E (3:11)

We want to follow up on several of those themes. But while we're emailing back and forth this week about what we'd talk about today, we talked about satisficers versus kind of optimizers or maximizers. And you mentioned that Barry Schwartz, one of your professors, and Andrew Ward, also at Swarthmore, were co authors on a paper titled Maximizing versus Satisfic. Can you give us a quick overview about how maximizing differs from satisficing and maybe define satisficing, because that one is probably less familiar, and also share maybe where you land on that spectrum? Because I thought it was interesting what you shared.

B (3:50)

Yeah, it's a really intriguing idea. And I think they kind of got the inspiration from Herb Simon, who is, depending on who you ask, sort of the original behavioral economist, if you will. And so it's this notion that in an ideal world, we would maximize, right? So we would make the best possible choice all the time. And we would do that by gathering all the information about all the options, doing the math, and then picking the one that's objectively the best. Right. The one that, you know, an economist would say you should pick. But because we're humans and we're not robots and we don't have infinite ability to process and remember information, we can't really maximize all that effectively, right? So the hardware in our minds is sort of the limiting factor. And so the alternative approach that people could use is satisficing. So rather than searching for the best possible option, you kind of search just enough to get an option that's just good enough. So something that would just be satisfactory, it may not be perfect, but it's something that you're happy enough with. And it turns out that it varies from person to person. So you kind of have this personality spectrum where you have maximizers at one end and you can kind of think of them, you know, the perfectionists, right, the type A personalities. And then you have satisfies at the other end who are kind of more, you know, laid back, more casual, and they're not sort of constantly going the extra mile to search for the perfect. And what their research shows, Ward and Schwartz and others, is that satisficers are happier. They might not do as well on paper. So they, you know, I think one of the studies showed that satisficers don't get as good job offers out of college, but they're happier. They're more satisfied And I think this is sort of an insight that we can all hopefully learn from, which is that the more you search for the perfect, the less satisfied you might be at the end of that search.

E (5:44)

I wanted to follow up on that. Andy, Is there the possibility that we might be satisficers in a lot of areas, but still have some maximizer tendencies in certain.

D (5:54)

Certain areas?

E (5:55)

When I take stock of how I am, I think largely a satisficer, but I do have a few areas where I'm kind of nutty about really getting the optimal outcome.

B (6:07)

Yeah. And I think that's an adaptive approach. Right. That's what you should do. So one factor that I think is an important, let's call it moderator of whether people satisfy or maximize is how knowledgeable are you. Right. If you're an expert. Right. You're a financial advisor, like, yeah, maybe going for the best possible choice makes a lot of sense. It's easier to process information if you have a deep knowledge base. You've had experience with it, so it's not quite as taxing and it might even be more enjoyable. But on the other hand, if you're in a domain where there's a lot of information out there, there's way too many options and you don't know the first thing, so you sort of lack the skill, it's not very appealing. Maximizing is going to be kind of painful. So in my own life, my wife kind of pokes fun at me a lot because there are times when I maximize. So consumer technology, I think I know a lot about it. I probably don't in reality, but I think I do. And so I'm willing to kind of take the time and effort to do all sorts of research and search all these review sites and try to get the best possible, whatever it is, gadget. On the other hand, I'm colorblind and so anything related to interior design I cannot maximize. I am likely to make the wrong choice if I try to maximize. So I'm smart enough to defer to other people who are not colorblind and, and sort of satisfies in that way.

D (7:20)

When you were at Stanford for your postdoc, you were interested in aging related issues. Things like how motivation, emotion and cognition change across the adult lifespan. Are you still interested in this topic as part of your role at Vanguard?

B (7:41)

Yeah, 100%, I would say. The one thing I learned in grad school was that development is a lifelong process. And so taking that lifespan view is absolutely critical to understanding why do people behave the way they do. And I would say by the same token, financial decision making is also a lifelong process. And we're interested in comparing generations like how do young investors behave versus older investors, looking at sort of the, let's call it the long shadow of childhood experiences. And one of the things that we discovered in our research is that the first conversation that people have with their parents about money can predict what their portfolio looks like decades later. And so if people learn about things like the power of compounding all elseql, they tend to have more equity in their portfolio versus people who did not. And so I think these two fields of, let's call it developmental psychology and aging, as well as behavioral finance, they're kind of intertwined in a really fascinating way.

