# The Behavioral Economics of Savings

Some quotes from the insightful (and surprisingly amusing) [The Behavioral
Economics of Retirement Savings
Behavior](https://assets.aarp.org/rgcenter/econ/2007_02_savings.pdf), by (Nobel
Laureate) Richard H. Thaler and Shlomo Benartzi (emphasis added):

> Investment in company stock is another tendency that defies all the logic of
> diversification, and yet **investors persist in the belief that investing in
> company stock is no more risky than investing in any other mutual fund**.

> Picking the best point on the efficient frontier is easier said than done.
> Indeed, when asked about how he allocated his retirement investments in his
> TIAA-CREF account, Nobel laureate Harry Markowitz, the “father” of modern
> portfolio theory, admitted that “**I should have computed the historic covariances
> of the asset classes and drawn an efficient frontier. Instead, ... I split my
> contributions fifty-fifty between bonds and equities.**”

> Markowitz’s strategy is a simple example of a naïve diversification strategy:
> when faced with “_n_” options, simply divide assets evenly across the options.
> […] For a concrete example, consider the following experiment Read and
> Loewenstein (1995) conducted one Halloween night. The “subjects” in the
> experiment were young “trick-or-treaters”. In one condition, the children
> approached two adjacent houses and were offered a choice between two candy
> bars (Three Musketeers and Milky Way) at each house. In the other condition,
> they approached a single house where they were asked to “choose whichever two
> candy bars you like.” Large piles of both candies were displayed to ensure
> that the children would not think it was rude to take two of the same. The
> results showed a strong diversification bias in the simultaneous choice
> condition: every child selected one of each candy. In contrast, only 48
> percent of the children in the sequential choice condition picked different
> candies. The remaining 52 percent picked two of the same candies, presumably
> their favorite.

> One of the most extreme examples of poor diversification is the case of
> employees investing in their employer’s stock. Mitchell and Utkus (2004)
> estimate that five million Americans have over 60 percent of their retirement
> savings invested in company stock. This concentration is risky on two counts.
> First, a single security is much riskier than the portfolios offered by mutual
> funds. **Second, as employees of Enron and WorldCom discovered the hard way, it
> is possible to lose one’s job and the bulk of one's retirement savings all at
> once.**

> It turns out that most of the supermarket employees considered the store
> butcher to be the investment maven and would turn to him for advice. Depending
> on the investment philosophy of the butcher at each individual location,
> employees ended up being heavily invested in stocks or heavily invested in
> bonds.

> With the above principles in mind, Save More Tomorrow invites participants to
> pre-commit to save more every time they get a pay raise. By synchronizing pay
> raises and savings increases, participants never see their take-home amounts go
> down, and they don’t view their increased retirement contributions as a loss.
> Once someone joins the program, the saving increases are automatic, using
> inertia to increase savings rather than prevent savings. When combined with
> automatic enrollment, this design can achieve both high participation rates and
> increased saving rates.