Investment in Minority-Owned Media: A Social Investor’s Perspective

Access to capital for minority media remains problematic in the pension and mutual fund world, even among those organizations that practice socially responsible investing. The reasons for this include the behavior traits of all institutional investors and the relatively undeveloped state of socially responsible investing. However, modern social research suggests that large media conglomerates, such as Disney, Time-Warner, and Viacom, might be potentially approachable sources of capital for minority media. Forum: New Approaches to Minority Media Ownership, Columbia Institute for Tele-Information, Columbia University

In Praise of Investor Irrationality

How should a market filled with investors who chronically make bad investments, but is nevertheless efficient, be regulated? A growing body of evidence suggests that this is the state of most securities markets; investors rely on cognitive processes that produce systematically bad choices, and yet the market remains largely efficient. In fact, cognitive errors might be essential to their efficient operation. Even investors who make systematic errors also often possess real and unique information that can contribute to accurate pricing of securities. If such investors became mindful of their limited ability to distinguish between real information and erroneous information, they would decline to rely on their beliefs to invest and would thereby withhold private information from the market. Over-confidence on the part of these investors leads them to trade anyway. This over-confidence provides market liquidity, but more importantly, provides the market with the private information that individual investors possess (but should, rationally, withhold). Hence, reforms designed to save investors from the costs of their cognitive errors would reduce market liquidity and deprive the market of valuable information. In short, markets need irrationality

In Praise of Investor Irrationality

How should a market filled with investors who chronically make bad investments, but is nevertheless efficient, be regulated? A growing body of evidence suggests that this is the state of most securities markets; investors rely on cognitive processes that produce systematically bad choices, and yet the market remains largely efficient. In fact, cognitive errors might be essential to their efficient operation. Even investors who make systematic errors also often possess real and unique information that can contribute to accurate pricing of securities. If such investors became mindful of their limited ability to distinguish between real information and erroneous information, they would decline to rely on their beliefs to invest and would thereby withhold private information from the market. Over-confidence on the part of these investors leads them to trade anyway. This over-confidence provides market liquidity, but more importantly, provides the market with the private information that individual investors possess (but should, rationally, withhold). Hence, reforms designed to save investors from the costs of their cognitive errors would reduce market liquidity and deprive the market of valuable information. In short, markets need irrationality

Nudges for Health Policy: Effectiveness and Limitations

One tool that our government can use to combat our healthcare challenges is the use of health policy in the form of programs, regulations, and agencies that are aimed at improving the overall health and welfare of Americans. Of the various approaches to shaping health policy, this paper will focus on the use of “nudges,” a behavioral strategy for shaping human behavior from the framework, Libertarian Paternalism. In this Article, a nudge is defined as any aspect of choice architecture or any method of structuring the choice environment that influences behavior in a predictable way, with the restriction that this tool may not constrain or remove choices nor can it significantly increase the cost associated with any of the options. This definition is largely consistent with the original conception by Thaler and Sunstein. This work was informed by the author’s participation in the Behavioral Science & Policy Association working group on the application of insights from behavioral economics to health and healthcare. The working group produced a report, jointly commissioned by the Behavioral Science and Policy Association and the White House Social and Behavioral Sciences Team, that identified opportunities for federal-level behavioral policy interventions to improve the health and well-being of Americans

Welfare Now

In evaluating interventions, policymakers should consider both their welfare effects, including their effects on people’s emotional states, and their effects on distributive justice, including their effects on those at the bottom of the economic ladder. The arguments for investigating welfare effects, and effects on distributive justice, are meant as objections to efforts to evaluate behaviorally informed interventions solely in terms of (for example) revealed preferences and effects on participation rates. The arguments are also meant as a plea for investigation and specification of the effects of such interventions on experienced well-being. If interventions give people a sense of security and safety, that is a strong point in their favor; if they make people feel frightened and sad, that is a strong point against them. A central concern is that policymakers sometimes neglect the emotional impact, whether negative or positive, of behaviorally informed interventions. Personalized approaches can promote distributive goals and also target interventions to those who are most likely to be helped by them

The Knowledge Gap in Workplace Retirement Investing and the Role of Professional Advisors

The dramatic shift from traditional pension plans to participant-directed 401(k) plans has increased the obligation of individual investors to take responsibility for their own retirement planning. With this shift comes increasing evidence that investors are making poor investment decisions. This Article seeks to uncover the reasons for poor investment decisions. We use a simulated retirement investing task and a new financial literacy index to evaluate the role of financial literacy in retirement investment decisionmaking in a group of nonexpert participants. Our results suggest that individual employees often lack the skills necessary to support the current model of participant-directed investing. We show that less knowledgeable participants allocate too little money to equity, engage in naive diversification, fail to identify dominated funds, and are inattentive to fees. Over the duration of a retirement account, these mistakes can cost investors hundreds of thousands of dollars. We then explore the capacity of professional advisors to mitigate this problem. Using the same study with a group of professional advisors, we document a predictable but nonetheless dramatic knowledge gap between professionals and ordinary investors. The professional advisors were far more financially literate and made better choices among investment alternatives. Our results highlight the potential value of professional advice in mitigating the effects of financial illiteracy in retirement planning. Our findings suggest that, in weighing the costs of heightened regulation against the value of reducing possible conflicts of interest, regulators need to be sensitive to the knowledge gap

Once and Future Nudges

The nudge – a form of behaviorally-informed regulation that attempts to account for people’s scarce cognitive resources – has been explosively successful at colonizing the regulatory state. This Essay argues that the remarkable success of nudges as a species creates new challenges and opportunities for individual nudges that did not exist ten years ago, when nudges were new. These changes follow from the new fact that nudges must now interact with other nudges. This creates opportunities for nudge versus nudge battles, where nudges compete with other nudges for the scarce resource of public cognition; and for nudge & nudge symbiosis, where nudges work complementarily with other nudges to achieve greater good with fewer resources. Because of the potential for positive and negative interactions with other nudges, modern nudges should be expected to operate differently from ancestral nudges in important ways, and future nudges should be expected to operate more differently still. Policymakers should prepare to manage future positive and negative nudge-nudge interactions

Libertarian Paternalism Is Not An Oxymoron

Cass R. Sunstein and Richard H. Thaler assert that while the idea of libertarian paternalism might seem to be an oxymoron, it is both possible and legitimate for private and public institutions to affect behavior while also respecting freedom of choice. Often people's preferences are ill-formed, and their choices will inevitably be influenced by default rules, framing effects, and starting points. In these circumstances, a form of paternalism cannot be avoided. Equipped with an understanding of behavioral findings of bounded rationality and bounded self-control, libertarian paternalists should attempt to steer people's choices in welfare-promoting directions without eliminating freedom of choice. Sunstein and Thaler argue that it is also possible to show how a libertarian paternalist might select among the possible options and to assess how much choice to offer. This paper gives examplesfrom many areas, including savings behavior, labor law, and consumer protection.