E (8:41)

I wanted to ask about a paper that you co authored with Laura Carstensen, who is the founding director of the Stanford center on Longevity and one of my favorite thought leaders in the whole longevity retirement space. The paper was about the age related positivity effect. Can you tell us more about what that is and what it means for investors and for people as they get older?

B (9:06)

Yeah, the positivity effect is a fascinating wrinkle in the literature on the connection between emotion and cognition. And so the original insight that kind of preceded the positivity effect is that people have typically demonstrate what's called a negativity bias. So when there's negative information in our environment, all else equal, people tend to pay more attention to it. They remember it better. It just really, it grabs our attention and it won't let go. And what Laura and her colleagues demonstrated over, I mean, at this point, there's over 100 studies on this topic, huge literature is that as we get older, our preference for negative relative to positive information tends to shift in the opposite direction. And so the older you are, the more you tend to favor positive relative to negative information compared to younger people. So again, it's a relative shift. It's not that all older adults show a positivity bias per se, but on average, older adults tend to focus more on positive compared to negative relative to younger adults. Now, how does that impact investment behavior? There's a few potential consequences. So one is there's bad news all the time, right? I mean, it's, there's always ups and downs in the market. There's always the possibility that on any given day, if you were to check your portfolio, that you might see some red on the screen. Right? There might be some bad news. And a number of years ago, there was actually a collaboration between some academics And George Lowenstein, I think, was the lead author and Vanguard. And Steve Utkiss, who's sort of a pioneer in applied behavioral research in industry, teamed up and they were studying what they called the ostrich effect. And this is this idea that when you expect bad news, you bury your head in the sand to avoid it. And in the domain of investing, as I mentioned, there's bad news on a regular basis. And so the question is, when people anticipate bad news, when they anticipate red in their portfolio, do they log in? Do they check their portfolio? And what they found is that many people do not. And the older you are, the more likely you are to avoid the bad news, the more ostrich like you are. And so the way I would interpret that is that that this is a way in which the positivity effect is manifesting, it's changing behavior. So older adults are deliberately avoiding negative information when it comes to their portfolio. Now, if they have a set it and forget it mentality, if they're in a fund or a service or advice that automatically rebalances, it's probably not such a bad thing that they're avoiding their portfolio, especially during market volatility. On the other hand, if they're boarding their portfolio and there's an opportunity to make a better choice, this could actually harm them in the long run.

D (11:47)

I'm curious, does this also tend to make older people more gullible? Potentially. And is that one of the reasons why we hear so much about scams targeting the elderly?

B (12:00)

Yeah. So it's something that we've certainly speculated on and hypothesized that if older adults aren't paying attention to red flags because the positivity of X said they should be focused on the green flags, then would they not realize that a scam is a scam? Right. That one of these scam messages is good to be true? I think the jury is somewhat out. I think that the dilemma in the fraud literature, or the billion dollar question, as it were, is are older adults more likely to be victimized because they're more likely to be targeted and or because they're more susceptible? There's certainly research, I think, suggesting both. But in terms of the teasing apart, the exact mechanism and whether the positivity effect plays out in the moment, that's a bit of an open question, but that's certainly a compelling hypothesis, to say the least.

E (12:49)

We wanted to switch over to ask about your work at Vanguard, but first we just wanted to discuss the terminology. So can you talk about what the difference is between behavioral economics and behavioral finance. And do you prefer one of those terms over the other?

