutral

time, that is before he could hear the Sirens’ songs, and

ensured that he stuck with his decision. This action of

pre-commitment is the work of the ref lective mind.

In the same way, financial advisors could invite their

clients to engage their reflective mind to pre-commit to

a rational investment strategy in advance of movementsof the market that might otherwise tr igger irrational re-

sponses of the intuitive mind. This kind of Ulysses Strategy

has been shown to work with the Save More Tomorrow

program (Thaler and Benartzi, 2004), in a pilot savings

product in the Philippines (Ashraf et al., 2006) and in a

program to help smokers quit, which involved participants

depositing a sum of money in an account that they would

forfeit if they relapsed (Giné et al., 2008). Pre-commitment

to a rational investment plan is important, because the

intuitive impulse to act otherwise is strong.

The first step in the process is to help your clients under-

stand the psychology of trading by individual investors

that can lead to poor decisions. Help them understand that

these misguided impulses of the intuitive mind are quite

natural, but that there is another, better path to follow,

one that is guided by the ref lective mind.

The second step is to agree on an investment strategy,

which would include an acceptable balance between risky

and conservative instruments. As financial advisors, you

are already very familiar with this. What would be novel for

most advisors, however, is to commit to a specific contin-

gency plan. This is an agreement made in advance about

what action will be taken should a certain event or condi-

tion occur: for example, if the market goes up 25 percent

or if the market goes down 25 percent.

The third component of the Ulysses Strategy is to formalize

these agreements in a commitment memorandum, to

which both the client and the financial advisor are par ties

(see Appendix A for a sample memorandum). Although

research shows that financial professionals are less

affected by the impulses of the intuitive mind, they a re not

completely immune to them (Barber and Odean, 2000).

And by being co-signatories to the memorandum, finan-

cial advisors put themselves on the same footing as theirclients. This memorandum is not binding, in the sense of a

legal contract. But the act of writing down the agreements

and putting one’s signature to it helps people resist the

siren call of the intuitive mind. It helps clients stick with

the plan when changes in market conditions might tempt

them to go with the herd, and make unwise decisions.

And it helps financial advisors honor the agreement, too.

The Ulysses Strategy

BeFi-in-Action:

1. Help clients understand the sometimesimpulsive nature of investment decisions.

2. Discuss and agree upon what actionwould be taken when, for example, themarkets move 25 percent up or down.

3. Draw up a commitment memorandum,with both client and advisor as signatories.(See sample memorandum, appendix Apage 6.)


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Nava Ashraf et al ., “Tying Ulysses to the

Mast: Evidence from a commitment savings

product in the Philippines,” The Quarterly

Journal of Economics, pp 635 – 672,

May 2006.

Nicholas Barberis and Wei Xiong, “Realization

Utility,” 2010, http://badger.som.yale.edu/

faculty/ncb25/rg40d.pdf

S. Bikhchandani et al., “A theory of fads,

fashion, custom, and cultural change as

informational cascades,” Journal of Political

Economy , vol 100, no. 5, pp 992 – 1026 (1992).

Brad M. Barber and Terrance Odean, “Trading

Is Hazardous to Your Wealth: The common

stock investment performance of individual

investors,” The Journal of Finance, vol LV, no. 2,

pp 773 – 806 (2000).

Brad M. Barber and Terrance Odean,

“All that Glitters: The Effect of Attention and

News on the Buying Behavior of Individual

and Institutional Investors,” The Review of

Financial Studies, vol 21, no. 2, pp 785 – 818

(2008).

Kent Daniel et al., “Investor Psychology and

Security Market Under- and Over-Reactions,”

The Journal of Finance, vol LIII, no. 6, pp 1839

– 1885 (1998).

Ilia D. Dichev, “What Are Stock Investors’

Actual Historical Returns?” The American

Economic Review , vol 97, no. 1, pp 386 – 401

(2007).

A. Edmans et al ., “Sports Sentiment and Stock

Returns,” Journal of Finance, vol 62, pp 1967 -

1998 (2007).

