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NewsWise: Why Consumers Make Bad Financial Decisions, and How Simple Policy Changes Can Help

In an ideal world, consumers are making investment and monetary decisions based on facts and thorough research of the markets, careful analysis, and guidance from seasoned financial experts. Think again. In the paper, “Behaviorally Informed Policies for Household Financial Decisionmaking,” by a working group of behavioral scientists including University of Chicago Booth School of Business Associate Professor Abigail Sussman, researchers find that financial mistakes happen when consumers fail to examine all of their choices when making monetary decisions. For instance, many home buyers don’t comparison shop when applying for a mortgage; they simply go with the first financial institution they contact. All too often, individuals “focus on limited local trade-offs, instead of broad outcomes, leading to inefficient spending, borrowing, and investment outcomes,”  the researchers said in the paper. Social context also plays a role. Individuals may look to the choices others make for guidance, and they may be motivated to make choices in part based on how others perceive their decisions. Trust is another factor. Consumers sometimes either have too much trust in financial advisors, who may be motivated by their own self-interests, or too little trust, which may lead them to squirrel money away in low-return savings accounts instead of investing in the stock market. Meanwhile, distrust of institutions and social stigma may deter people from claiming financial benefits to which they are entitled, such as welfare, disability and unemployment insurance benefits. These less-than-stellar money choices help contribute to the nation’s $14.5 trillion in household liabilities, which include consumer mortgages, credit card debt, and other loans. The paper provides solutions that institutions and employers can implement to help the public make better financial choices. For instance, they can improve retirement outcomes through automatic enrollments in 401(k) plans, “which simplifies the decision about whether to save and forestalls procrastination,” according to the paper. Read more at NewsWise.