B (13:07)

I'm still asking myself that question, to be honest, because I hear the terms behavioral economics, behavioral finance, behavioral science, behavioral research. I mean, the list goes on and on. Ironically, I think there's sort of an unspoken rule that researchers in this area, whatever you call it, have to come up with a million names for the same thing. So I'll give you another example. Temporal discounting, delay discounting, hyperbolic discounting, present bias, and delay of gratification. Those are five different names for basically the same phenomenon. So there's something about language that researchers love. Kind of everybody wants to coin their own term. I would say, in the grand scheme of things, whatever you call it, it's really the intersection of economics and psychology to explain what are the choices people make and why do they make those choices. And so I tend to gravitate towards behavioral economics because it kind of feels like behavioral is the psychology part, economics is economics, and that's sort of the intersection of the two. Although I do joke that I'm a behavioral economist, but I am not qualified to be an economist because I'm a psychologist, and people get very confused by that. So I think it's a little bit like peanut butter and jelly. These two things are great by themselves, and you put them together and you get something truly special.

D (14:22)

So the whole field of behavioral economics or behavioral finance is relatively new. And I'm curious, when did Vanguard first start getting involved in behavioral economics?

B (14:35)

Ooh, that is an excellent question. So I did some digging, coincidentally, a few weeks ago, because I was giving a talk on basically this topic. And it turns out that way back in 1951, in Jack Bogle's senior thesis at Princeton, which is the role of the investment firm, he writes this great quote where he says, investment companies are using psychology to attract more investors. And I thought, okay, he's thinking about the application of psychology in the world of investing. Does that make him a behavioral economist? I'm not saying he was the original behavioral economist by any means, although it did occur to me that you cannot spell Bogle without O, G, B, and e, so I'll just throw it out there. In all seriousness, the founding document from Vanguard, which was written in 1974, had a number of insights about investor behavior, investor preferences, investor psychology. So there was some commentary on risk tolerance, which is quite interesting. And so I sort of feel like, like, Vanguard's been, let's call it dabbling in behavioral economics and behavioral insights since before it was founded. Now, in terms of real application and kind of infusing it into the business and using it to benefit investors, I think there were some key milestones that we can discuss. I think one was 2002 when the save More Tomorrow program was launched. And that was a formal collaboration with Richard Thaler and Shlomo Benartzi as well as Steve Utkiss at Vanguard. And it was really an attempt to apply insights from behavioral economics to improve outcomes for 401 participants. So that's kind of the, I would say it wasn't the genesis moment, but it's certainly a seminal moment in Vanguard's involvement in behavioral economics. And I think the rest is sort of history.

E (16:24)

So say a little more about that say More Tomorrow program. What was it about?

B (16:29)

Yeah, I think the goal was to increase retirement savings rates. And so the idea was at the time in the early 2000s, this is before all the auto solutions that we now consider to be gold standard in 401 plan design. So think automatic enrollment, automatic increases and automatic investing and targeted funds long before those became sort of widespread practice. And so in the early days there were a number of challenges. So people weren't participating enough, they weren't saving enough and they were often invested in kind of head scratching ways. So you saw a lot of cash in 401ks, you saw a lot of company stock. You didn't see sort of balanced, diversified portfolios. And so the innovation from Save More Tomorrow was okay. Saving is kind of painful, right? Like having less money now and more money, you know, decades into the future kind of goes against human nature. And what I mentioned before about temporal discounting, delayed discounting, that's exactly what those things are, right? It's we prefer less money now over more money later. And what Thaler and Bernardzi, you know, the insight, the aha was that if you get people to sort of pre commit to increasing their savings rate so that it kicks in later, it's a little bit sort of less painful to make that decision, right? Because you're not necessarily saving more now, you're saving more tomorrow. And so by the time it kicks in, people are sort of, you know, they're not paying close attention, they're not as engaged, it's not as painful. And so you can kind of harness the power of inertia to get people on this savings escalator that benefits them tremendously over time. And so I think, you know, the success of that, as I said, it's really led to this sort of gold standard plan design. That we kind of take for granted now, but at the time it was pretty innovative.

D (18:14)

I'm curious, is there kind of a Boglehead effect where Vanguard investors are less susceptible to behavioral pitfalls than people who use other financial services firms? Or would you say that your client base is normal and still subject to some of the most common behavioral issues?