John Galbraith, A Short History of Financial

Euphoria, Whittle Books in association with

Viking, New York, 1993.

Xavier Giné et al., “Put Your Money Where

Your Butt Is: A commitment savings account

for smoking cessation,” American Economics

Journal , vol 2, no. 4, pp 213 – 235 (2010).

David Hirshleifer and Tyler Shumway,

“Good Day Sunshine: Stock returns and the

weather,” The Journal of Finance, vol 58, no. 3,

pp 1009 – 1032 (2003).




pp 263 – 291 (1979).

Guy Kaplanski and Haim Levy, “Sentiment

and Stock Prices: The Case of Aviation Disas-

ters,” Journal of Financial Economics, vol 95,

pp 174 – 201 (2010).

T. Loughran and P. Schultz, “Weather, Stock

Returns, and the Impact of Localized trading,”

Journal of Financial and Quantitative Analysis,

vol 39, no. 2, pp 343 – 364 (2004).

References


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Appendix A

Sample Commitment Memorandum

A commitment memorandum drawn up between

a financial advisor and his/her client can help the

client avoid making unwise investment decisions.

A sample memorandum might read something

like this:


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Part 4 – Regaining and Maintaining Trust:Competence + Empathy


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A July 2010 Gallup Poll ranks financial institutions 11th out

of 16 institutions in the United States in terms of public

trust. Only television news, Labor, Big Business, HMOs

and Congress score lower, in that order. According to the

Chicago Booth/Kellogg School Financial Trust Index, at the

beginning of 2009 only 34 percent of Americans expressedtrust in financial institutions.

Financial advisors are often tarred by the same brush and

many now face clients whose confidence in them has been

undermined.

The bruised psychological state of investors has been

likened to the feelings of betrayal following the discovery

of a partner’s affair. Just as in repairing such a relationship,

regaining trust with clients in the aftermath of the finan-

cial crisis requires humility, patience and hard work.Regaining trust is a top priority for financial advisors, even

if their strategies did not lead directly to clients’ losses

(Gounaris and Prout, 2009).

1 Noah Goldstein is a member of the Academic Advisory Board of the Allianz


As financial advisors know very well, their client relation-

ships have two components: the technical and the

personal. “Active demonstrations of professional compe-

tence and personal empathy have been identified as key

to building and maintaining trust,” notes Noah Goldstein,1

of the UCLA Anderson School of Management (see Gärlinget al., 2009). The following BeFi-in-Action strategies are

applicable not just to regaining trust in current circum-

stances, but also to maintaining trust in the ongoing

financial advisor/client relationship. Some of these

strategies might at first seem commonplace, but we

add a unique angle on them, often backed up by social

science research.

Regaining and Maintaining Trust:Competence + Empathy

Investor paralysis is just one important consequence of the recent financial crisis.

A second, related corollary is its impact on the bond of trust that exists between financial

advisors and their clients. The Nobel laureate economist Kenneth Arrow is often quoted

as saying, “Virtually every commercial transaction has within itself an element of trust”

(Arrow, 1972). This is especially true of the financial advisor/client relationship

(Guiso et al., 2008).

Active demonstrations of

professional competence and personal

empathy have been identified as key

to building and maintaining trust.”

Noah Goldstein,



23/36


24/36


downside and upside are presented is crucial to how the

whole is perceived. In this case, clients will be more

trusting of positive claims about a product or service if

the positive claims are preceded by one or two negative

claims. These are known to social scientists as “two-sided

messages” (Bohner et al., 2003). By talking about the

downside first, the financial advisor is displaying honesty

that elicits a greater willingness in the listener to trust

what is then said about the upside.

Note that this does not mean that the very first thing you

say about the product needs to be negative. Ideally, you

could mention one positive argument for the product,

followed by a potential downside, followed immediately

by the strongest argument for the product. The reason for

this narrative str ucture is that social science research

shows that people are more likely to remember the first

and last things you say about something (Atkinson and

Shiffrin, 1968).

