Hat tip to Vikram Parekh of USAA (podcast upcoming) for highlighting the work of one of his favorite behavioral economists, Shlomo Benartzi of UCLA’s Anderson School of Business. In this 17 minute TED video, Shlomo highlights the hurdles to saving and how he designed a savings program (“behavioral economics on steroids”) to overcome these challenges. He provides some good examples that you might use with your students to show how our behavioral biases cause us to fall short of our intentions and how we should design our a savings plan to meet our goals.

Here are my notes:

Key question: How do we turn behavioral challenges into behavioral solutions?

• 50% can save through a 401(k) plan, so 50% cannot
  • 1/3 actually save through 401(k)
  • 1/10 are saving enough for retirement
  • 1/2 of 1% believe they save too much
• Why are people not saving?
  • Bananas and chocolates problem (“present bias” problem)
    • Self-control not a problem n the future
  • Inertia
    • Organ donation example
    • Power of default settings (“checking the box”)
  • Loss aversion
    • Mentally and emotionally they frame savings as a loss (have to cut their spending)
• The Solution: Save More Tomorrow
  • Auto-pilot saving plan
  • Make people save more when they make more money (don’t have to cut their spending)
• Results of pilot program
  • Quadrupled savings for employees at midwestern company

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Interested in behavioral finance/economics? Be sure to check out more posts in the NGPF Blog!

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.