B (18:36)

Yeah, it's a great question. So are they special or are they humans? Right. I think the answer is they're special humans. So a little bit of both, unfortunately. And they might be more human than Boglehead at the end of the day. So what's fascinating and we do try to figure out when we observe some sort of behavioral phenomenon. So take for example, Cache Dragon. We've done a lot of research looking at people holding cash in places that you wouldn't expect to find it. So young people holding 100% cash portfolios in their IRAs, which kind of doesn't make any sense when you think about it. They have the longest time horizons, they're saving for a goal that's maybe 40, 50 years into the future, and they're sitting in cash. And the question that often comes up is, is this a Vanguard thing or is this an industry wide thing? In many cases it's the latter. Now, it's a little tough to know for sure because many other firms in our industry are not as, let's say, forthcoming about their investor behavior as we are. So the data can be hard to come by. But a lot of the behaviors that we observe, the biases that we observe, they're things that you tend to see in the academic research literature. They're things that you tend to see also in the industry stats and reports, including Morningstar reports. And so I would say for the most part, Vanguard investors tend to behave like investors in general, where they're sort of above average. I think there's a few things that they do exceptionally well. One is in terms of building low cost diversified portfolios. I mean, they're doing phenomenal, right? So the average asset weighted expense ratios in Vanguard portfolios is incredibly low. We did a research study last year, we never published it. We were trying to identify are there Vanguard investors that hold overpriced index funds. So this is behavioral economists would call it a dominated alternative. So it's two options, they're objectively identical, except one is more expensive than the other. And we did, lo and behold, find some evidence of this, of overpriced index ETFs. But the alpha opportunity was so minuscule that even if we switched Every single investor that we found at Vanguard to the lower cost alternative, the dominating alternative, it would only save about $50,000, like $50,000 for 8 million retail investors. So I think in terms of cost optimization, Vanguard investors are way ahead of the curve as well as diversification. That being said, things like home bias, local bias, this is something that we see across the industry. And Vanguard investors are by no means immune to either one.

E (21:06)

I wanted to follow up on the point about people holding cash in their long term investment accounts. You've written about problems with people holding cash in their IRA rollovers, where people sometimes have done the rollover, it's come over from a 401 or something like that, but then the money sits there uninvested. Can you talk about why this happens and have you found any good ways to keep people from making this mistake, which is, which presumably can cost them a lot of money if they don't get the funds invested in something with long term growth potential?

B (21:41)

Absolutely. The first thing I have to do is admit that I did this at least once in my life. So maybe I'm not the right person to opine on the way to solve it. But look, it's inertia. I think that it boils down to inertia. The fundamental question in a lot of behavioral finance, in the world of investing, is what happens if you do nothing. We're very focused on what happens when investors do something, whether that's making a risky bet or overreacting to the market. But the reality is that the vast majority of time, almost every investor is doing nothing with respect to their portfolio. Now, in the world of IRA rollovers, if you do nothing, chances are if the money rolled over as cash, which is incredibly common, it's going to stay in cash. And what our research showed is that it stays in cash and it stays in cash and it stays in cash. And for many investors, it stays in cash for seven years or longer, especially those who are younger, which is quite painful because they have the longest time horizon, they should have the lowest amount of cash, and those who have smaller balances. Now, we were also asking ourselves, well, why? So we identified the what ton of money sitting in cash after rollovers for a very long time? We identified the who. It's younger people, it's, you know, lower balances. And to figure out the why, we just asked them, right? We did a survey. So we sent out the survey to hundreds of investors who had rolled over or contributed and then left it in cash. And we asked them, well, first we actually asked Them. Do you know how your IRA is invested? Because we didn't want to spill the beans. And a lot of them thought that it was invested in, you know, either in the market, in the stock market, or a mix of stocks, you know, equities, cash, et cetera. And very few of them actually realized that it was sitting entirely in cash. So that was the big aha was that they don't even know that they're sitting in cash. And then we said, this may come as a surprise to you, but our records show that you're sitting entirely in cash in your ira. Why is this? And most of them said it wasn't intentional. They either didn't realize they meant to do it, so they procrastinated, but they never got around to it. Or a number of investors actually told us they thought it was automatically invested. So in other words, they thought the IRA worked like the 401k. So that was a big aha for us. And we realized that, okay, well, if we want to solve this cash drag problem in the IRA space, which has already been solved in the 401 space, let's just make IRAs look like 401s. So we've been advocating for a policy change to enable. We're kind of referring to it as the Iraqdia. Right? So a default investment option in IRAs that's better than cash because cash is the current default and something like a target date fund. And our research shows that the average investor would benefit to the tune of six figures in additional retirement wealth if they were defaulted into a target date fund when they do a rollover versus defaulted into cash.