Display evidence of competence. Here’s a story of a physi-

cians’ practice that struggled with the common problem

of patient non-compliance with exercise therapy designed

to speed recuperation. No amount of explaining to patients

the importance of the exercises made for a significant

improvement in compliance. The physicians’ assistants

engaged a consultant to find a solution. On visiting the

practice’s offices, the consultant noticed that there were

no professional credentials to be seen. The consultant

advised the physicians’ assistants to prominently

display all relevant certificates and diplomas. Patient

compliance immediately leapt by more than 20 percent

(Goldstein, 2011).

This dramatically improved outcome is hardly rational.

If asked, the patients would have surely acknowledged that

they knew the physicians’ assistants would not be able to

practice without the required certification. Yet when these

credentials were clearly visible, patients’ compliance

soared. From a psychological perspective, this improved

outcome was not a matter of patients’ reflective minds

thinking, “Hm, look at all those diplomas. These people

must really know what they are doing. I had better do asthey tell me.” Rather, making evidence of competence

salient in the professional environment triggered an un-

conscious response in the intuitive mind, in this case in a

positive direction.

If you don’t do so already, know that displaying professional

credentials is not a sin of ostentation. Rather, it helps your

clients more readily see who you are, professionally, and

what you have achieved.

Displaying professional credentials

is not a sin of ostentation. Rather, it

helps your clients more readily see

who you are, professionally, and what

you have achieved.”

Shlomo Benartzi,



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Exhibiting Empathy

Most financial advisors know very well that there is more to

the advisor/client relationship than just shaping an invest-

ment portfolio: there is the human side of the relationship,

too. Those financial advisors who place great value on this

aspect of their interaction with clients should know that

their intuition to do so is strongly supported by research.

This research shows that paying genuine attention to thehuman element in business transactions improves all

bottom-line measures (Pfeffer, 1998). Putting value on the

human side of business has been described as “relational

intelligence” (Saccone, 2009).

In the context of regaining and maintaining tr ust, there-

fore, exhibiting empathy with a client is not just “being

nice”: it is good business practice. And most financial

advisors know that exhibiting individualized care to their

clients is an integral part of the way they need to work,

in order to serve their clients most effectively. Here area few actions around exhibiting empathy that may be

less obvious.

Have frequent contact with clients, especially in diff icult

times. As we all know, maintaining relationships requires

frequent interactions. When those contacts are made are,

however, even more important. “Financial advisors find

talking with clients during prosperous times to be easy,

and even rewarding,” notes Goldstein. “But clients need

contact with their financial advisors most urgently during

difficult economic times, when they are facing uncertainty

and worry.” These difficult times offer an opportunity to

strengthen the relationship. Good financial advisors push

aside the inclination to avoid contact at these times, and

call their clients more frequently than before, thus provid-

ing emotional support. They are regarded not only as

competent, but also as trustworthy. Their example is

worth emulating.

Allay embarrassment. Have you ever asked a client,

“Is there anything about our strategy you don’t under-

stand?” It is a perfectly valid, and very professional,

question because it comes from a desire to ensure that thefinancial advisor/client relationship is on a sound footing.

After all, no financial advisor wants a client to be going

along with a strategy that he/she doesn’t fully grasp.

However, the wording of the question might not elicit the

truth. Many people don’t like to admit ignorance. A client

might not understand everything, but will nevertheless

answer, “No, there isn’t,” rather than face that embarrass-

ment. A slightly different wording of the same question,

such as “Is there anything about our strategy that I can

clarify?” allows the client to admit ignorance without it

being so labeled. The same goal is achieved.

Seek feedback. Seeking feedback from clients is a standard

part of the financial advisor/client relationship. But, once

again, this is especially important in challenging

economic times. A financial advisor might therefore ask,

“Is there anything I can do to improve my service to you

in this difficult climate?” This is a win-win question, for

several reasons. To begin with, the financial advisor is

showing concern to be doing better for his/her client. If the

answer is “Yes,” then an opportunity has been opened to

improve the professional relationship. If the answer is “No,”

then the financial advisor can be content with what he/she

is offering. At the same time, something psychologically

quite interesting happens in the client’s mind.


