Overcoming Inertia: Do Automated Saving and Investing Strategies Work?

Many workers do not take advantage of savings opportunities provided to them at their workplace, nor do they always make wise investment decisions regarding employer plans. Various automated strategies have been implemented by employers with the objective of increasing retirement plan participation and, hence, the financial security of workers. Automatic strategies work by proactively arranging some type of action (e.g., plan enrollment) to occur unless people specifically opt out. This article examines and synthesizes previous empirical research about five automatic savings and investing strategies: (a) automatic retirement savings plan enrollment, (b) automatic contribution increases, (c) automatic portfolio rebalancing, (d) automatic rollovers, and (e) automatic investment plans. Advantages and disadvantages of each strategy are discussed, along with implications for financial educators. Copyright Springer Science+Business Media, LLC 2007Automatic investing, Automatic retirement plan enrollment, 401(k) plans,

Risk Management in Electricity Markets: Hedging and Market Incompleteness

Abstract: The high volatility of electricity markets gives producers and retailers an incentive to hedge their exposure to electricity prices. This paper studies how welfare and investment incentives are affected when markets for derivatives are introduced, and to what extent this depends on market completeness. First, we show that aggregate welfare in the market increases with the number of derivatives offered. If firms have liquidity constraints, option markets are particularly attractive from a welfare point of view. Second, we demonstrate that increasing the number of derivatives improves investment decisions of small firms, because additional financial markets signal how firms can reduce overall sector risk. Finally, we show that government intervention may be needed, because private investors may not have the right incentives to create the optimal number of markets.

An experimental examination of the house money effect in a multi-period setting

There is evidence that risk-taking behavior is influenced by prior monetary gains and losses. When endowed with house money, people become more risk taking. This paper is the first to report a house money effect in a dynamic, financial setting. Using an experimental method, we compare market outcomes across sessions that differ in the level of cash endowment (low and high). Our experimental results provide support for a house money effect. Traders’ bids, price predictions, and market prices are influenced by the amount of money that is provided prior to trading. However, dynamic behavior is difficult to interpret due to conflicting influences. Copyright Springer Science + Business Media, LLC 2006House money, Prospect theory,