E (24:40)

I wanted to follow up. I have a number of things I want to follow up on. But the point about inertia, is it possible that it's like the most under discussed force in behavioral economics, that people are busy, lazy. Ultimately this isn't super fascinating for a lot of people. Could that explain a lot of what people do?

B (25:04)

I think so, yeah. I like to joke that inertia, nothing is the most powerful force in behavioral finance. That's what inertia is. It's nothing. It's doing nothing. I have asked some prominent behavioral economists because I think the flip side of that is, well, if inertia is the most powerful thing, then defaults matter more than anything else we could do to change behavior, right? And it turns out the defaults are incredibly powerful. If you look in the 401 space, plans with automatic enrollment, the participation rates are way higher across the board, especially for young people, than plans with Voluntary enrollment. So it's somewhere on the order of 90% participation versus 60%. You see it in the domain of organ donation. There's this classic study by Eric Johnson and Dan Goldstein, and it's called Do Defaults Save Lives? And it's been cited thousands of times. And they compared countries that had opt in versus opt out organ donation schemes. And if you took two neighboring countries, I think it was Germany and Austria, one with opt out, one with opt in. I mean, the participation rates were basically close to 100% in one case and closer to zero in the other case. So defaults are so incredibly powerful because inertia is so incredibly powerful. But as you've alluded to, inertia is not very exciting. Right? People like talking about something. It's hard to talk about nothing. But it is something that we as an organization are very focused on is how do you set the right defaults? Right? How do you create a system such that an investor could fall asleep for 40 years and wake up in retirement and be in great shape? That's the dream scenario. So we're a long ways away from that, but I think there's some great opportunities on the horizon.

D (26:40)

So related to that, Vanguard has a robo advisor, Vanguard Digital Advisor, which has been very successful. And I'm wondering, how do you incorporate nudges in programs like that to try to encourage investors to adopt positive investment habits?

B (27:01)

Yeah, absolutely. I'll call out sort of one feature that I think is super powerful within that specific product, which is automatic rebalancing. A lot of investors don't fully understand what rebalancing means. They don't really know how to rebalance. They don't know how frequently to rebalance. And so if you kind of do it for them, if you automatically kind of adjust the portfolio up or down to maintain that target, sort of the right asset mix, the right mix of stocks and bonds and cash for the person, and that right mix is going to vary from person to person based on their risk tolerance, their time horizon, and so forth. Then that can be really powerful. Right? Help them keep on track. Even if you know their intuition or their gut response or their knowledge kind of would lead them in a different direction. And what we find is that most investors don't rebalance on their own. Like when there's big market movement up or down, the typical response for Vanguard investors is actually to do nothing. So there's a lot of, again, inertia. Now, if they do react to the market, you do see some evidence of rebalancing. More so than wholesale diving in or out of equities. But I think this automatic rebalancing feature is super powerful. And by the way, it also shows up in things like target date funds on the 401 side. So if retail investors don't understand what rebalancing is, how valuable it is, or how to do it, then 401 participants don't really don't understand it because there's an even bigger knowledge gap there. So I think this automatic rebalancing feature is super powerful, and it helps people get on a better path without lifting a finger. Now, more broadly, we also have a whole program built around digital nudges to really encourage people to make the right choices in a variety of domains. So, for example, that cash drag problem that I mentioned, as we advocate for policy change, which could take a while, but it could be tremendously valuable, were tackling the problem head on by delivering personalized digital messages and nudges to encourage people to get out of cash and into the market. And since 2023, when we sort of started this initiative, we've been able to nudge 100,000 investors to move about $6 billion out of cash and into the market. And given the way the market's gone over the last couple of years, they've benefited considerably from that nudge.

