Saving for tomorrow, tomorrow
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0:00 - 0:03I'm going to talk today about saving more,
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0:03 - 0:06but not today, tomorrow.
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0:06 - 0:08I'm going to talk about Save More Tomorrow.
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0:08 - 0:10It's a program that Richard Thaler
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0:10 - 0:12from the University of Chicago and I
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0:12 - 0:15devised maybe 15 years ago.
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0:15 - 0:17The program, in a sense,
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0:17 - 0:19is an example of behavioral finance
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0:19 - 0:21on steroids --
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0:21 - 0:24how we could really use behavioral finance.
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0:24 - 0:27Now you might ask, what is behavioral finance?
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0:27 - 0:30So let's think about how we manage our money.
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0:30 - 0:33Let's start with mortgages.
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0:33 - 0:35It's kind of a recent topic,
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0:35 - 0:37at least in the U.S.
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0:37 - 0:39A lot of people buy
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0:39 - 0:42the biggest house they can afford,
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0:42 - 0:45and actually slightly bigger than that.
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0:45 - 0:48And then they foreclose.
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0:48 - 0:50And then they blame the banks
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0:50 - 0:53for being the bad guys who gave them the mortgages.
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0:53 - 0:55Let's also think about
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0:55 - 0:57how we manage risks --
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0:57 - 0:59for example, investing in the stock market.
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0:59 - 1:02Two years ago, three years ago, about four years ago,
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1:02 - 1:04markets did well.
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1:04 - 1:07We were risk takers, of course.
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1:07 - 1:09Then market stocks seize
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1:09 - 1:11and we're like, "Wow.
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1:11 - 1:14These losses, they feel, emotionally,
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1:14 - 1:17they feel very different
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1:17 - 1:20from what we actually thought about it
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1:20 - 1:22when markets were going up."
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1:22 - 1:25So we're probably not doing a great job
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1:25 - 1:27when it comes to risk taking.
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1:27 - 1:30How many of you have iPhones?
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1:30 - 1:33Anyone? Wonderful.
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1:33 - 1:36I would bet many more of you
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1:36 - 1:39insure your iPhone --
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1:39 - 1:42you're implicitly buying insurance by having an extended warranty.
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1:42 - 1:44What if you lose your iPhone?
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1:44 - 1:46What if you do this?
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1:46 - 1:48How many of you have kids?
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1:48 - 1:50Anyone?
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1:50 - 1:52Keep your hands up
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1:52 - 1:55if you have sufficient life insurance.
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1:55 - 1:57I see a lot of hands coming down.
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1:57 - 1:59I would predict,
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1:59 - 2:01if you're a representative sample,
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2:01 - 2:03that many more of you
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2:03 - 2:06insure your iPhones than your lives,
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2:06 - 2:08even when you have kids.
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2:08 - 2:11We're not doing that well when it comes to insurance.
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2:11 - 2:15The average American household
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2:15 - 2:18spends 1,000 dollars a year
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2:18 - 2:20on lotteries.
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2:20 - 2:23And I know it sounds crazy.
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2:23 - 2:26How many of you spend a thousand dollars a year on lotteries?
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2:26 - 2:28No one.
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2:28 - 2:31So that tells us that the people not in this room
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2:31 - 2:33are spending more than a thousand
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2:33 - 2:36to get the average to a thousand.
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2:36 - 2:38Low-income people
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2:38 - 2:42spend a lot more than a thousand on lotteries.
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2:42 - 2:44So where does it take us?
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2:44 - 2:47We're not doing a great job managing money.
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2:47 - 2:50Behavioral finance is really a combination
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2:50 - 2:52of psychology and economics,
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2:52 - 2:54trying to understand
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2:54 - 2:56the money mistakes people make.
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2:56 - 2:58And I can keep standing here
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2:58 - 3:02for the 12 minutes and 53 seconds that I have left
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3:02 - 3:04and make fun of all sorts of ways
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3:04 - 3:06we manage money,
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3:06 - 3:09and at the end you're going to ask, "How can we help people?"
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3:09 - 3:12And that's what I really want to focus on today.
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3:12 - 3:14How do we take an understanding
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3:14 - 3:17of the money mistakes people make,
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3:17 - 3:20and then turning the behavioral challenges
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3:20 - 3:22into behavioral solutions?
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3:22 - 3:24And what I'm going to talk about today
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3:24 - 3:26is Save More Tomorrow.
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3:26 - 3:28I want to address the issue
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3:28 - 3:30of savings.