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By publicly stating that the financial advisor is providing

excellent service, that notion is reinforced in the client’s

mind, as described by the theory of self-perception. This

theory says that people’s attitudes and beliefs may be

shaped by observing their actions (in this case, by making

a particular statement). The theory is counterintuitive,

because it would seem more natural if actions were

shaped by beliefs (Bem, 1972).

Regaining and Maintaining Trust

BeFi-in-Action:

Competence

1. Admit luck.

2. Precede the greatestupside of a product with

a potential downside.

3. Display evidenceof competence.

Empathy

1. Have frequent contactwith clients, especially

in difficult times.

2. Allay embarrassment.

3. Seek feedback, especiallyin difficult times.

Financial advisors find

talking with clients during

prosperous times to be easy,

and even rewarding. But clients

need contact with their financial

advisors most urgently during

difficult economic times, whenthey are facing uncertainty

and worry.”

Noah Goldstein,



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Kenneth Arrow, “Gifts and Exchanges,”

Philosophy and Public Affairs, vol 1, pp 343 –

362 (1972).

R.C. Atkinson and R.M. Shiffrin, “Human

Memory: A proposed system and its control

processes,” in K.W. Spence and J.T. Spence,

Psychology of Learning and Motivation, II,

Academic Press, pp 89 –195 (1968).

D. J. Bem, Self-Perception Theory .

In L. Berkowitz (Ed.), Advances in Experimen-

tal Social Psychology (Vol. 6, pp 1 – 62).

New York: Academic Press (1972).

G. Bohner et al., “When Small Means

Comfortable,” Journal of Consumer

Psychology , vol 13, pp 454 – 463 (2003).

Gallup Poll, “Congress Ranks Last inConfidence in Institutions,” July 2010.

Tommy Gärling et al., “Psychology, Financial

Decision Making, and Financial Crises,”

Psychological Science in the Public Interest ,

vol 10, no. 1, pp 1 – 47 (2009).

Noah Goldstein, 2011,

personal communication.

Kathleen Gounaris and Maurice Prout,

“Repairing Relationships and Restoring Trust:

Behavioral Finance and the Economic Crisis,”

Journal of Finance Service Professionals,

July 2009, pp 75 – 84.

Luigi Guiso et al., “Trusting the Stock Market,”

Journal of Finance, vol 63, issue 6, pp 2557 –

2600 (2008).

F. Lee et al., “Mea Culpa: Predicting stock

prices from organizational attributions,”

Personality and Social Psychology Bulletin,

vol 30, pp 1636 – 1649 (2004).

Jeffery Pfeffer, The Human Equation:

Building profits by putting people first ,

Harvard Business Press, 1998.

Steve Saccone, Relational Intelligence:How leaders can expand their influence

through a new way of being smart ,

Jossey-Bass (2009).

K.D. Williams et al., “The Effects of Stealing

Thunder in Criminal and Ci vil Trials,” Law and

Human Behavior , vol 17, pp 597 – 609 (1993).

References


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Part 5 – Addressing the Disinclination to Save:The Behavioral Time Machine – In Development


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As fina ncial advisors know, people find the task of saving

adequately to be very challenging. Standard economic

theory of saving assumes that people will be able to grasp

how much they need to save, for retirement and for other

contingencies; and then have the self-control to forgo

current rewards in favor of later benefits.

Even those people who can do the math (it isn’t easy) often

find their best intentions derailed by the lure of immediate

gratification leading to poor financial decisions that the

mind, if given time to reflect, would reject.