E (29:17)

Definitely wanted to follow up on target date funds. Our data suggests that all in one funds like that tend to contribute to good investor outcomes. That investors buy them, they continue to contribute to them, and they hold them. And so their dollar weighted returns are good, their outcomes are relatively better. What do you think is the best explanation for that?

B (29:41)

Yeah, I think it's twofold. And if you look at the opposite end of the spectrum, so investors who aren't simply buying and holding, but those who are tinkering, they're trying to time the market, they're trying to make clever trades, they tend to do worse. And so one of my favorite papers in all of behavioral economics is Barbara and Odin's trading is hazardous to your wealth. So the people who trade more get worse returns. And it's kind of counterintuitive. But what it boils down to is that trying to time the market is really difficult. And people who are overconfident take certain risks that are not necessarily a good idea. Now, at the flip side of the spectrum, if you're in the right product or service, you don't really have to do anything as an investor. So that's sort of the upside of inertia. And so as you Sort of alluded to. It's great for 401 participants who are automatically enrolled, automatically increased, automatically invested. But at the same time, investors who don't have those safeguards in place. So think IRA investors. That same inertia can keep them in cash for a very long time where they lose real value. So I think target day funds are fantastic. I think for people who don't have the knowledge or the motivation or the time to really deal with their portfolio or manage their investments, it can be a great solution. And I think again, inertia can be the investor's worst enemy or their best friend. And it really depends on plan design and product choice.

A (31:09)

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D (31:40)

Another challenge with retirement savings is that people often take money out of their 401s when they change jobs. And that can obviously be a big problem. If people are changing jobs every three or four years. Is there something that employers or plan administrators can do to encourage people to keep those retirement assets invested when they do change jobs?

B (32:08)

Yeah, it's a huge source of leakage. And the unfortunate news is that people change jobs very frequently. So nine or 10 job changes over the course of a working career is not uncommon these days. And each job change is an opportunity for leakage. And our research shows that there's a lot of cash outs that occur. I think that's what you're referring to, cash outs. But even if you don't necessarily cash out and sort of liquidate your 401, what happens during the rollover process is that your target date fund converts into a money market fund. And so as I mentioned before, that's also a major source of cash drag. I think there's a few things that plan sponsors can potentially do to help. One is just education, right? People don't realize that these things happen when you leave an employer, when you leave a plan, it's kind of foreign to them. So just letting them know, hey, as a heads up, when you leave, here are the things that are going to happen and here are the steps that you should take to make sure that you stay on track. Number two, I think auto portability is a really compelling solution to this problem. So instead of people being forced out of the plan if they have a low balance or rollover to an IRA that by the way, they may not even realize exists. Being able to move your pockets of money from one plan to another can be really powerful in kind of maintaining that saving and investing momentum. And then the other thing we're really trying to advocate for some of these policy solutions that kind of provide a safeguard if people are rolled over or forced out or whatever and they end up in an IRA. Can we make the IRA work more like a 401? Because we know that staying in the 401 works really well, but that's not always a possibility for people. And so then the question is, you know, how do we sort of bring the goodness of a 401k to other types of accounts like IRAs?

E (33:53)

Sticking with workplace savings for a second, I wanted to ask about a Provision in Secure 2.0 that allows companies to give their employees a savings option for emergency savings. Do you think that's a good idea? And if so, why haven't we seen more uptake? Because it doesn't seem like many companies have yet added these emergency savings accounts.

B (34:17)

Yeah, I've studied emergency savings for the past decade and it never ceases to amaze me how powerful even a little bit of emergency savings is for financial well being, Both objectively in terms of preventing debt, but also subjectively giving people a sense of peace of mind, reducing anxiety, the feeling that, hey, if something happens, and trust me, for everyone, everyone will experience some sort of financial shock or emergency at some point in their lives. It's pretty much guaranteed if something happens, hey, you've got a bit of a buffer. So emergency savings. In our research we find that people with even like $2,000 in emergency savings predicts a level of peace of mind that's comparable to having a million dollars in net worth. Wow. A million dollars, which is just mind boggling. And an economist would be scratching their head saying that's not possible. Right? A million dollars is way more utility than 2000. But I think it speaks to the mental accounting aspect of this, right? If it's earmarked for emergencies, it's your safety net, right? And having that safety net, having that cushion, $2,000 under your pillow helps you sleep better at night and so tremendously valuable. And it's really kind of a no brainer if you're trying to help employees, especially younger employees, really set them up for a lifetime of financial success. Having that emergency savings cushion in place is incredibly important. I really can't understate the value of emergency savings.