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3:30 - 3:32We have on the screen
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3:32 - 3:34a representative sample
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3:34 - 3:36of 100 Americans.
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3:36 - 3:39And we're going to look at their saving behavior.
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3:39 - 3:41First thing to notice is,
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3:41 - 3:43half of them
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3:43 - 3:45do not even have access
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3:45 - 3:47to a 401(k) plan.
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3:47 - 3:50They cannot make savings easy.
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3:50 - 3:53They cannot have money go away from their paycheck
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3:53 - 3:55into a 401(k) plan
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3:55 - 3:57before they see it,
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3:57 - 3:59before they can touch it.
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3:59 - 4:02What about the remaining half of the people?
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4:02 - 4:05Some of them elect not to save.
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4:05 - 4:07They're just too lazy.
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4:07 - 4:10They never get around to logging into a complicated website
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4:10 - 4:13and doing 17 clicks to join the 401(k) plan.
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4:13 - 4:15And then they have to decide how they're going to invest
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4:15 - 4:17in their 52 choices,
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4:17 - 4:21and they never heard about what is a money market fund.
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4:21 - 4:23And they get overwhelmed and the just don't join.
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4:23 - 4:28How many people end up saving to a 401(k) plan?
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4:28 - 4:31One third of Americans.
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4:31 - 4:33Two thirds are not saving now.
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4:33 - 4:35Are they saving enough?
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4:35 - 4:37Take out those
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4:37 - 4:39who say they save too little.
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4:39 - 4:41One out of 10
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4:41 - 4:44are saving enough.
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4:44 - 4:46Nine out of 10
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4:46 - 4:49either cannot save through their 401(k) plan,
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4:49 - 4:52decide not to save -- or don't decide --
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4:52 - 4:55or save too little.
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4:55 - 4:57We think we have a problem
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4:57 - 4:59of people saving too much.
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4:59 - 5:01Let's look at that.
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5:01 - 5:03We have one person --
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5:03 - 5:06well, actually we're going to slice him in half
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5:06 - 5:09because it's less than one percent.
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5:09 - 5:12Roughly half a percent of Americans
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5:12 - 5:17feel that they save too much.
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5:17 - 5:19What are we going to do about it?
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5:19 - 5:21That's what I really want to focus on.
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5:21 - 5:23We have to understand
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5:23 - 5:25why people are not saving,
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5:25 - 5:27and then we can hopefully flip
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5:27 - 5:29the behavioral challenges
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5:29 - 5:31into behavioral solutions,
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5:31 - 5:34and then see how powerful it might be.
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5:34 - 5:36So let me divert for a second
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5:36 - 5:38as we're going to identify the problems,
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5:38 - 5:41the challenges, the behavioral challenges,
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5:41 - 5:43that prevent people from saving.
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5:43 - 5:47I'm going to divert and talk about bananas and chocolate.
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5:47 - 5:50Suppose we had another wonderful TED event next week.
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5:50 - 5:52And during the break
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5:52 - 5:54there would be a snack
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5:54 - 5:56and you could choose bananas or chocolate.
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5:56 - 5:59How many of you think you would like to have bananas
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5:59 - 6:01during this hypothetical TED event next week?
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6:01 - 6:03Who would go for bananas?
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6:03 - 6:05Wonderful.
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6:05 - 6:07I predict scientifically
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6:07 - 6:1074 percent of you will go for bananas.
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6:10 - 6:14Well that's at least what one wonderful study predicted.
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6:15 - 6:18And then count down the days
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6:18 - 6:22and see what people ended up eating.
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6:23 - 6:26The same people that imagined themselves
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6:26 - 6:28eating the bananas
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6:28 - 6:30ended up eating chocolates
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6:30 - 6:32a week later.
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6:32 - 6:34Self-control
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6:34 - 6:37is not a problem in the future.
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6:37 - 6:39It's only a problem now
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6:39 - 6:43when the chocolate is next to us.
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6:43 - 6:46What does it have to do with time and savings,
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6:46 - 6:49this issue of immediate gratification?
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6:49 - 6:53Or as some economists call it, present bias.
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6:53 - 6:55We think about saving. We know we should be saving.
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6:55 - 6:58We know we'll do it next year, but today let us go and spend.
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6:58 - 7:00Christmas is coming,
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7:00 - 7:03we might as well buy a lot of gifts for everyone we know.
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7:03 - 7:07So this issue of present bias
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7:07 - 7:09causes us to think about saving,
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7:09 - 7:11but end up spending.