It may be difficult to focus on the benefits of financialrewards that will be available at retirement, because the

present self may be psychologically disconnected from the

distant future self. “With extreme psychological discon-

nection,” says Hal Ersner-Hershfield, of the Kellogg School

of Management, Northwestern University, “saving for re-

tirement may feel to the present self like giving money to a

stranger years in the future.” That is a strong disincentive

to saving now.

The Behavioral Time Machine currently under develop-

ment offers the prospect of a simple tool that effectively

reduces the gap between present and future selves. It will

assist people’s imagination to understand the impact of

present decisions on the future self, thereby enhancing

people’s willingness to save now (Ersner-Hershfield et al.,

in press).

In Development:Addressing the Disinclination to Save–

The Behavioral Time Machine

Many people were caught off guard in the recent financial crisis as they watched with alarm

the value of their 401(k) accounts plummet, the price of their house decline and their job

security threatened or even lost entirely. Most people imagined these three pillars of future

financial stability to be separate: if one pillar started to crumble, the other two would

compensate. The fact that under a confluence of certain financial circumstances their fates

might be closely correlated was a timely reminder of the interconnectedness of things in

our financial worlds. It also exposed a chronic problem: inadequate savings, not just for

retirement but also for a source of stability in blustery financial climates in the future.


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Two Selves

The notion of a disconnection between present and future

selves has fascinated philosophers since the time of Plato.

Many young people view their older selves heading into

retirement as strangers. The British philosopher Derek

Parfit famously described this lack of comprehension of

future selves as “a failure of imagination, or some false

belief” (Parfit, 1971). It is a failure to identify with oneselfin the future.

This unconscious assumption of a different self in the

future is demonstrated graphically by brain scans. Re-

searchers at Northwestern University and elsewhere find

that when people think about their future selves, the same

brain region lights up as when they think about strangers.

This neurological response to thinking about future selves

is stronger in some people than in others. And those in

whom the brain region is activated most when looking at

future selves also show the steepest discounting of thefuture (Ersner-Hershfield et al., 2009). The degree of psy-

chological disconnection is reflected in an unwillingness

to save.

To a failure of imagination we might add many young

people’s seeming sense of immortality, or denial that one

day they, too, will be old.

In any case, the disconnection between present and future

selves is well recognized, and it correlates with a reluc-

tance to save. The question is, can the psychological gap

between the two selves be closed, and would this affect

willingness to save?

Having people imagine their future selves in a substantive

way is very challenging, for several reasons. For a start, it is

not something people ordinarily do, and so it is a foreign

exercise for them. And for anyone, imagining themselves at

the age of retirement conjures up many possibilities, with

different contingencies (losing one’s hair, winning the

lottery, moving to another town or country, having a face-

lift), which leads to multiple different outcomes. Under this

spate of different potential future selves, people find it veryhard to bring a single future self into focus.

The Behavioral Time Machine will provide a means of

creating a single, salient future self to which the intuitive

self reacts strongly. The reflective mind endorses that

reaction, and makes rational decisions about saving.

Enter Virtual Worlds

When people are confronted with vivid visual images of

themselves that have been digitally aged, they take notice.

Hal Ersner-Hershfield and six colleagues performed such

an experiment on young volunteers, using age-progression

software in a vir tual reality environment. These algo-

rithms use a framework of key facial features to build an

image of what that person will look like in, say, thirty years’

time. Some of the comments on seeing age-rendered

future selves included: “Wow, I look just like Grandma,”

“Oooh, I don’t know if I want to see this” and “Whoa, this

is freaky” (Ersner-Hershfield, 2011). But more pertinently,

the volunteers in the experiment who see their future

selves more than double the amount of money they say

they would allocate to retirement savings.


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This was not a simple priming effect. When the volunteers

see similarly age-processed images of other people, it does

not affect their allocation to savings. Only when they see

images of their own future selves do they do the right thing

with savings.

These experimental results are the first demonstration of

a new kind of intervention that shifts participants’ willing-

ness to forgo present rewards in favor of future benefits.

