How Do You Make Financial Decisions? W&M Wants to Know

By Amber Lester Monday, April 05, 2010

For many workers, choosing a 401(k) or planning investments is an intimidating and overwhelming process. The language seems foreign, the differences between options aren’t clear and in desperation, many new employees will sign up for a plan with no idea of what it really means.

The Social Security Administration is hoping to clear the confusion with its new Financial Literacy Research Consortium, which unites several higher education institutions in an effort to find out how people make financial decisions. The College of William and Mary will be participating in the process, conducting research through focus groups, interviews and experiments over the next five years.

With approximately $7.6 million in first-year funding from the SSA, three research centers have been established, at Boston College, the RAND corporation and the University of Wisconsin. Through its Center for Interdisciplinary Behavioral Finance Research, William and Mary will provide pre-testing and testing services for the Center for Financial Literacy at Boston College.

Mason School of Business professors Lisa Szykman, Julie Agnew and Nicole Montgomery will be managing the research effort at William and Mary, where they’ll create a database of people interested in participating in the research. They will need a list of community members throughout the region willing and interested in participating. All participants will be paid.

“We really need everybody,” Agnew says. “We want to see the whole gamut in terms of financial knowledge.”

The Center for Interdisciplinary Behavioral Finance Research will start advertising its focus group needs more in May, but the first focus groups will be conducted Tuesday and Wednesday night at Alan B. Miller Hall, located at the corner of Jamestown Road and Ukrop Way on the college campus. The first focus groups require participants who are 58 or older and currently working. Participants will be asked to read and provide feedback on a draft copy of a brochure.

Agnew says finance experts only recently began studying how one’s behavior affects his or her financial planning. She and Szykman have been tying consumer behavior and finance together in their research since 2001; Szykman’s previous research investigated how people choose health plans.

One of their projects studied the behavioral reasons for why the market for life annuities is small. Previous research had looked for a rational reason, but Szykman and Agnew looked at the emotional reactions to the framing. They found that if the framing of investments is negative, such as showing how a failure to invest in annuities could be a mistake, people are more likely to consider annuities.

“In the past 10 years, there has been a real shift in the financial community to recognize that psychology is important,” Agnew says.

The Mason School professors will be using their research to help Boston College produce financial literacy guides. The lab in Miller Hall is equipped with computers and perception analyzers, similar to those that indicate audience responses to State of the Union addresses. The professors will also be working with Vanguard to study target date funds, which are actively rebalanced with one’s retirement date in mind.

All of the research will be geared toward taking away some of the mystery of good financial planning for those who don’t understand. Agnew says she found finance interesting enough to earn a doctorate in it, but knows that isn’t the case for most. “The rest of the world finds finance fascinating, but doesn’t have the time to understand it,” she says.

The SSA grant calls for the Center for Financial Literacy, in its first year, to produce print and Web-based interactive guides to financial issues facing retirees; develop a Web-based interactive program to help older workers choose a target retirement age; field commitment programs to help low- and moderate-income households control finances; design a plan for a comprehensive “go-to” Web site; review the effectiveness of existing financial literacy programs; create a financial literacy “food pyramid”; and evaluate how target date funds are used by 401(k) participants.

The Center for Finance Literacy’s active partners include William and Mary, the National Bureau of Economic Research, The Brookings Institution, Innovations for Poverty Action, Financial Engines, Knowledge Networks and the National Endowment for Financial Education.