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7:11 - 7:13Let me now talk
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7:13 - 7:15about another behavioral obstacle to saving
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7:15 - 7:17having to do with inertia.
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7:17 - 7:19But again, a little diversion
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7:19 - 7:22to the topic of organ donation.
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7:22 - 7:25Wonderful study comparing different countries.
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7:25 - 7:28We're going to look at two similar countries,
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7:28 - 7:31Germany and Austria.
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7:31 - 7:33And in Germany,
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7:33 - 7:35if you would like to donate your organs --
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7:35 - 7:37God forbid something really bad
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7:37 - 7:39happens to you --
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7:39 - 7:42when you get your driving license or an I.D.,
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7:42 - 7:44you check the box saying,
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7:44 - 7:46"I would like to donate my organs."
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7:46 - 7:48Not many people like checking boxes.
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7:48 - 7:50It takes effort. You need to think.
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7:50 - 7:53Twelve percent do.
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7:53 - 7:56Austria, a neighboring country,
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7:56 - 7:58slightly similar, slightly different.
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7:58 - 8:00What's the difference?
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8:00 - 8:02Well, you still have choice.
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8:02 - 8:04You will decide
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8:04 - 8:07whether you want to donate your organs or not.
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8:07 - 8:09But when you get your driving license,
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8:09 - 8:11you check the box
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8:11 - 8:15if you do not want to donate your organ.
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8:15 - 8:17Nobody checks boxes.
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8:17 - 8:19That's kind of too much effort.
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8:19 - 8:22One percent check the box. The rest do nothing.
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8:22 - 8:24Doing nothing is very common.
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8:24 - 8:27Not many people check boxes.
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8:27 - 8:29What are the implications
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8:29 - 8:31to saving lives
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8:31 - 8:34and having organs available?
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8:34 - 8:36In Germany, 12 percent check the box.
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8:36 - 8:39Twelve percent are organ donors.
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8:39 - 8:41Huge shortage of organs,
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8:41 - 8:43God forbid, if you need one.
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8:43 - 8:46In Austria, again, nobody checks the box.
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8:46 - 8:49Therefore, 99 percent of people
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8:49 - 8:51are organ donors.
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8:51 - 8:53Inertia, lack of action.
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8:53 - 8:55What is the default setting
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8:55 - 8:57if people do nothing,
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8:57 - 9:00if they keep procrastinating, if they don't check the boxes?
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9:00 - 9:02Very powerful.
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9:02 - 9:04We're going to talk
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9:04 - 9:08about what happens if people are overwhelmed and scared
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9:08 - 9:11to make their 401(k) choices.
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9:11 - 9:14Are we going to make them automatically join the plan,
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9:14 - 9:16or are they going to be left out?
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9:16 - 9:19In too many 401(k) plans,
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9:19 - 9:21if people do nothing,
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9:21 - 9:24it means they're not saving for retirement,
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9:24 - 9:26if they don't check the box.
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9:26 - 9:29And checking the box takes effort.
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9:29 - 9:32So we've chatted about a couple of behavioral challenges.
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9:32 - 9:35One more before we flip the challenges into solutions,
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9:35 - 9:37having to do with monkeys and apples.
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9:37 - 9:39No, no, no, this is a real study
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9:39 - 9:43and it's got a lot to do with behavioral economics.
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9:43 - 9:46One group of monkeys gets an apple, they're pretty happy.
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9:46 - 9:48The other group gets two apples, one is taken away.
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9:48 - 9:50They still have an apple left.
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9:50 - 9:53They're really mad.
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9:53 - 9:56Why have you taken our apple?
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9:56 - 9:59This is the notion of loss aversion.
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9:59 - 10:01We hate losing stuff,
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10:01 - 10:04even if it doesn't mean a lot of risk.
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10:04 - 10:07You would hate to go to the ATM,
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10:07 - 10:09take out 100 dollars
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10:09 - 10:11and notice that you lost one of those $20 bills.
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10:11 - 10:13It's very painful,
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10:13 - 10:15even though it doesn't mean anything.
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10:15 - 10:19Those 20 dollars might have been a quick lunch.
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10:19 - 10:23So this notion of loss aversion
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10:23 - 10:26kicks in when it comes to savings too,
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10:26 - 10:28because people, mentally
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10:28 - 10:31and emotionally and intuitively
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10:31 - 10:33frame savings as a loss
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10:33 - 10:36because I have to cut my spending.
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10:36 - 10:38So we talked about
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10:38 - 10:40all sorts of behavioral challenges
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10:40 - 10:44having to do with savings eventually.