The age-progression exercise helps people recognize that

the future self is indeed the same person as the present

self. It repairs the disconnection

between the two selves and leads to

far-sighted decisions that take care

of the future self by making adequatecontributions to a retirement plan.

In other words, says Daniel Goldstein,1

a professor at London Business School,

“The Behavioral Time Machine helps

people to imagine their future selves

by presenting them with a striking

visual image of that self.”

In a second study these same experi-

menters added an emotional dimen-

sion to the future selves. They firsttook three photographs of each

participant, one with a very happy

expression, another with a very sad

expression and a third one with a

neutral face. These three images were

then digitally processed to form a

series of about a dozen expressions in

a future self-image, progressing from

very happy to very sad. The experi-

menters then linked this sliding

emotional scale to a sliding financial

scale, going from minimal allocation

of savings for retirement on the left to

optimal allocation on the right.

1 Daniel Goldstein is a member of the Academic Advisory Board of the Allianz


Seeing our future selves boosts savings

Seeing a happy future self further boosts savings

(Ersner-Hershfield and Goldstein, in progress)


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Participants could then see the emotional reaction of their

future selves to different rates of saving for retirement by

the present self: pushing the slider toward the left (low

allocation) end of the scale evokes an ever sadder future

face; when participants move the slider toward the right

(high allocation) end of the scale, the smile on their future

selves’ faces gets ever broader.

The results of the procedure are clear-cut: Participantswho see these emotional reactions in their future selves

allocate significantly more to saving for retirement as

compared with others who encounter only happy or sad

images of their present selves.

The virtual reality environment that these experimenters

used in their laboratory studies is very high tech and

sophisticated. Ersner-Hershfield and one of his colleagues,

Daniel Goldstein, are working with Allianz Global Investors

to scale down the technology to a level that would be

practicable for financial advisors to use with their clients.

This is the Behavioral Time Machine currently under

development.2

The Behavioral Time Machine will be complementary

to other savings-enhancement strategies, which focus

on present and future rewards rather than present and

future selves. One of these is Save More Tomorrow, which

effectively reduces the lure of the present (Thaler and

Benartzi, 2004). Another strategy is to heighten people’s

awareness of the benefits of future uses of money: trips

to Europe, for instance, or spoiling the grandchildren.

Research shows that this second strategy increases

people’s patience, and enhances their willingness to

save more now (Bartels and R ips, 2010). Financial advisorsmight use the Behavioral Time Machine on its own,

or in combination with one of these strategies.

2 The Behavioral Time Machine tool is in development with a launch date

to be determined.

The Behavioral Time Machine

helps people to imagine their future

selves, by presenting them with a

striking visual image of that self.”

Daniel Goldstein,London School of Business


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Daniel M. Bartels and Lance J. Rips,

“Psychological Connectedness and Inter-

temporal Choice,” Journal of Experimental

Psychology—General , vol 139, no. 1,

pp 49 – 69 (2010).

Hal Ersner-Hershfield, 2011,

personal communication.

Hal Ersner-Hershfield et al., “Saving for the

Future Self: Neural measures of future self-

continuity predict temporal discounting,”

Social Cognitive and Affective Neuroscience,

vol 4, no. 1, pp 85 – 92 (2009).

Hal Ersner-Hershfield et al., “Increasing

Saving Behavior Through Age-Progressed

Renderings of the Future Self,” Journal of

Marketing Research, in press.

Derek Parfit, “Personal Identity,” Philosophical

Review , vol 80, no. 1, pp 3 – 27 (1971).

Elke U. Weber et al., “Asymmetric Discount-

ing in Intertemporal Choice,” Psychological

Science, vol 18, no. 6 , pp 516 – 523 (2007).

References


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About the Author

The Behavioral Finance in Action series

was written by Shlomo Benartzi, Ph.D.,

Professor, UCLA Anderson School of Man-

agement, and Chief Behavioral Economist

of the Allianz Global Investors Center for

Behavioral Finance.

