If so much mainstream economic theory is based on the assumption that people are rational and act in their own self interest, why do they make so many lousy decisions, particularly about saving and investing money? That’s a question that Leonard Wolk, Colby’s new Todger Anderson Assistant Professor of Investing and Behavioral Economics, ponders, researches, and explains.
He gave a glimpse into his area of scholarly research Oct. 28 at an inaugural lecture for the faculty chair endowed by Todger Anderson ’67, a successful investment advisor, former Colby overseer, and judge of the annual Colby Entrepreneurial Alliance business competition.
At a dinner before the lecture, President David A. Greene talked about Colby’s extraordinary faculty as a critical and central strength of the institution, and he thanked Anderson for this latest gift. “Being able to ensure that we can recruit, retain, and support the very best faculty is a big part of what we’re doing, and a chair helps enormously,” he said. “It makes a big difference to us.”
Provost and Dean of Faculty Lori Kletzer, herself an economist, introduced Wolk’s lecture explaining that behavioral economics is a branch of the discipline that returns to some of the foundations of economics—psychology, sociology, and now cognition science—to explain why people act as they do.
Wolk used examples showing that investors, despite understanding future needs, don’t put aside enough for their retirement or, when they save, they invest far too conservatively. “How can we help them make better decisions?” he asked. Similarly, social laboratory experiments show that, despite obvious and transparent odds, people make poor decisions betting on coin flips or money-sharing propositions.
“We can help people invest their savings better by restricting the set of choices they have.”
Anderson Assistant Professor Leonard Wolk
He cited an experiment that showed people made better choices if they had fewer options for reinvesting and concluded, “We can help people invest their savings better by restricting the set of choices they have,” In one case, he said, merely reminding subjects to focus on the long run spurs better decisions.
After presenting examples of such research, he concluded, “Markets make it possible to trade assets, forecast future events, and trade goods and services in a very efficient manner. There are some design problems we see in the lab, and we see traces of them in real markets as well. Behavioral and experimental economics can help us understand these problems better and help us improve the design of these financial markets over time.”
Kletzer noted that the endowed chair positions Colby well in the developing field and, she added, with the strong interdisciplinary connections at the College, “It’s an area where there’s potential for Colby to make a real difference.”