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10:44 - 10:47Whether you think about immediate gratification,
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10:47 - 10:50and the chocolates versus bananas,
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10:50 - 10:53it's just painful to save now.
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10:53 - 10:55It's a lot more fun
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10:55 - 10:57to spend now.
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10:57 - 11:00We talked about inertia and organ donations
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11:00 - 11:02and checking the box.
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11:02 - 11:04If people have to check a lot of boxes
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11:04 - 11:06to join a 401(k) plan,
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11:06 - 11:08they're going to keep procrastinating
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11:08 - 11:10and not join.
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11:10 - 11:12And last, we talked about loss aversion,
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11:12 - 11:14and the monkeys and the apples.
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11:14 - 11:17If people frame mentally
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11:17 - 11:20saving for retirement as a loss,
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11:20 - 11:23they're not going to be saving for retirement.
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11:23 - 11:25So we've got these challenges,
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11:25 - 11:27and what Richard Thaler and I
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11:27 - 11:29were always fascinated by --
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11:29 - 11:31take behavioral finance,
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11:31 - 11:33make it behavioral finance on steroids
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11:33 - 11:35or behavioral finance 2.0
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11:35 - 11:37or behavioral finance in action --
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11:37 - 11:41flip the challenges into solutions.
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11:41 - 11:44And we came up with an embarrassingly simple solution
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11:44 - 11:48called Save More, not today, Tomorrow.
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11:48 - 11:50How is it going to solve the challenges
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11:50 - 11:52we chatted about?
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11:52 - 11:54If you think about the problem
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11:54 - 11:56of bananas versus chocolates,
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11:56 - 11:59we think we're going to eat bananas next week.
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11:59 - 12:02We think we're going to save more next year.
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12:02 - 12:05Save More Tomorrow
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12:05 - 12:07invites employees
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12:07 - 12:09to save more maybe next year --
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12:09 - 12:11sometime in the future
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12:11 - 12:13when we can imagine ourselves
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12:13 - 12:15eating bananas,
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12:15 - 12:17volunteering more in the community,
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12:17 - 12:21exercising more and doing all the right things on the planet.
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12:21 - 12:24Now we also talked about checking the box
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12:24 - 12:27and the difficulty of taking action.
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12:27 - 12:29Save More Tomorrow
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12:29 - 12:31makes it easy.
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12:31 - 12:33It's an autopilot.
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12:33 - 12:37Once you tell me you would like to save more in the future,
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12:37 - 12:39let's say every January
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12:39 - 12:42you're going to be saving more automatically
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12:42 - 12:45and it's going to go away from your paycheck to the 401(k) plan
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12:45 - 12:47before you see it, before you touch it,
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12:47 - 12:49before you get the issue
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12:49 - 12:52of immediate gratification.
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12:52 - 12:55But what are we going to do about the monkeys
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12:55 - 12:57and loss aversion?
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12:57 - 12:59Next January comes
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12:59 - 13:01and people might feel that if they save more,
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13:01 - 13:04they have to spend less, and that's painful.
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13:05 - 13:07Well, maybe it shouldn't be just January.
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13:07 - 13:10Maybe we should make people save more
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13:10 - 13:13when they make more money.
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13:13 - 13:16That way, when they make more money, when they get a pay raise,
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13:16 - 13:20they don't have to cut their spending.
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13:20 - 13:22They take a little bit
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13:22 - 13:24of the increase in the paycheck home
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13:24 - 13:26and spend more --
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13:26 - 13:28take a little bit of the increase
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13:28 - 13:30and put it in a 401(k) plan.
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13:30 - 13:32So that is the program,
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13:32 - 13:34embarrassingly simple,
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13:34 - 13:36but as we're going to see,
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13:36 - 13:38extremely powerful.
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13:38 - 13:40We first implemented it,
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13:40 - 13:42Richard Thaler and I,
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13:42 - 13:45back in 1998.
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13:45 - 13:48Mid-sized company in the Midwest,
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13:48 - 13:50blue collar employees
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13:50 - 13:52struggling to pay their bills
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13:52 - 13:54repeatedly told us
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13:54 - 13:57they cannot save more right away.
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13:57 - 14:00Saving more today is not an option.
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14:00 - 14:02We invited them to save
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14:02 - 14:05three percentage points more
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14:05 - 14:08every time they get a pay raise.
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14:08 - 14:11And here are the results.