Professor Benartzi is a leading authority on behavioral financewith a special interest in personal f inance and participant behavior

in defined contribution plans. He received his Ph.D. from Cornell

University’s Johnson Graduate School of Management, and he is

currently co-chair of the Behavioral Decision-Making Group at

The Anderson School at UCLA.

Professor Benartzi is also co-founder of the Behavioral Finance

Forum (www.behavioralfinanceforum.com), a collective of 40

prominent academics and 40 major financial institutions from

around the globe. The Forum helps consumers make better

financial decisions by fostering collaborative research effortsbetween academics and industry leaders.

Professor Benartzi’s most significant research contribution is the

development of Save More Tomorrow™ (SMarT), a behavioral

prescription designed to help employees increase their savings

rates gradually over time. Along with Richard Thaler of the

University of Chicago, he was recognized by Money as one of

2004’s “Class Acts” for SMarT’s success – increasing savings rates

in one plan from 3.5% to 13.6%. The SMarT program is now offered

by approximately half of the large retirement plans in the U.S. anda growing number of plans in Australia and the U.K.

Professor Benartzi has supplemented his academic research with

practical experience, serving on the advisory boards of the Alaska

State Pension, Fuller and Thaler Asset Management, Guggenheim

Partners, Morningstar and the U.S. Department of Labor.


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Richard H. Thaler

The University of Chicago

Booth School of BusinessRalph and Dorothy Keller

Distinguished Service Professor of

Behavioral Science and Economics

http://www.chicagobooth.edu/faculty/bio.

aspx?person_id=12825835520

Nicholas Barberis

Yale School of Management

Stephen & Camille Schramm

Professor of Finance

http://www.som.yale.edu/faculty/ncb25/

Kent Daniel

Graduate School of Business,

Columbia University

Professor of Finance

http://www.columbia.edu/~kd2371/

Daniel G. Goldstein

Yahoo Research, Research Scientist

London Business School,Assistant Professor of Marketing

http://www.dangoldstein.com/

http://www.london.edu/facultyandresearch/

faculty/search. do?uid=dgoldstein

Noah Goldstein


Assistant Professor of Human Resources

and Organizational Behavior

http://www.anderson.ucla.edu/x20524.xml

John Payne

Duke University, The Fuqua School

of Business, Joseph J. Ruvane, Jr.

Professor of Business Administration

Director, Center for Decision Studies,

Fuqua School of Business

http://faculty.fuqua.duke.edu/~jpayne/bio/

Acknowledgements

We would also like to thank the financial advisors who provided feedback on the Behavioral Finance in Action series.

And we welcome further comments from our readers. Email us at [email protected].

We would like to thank the following experts in behavioral finance for their input to the intellectual

content of the Behavioral Finance in Action series. Each of them is a member or past member of the

Academic Advisor y Board of the Allianz Global Investors Center for Behavioral Finance.


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Allianz Global Investors is the asset management arm of Allianz SE.The Center for Behavioral Finance is sponsored by Allianz Global Investors Capital

and Allianz Global Investors Distributors LLC.

The principles and strategies suggested do not constitute legal advice and do not address the legal issues associated

with implementing any recommendations, or associated with establishing or amending employee benefit plans.

There are many legal and other considerations plan sponsors and plan fiduciaries should consider prior to adopting

any of the recommendations herein, and legal counsel should be consulted to ensure compliance with the law. Any

adoption of these general recommendations must be considered in light of the particular facts and circumstances

of each retirement plan and its participants, and the authors of the program and Allianz Global Investors provide no

The Allianz Global Investors Center for Behavioral Finance is committed

to empowering clients to make better financial decisions by offering them

actionable insights and practical tools.

We developed Behavioral Finance in Action to present potential solutions

to some of the key challenges financial advisors are facing. We consider this

a work in progress. Our goal is to build on what we’ve begun, to improve and

expand upon the contents. We can do this most effectively in partnership

with you. We therefore invite you to give us your feedback.

To do so, please email [email protected].

befi.allianzgi.com

Allianz_behavioral Finance in Action

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