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14:11 - 14:13We're seeing here a three and a half-year period,
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14:13 - 14:15four pay raises,
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14:15 - 14:17people who were struggling to save,
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14:17 - 14:19were saving three percent of their paycheck,
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14:19 - 14:21three and a half years later
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14:21 - 14:24saving almost four times as much,
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14:24 - 14:27almost 14 percent.
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14:27 - 14:29And there's shoes and bicycles
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14:29 - 14:31and things on this chart
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14:31 - 14:33because I don't want to just throw numbers
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14:33 - 14:35in a vacuum.
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14:35 - 14:38I want, really, to think about the fact
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14:38 - 14:40that saving four times more
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14:40 - 14:42is a huge difference
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14:42 - 14:44in terms of the lifestyle
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14:44 - 14:46that people will be able to afford.
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14:46 - 14:48It's real.
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14:48 - 14:51It's not just numbers on a piece of paper.
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14:51 - 14:53Whereas with saving three percent,
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14:53 - 14:55people might have to add nice sneakers
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14:55 - 14:57so they can walk,
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14:57 - 15:01because they won't be able to afford anything else,
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15:01 - 15:03when they save 14 percent
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15:03 - 15:06they might be able to maybe have nice dress shoes
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15:06 - 15:09to walk to the car to drive.
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15:09 - 15:11This is a real difference.
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15:11 - 15:16By now, about 60 percent of the large companies
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15:16 - 15:19actually have programs like this in place.
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15:19 - 15:22It's been part of the Pension Protection Act.
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15:22 - 15:24And needless to say that Thaler and I
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15:24 - 15:27have been blessed to be part of this program
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15:27 - 15:29and make a difference.
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15:29 - 15:31Let me wrap
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15:31 - 15:34with two key messages.
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15:34 - 15:37One is behavioral finance
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15:37 - 15:40is extremely powerful.
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15:40 - 15:43This is just one example.
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15:43 - 15:45Message two
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15:45 - 15:47is there's still a lot to do.
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15:47 - 15:50This is really the tip of the iceberg.
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15:50 - 15:53If you think about people and mortgages
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15:53 - 15:56and buying houses and then not being able to pay for it,
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15:56 - 15:58we need to think about that.
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15:58 - 16:01If you're thinking about people taking too much risk
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16:01 - 16:04and not understanding how much risk they're taking
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16:04 - 16:06or taking too little risk,
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16:06 - 16:08we need to think about that.
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16:08 - 16:11If you think about people spending a thousand dollars a year
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16:11 - 16:13on lottery tickets,
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16:13 - 16:15we need to think about that.
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16:15 - 16:17The average actually,
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16:17 - 16:19the record is in Singapore.
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16:19 - 16:21The average household
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16:21 - 16:24spends $4,000 a year on lottery tickets.
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16:24 - 16:26We've got a lot to do,
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16:26 - 16:28a lot to solve,
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16:28 - 16:31also in the retirement area
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16:31 - 16:33when it comes to what people do with their money
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16:33 - 16:35after retirement.
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16:35 - 16:37One last question:
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16:37 - 16:40How many of you feel comfortable
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16:40 - 16:42that as you're planning for retirement
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16:42 - 16:45you have a really solid plan
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16:45 - 16:47when you're going to retire,
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16:47 - 16:50when you're going to claim Social Security benefits,
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16:50 - 16:52what lifestyle to expect,
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16:52 - 16:54how much to spend every month
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16:54 - 16:56so you're not going to run out of money?
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16:56 - 16:59How many of you feel you have a solid plan for the future
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16:59 - 17:03when it comes to post-retirement decisions.
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17:04 - 17:07One, two, three, four.
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17:07 - 17:09Less than three percent
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17:09 - 17:11of a very sophisticated audience.
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17:11 - 17:14Behavioral finance has a long way.
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17:14 - 17:16There's a lot of opportunities
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17:16 - 17:20to make it powerful again and again and again.
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17:20 - 17:22Thank you.
-
17:22 - 17:24(Applause)
- Title:
- Saving for tomorrow, tomorrow
- Speaker:
- Shlomo Benartzi
- Description:
-
It's easy to imagine saving money next week, but how about right now? Generally, we want to spend it. Economist Shlomo Benartzi says this is one of the biggest obstacles to saving enough for retirement, and asks: How do we turn this behavioral challenge into a behavioral solution?
- Video Language:
- English
- Team:
- closed TED
- Project:
- TEDTalks
- Duration:
- 17:24
TED edited English subtitles for Saving for tomorrow, tomorrow | ||
TED added a translation |