D (35:47)

We also wanted to talk about the spending side for people who are in retirement, and one topic that often comes up in this podcast and other discussions is this issue of people being really, really afraid of running out of assets, even if they are relatively wealthy and have managed to build up a decent sized portfolio. What can retirees do to kind of switch their mindset from saving to spending and get away from that fear or scarcity type of mentality?

B (36:28)

It's one of the biggest challenges in behavioral finance, I think, and for a few reasons. One, it's hard to change a mindset, right? There's no magic light switch that you can flip and go from saver to spender. The same way that it's hard, if not impossible, to change somebody's personality, right? Undoing decades of development and experience and sort of these deep, almost like intuitive and emotional patterns that we develop in a short period of time. That's asking a lot and that's going against human nature. But that being said, I think there are a few sort of strategies and solutions that may be helpful. Now, candidly, until we do like a true randomized control trial experiment, which we would love to do in this space, it's hard to say what is the definitive solution. But I think there's some, at least correlational evidence that points in some direction. So one is people want predictable income. They don't necessarily want spiky income. They don't want income that's uncertain. Predictability is reliable, it generates confidence, and economists would say it optimizes utility if you can smooth your consumption over time. And so I think what that sort of implies is that any sort of solutions that generate predictable income and they kind of give you the sort of North Star is a bit of a paycheck in retirement, right? People love a regular, predictable, reliable paycheck. They also like bonuses, too. But a reliable paycheck is a great source of psychological security. And so then the question is, how can you generate that paycheck in retirement? It's something that advisors can certainly help with. It's something that technology can enable. In our research, we find that even basic things like making sure people take their RMDs in a timely manner can be a big help. At the same time, there's emerging evidence around annuities that's really fascinating. So you're probably familiar with the annuity puzzle, which is this notion that everybody loves the concept of annuities, but they don't love Annuities themselves. The annuity is a four letter word. So when you ask people, do you want guaranteed income that will never run out? Yeah, sure. Do you want regular paychecks to sustain your spending in retirement? Yeah, sure. Sounds great. Do you like Social Security? Yeah, sure. Do you want to buy an annuity? Oh, no, no, I don't want to buy an annuity. No, that's not zero interest. So I think annuities are part of the solution because again, if you want to create truly guaranteed income, then annuities can be helpful in that regard. But then the dilemma is, okay, well, how do you get people to buy an annuity when they don't want to buy an annuity? So two things. One is really, recent research has shown that, that when people have annuities, they feel more comfortable spending in retirement. It's sort of a license to spend, if you will. And the second is, can you bundle an annuity into something like a target date fund where they're annuitizing but they don't have to explicitly purchase a standalone annuity. And so that might make it more palatable because again, people like the benefits of annuities. It's just that annuities have a negative connotation and that creates a sense of aversion that's hard to overcome.

E (39:35)

I wanted to follow up on the whole issue of retirees favoring some types of income over others. And one thing we've talked about on our team is just there's this persistent preference for dividends. Even though we counsel people to be total return oriented, people love organically generated income from their portfolios. And I think it's just easier that rather than saying I have to sell a chunk of my portfolio, it's easier to spend the dividend income. I'm wondering if Vanguard has studied that issue and what your thoughts are.

B (40:09)

Yeah, coincidentally, one of my colleagues, actually two of my colleagues, Paolo Acosta and Sharon Hill, collaborated with Mayor Stadtman on a paper on this very topic that came out earlier this year. Kind of trying to figure out the dividend puzzle. And one of the big ahas that's really counterintuitive is that there are a lot of investors and as you sort of allude to, like older investors that really like dividend funds, but then when we look at their behavior, they reinvest the dividends and it's a real head scudder. It's like, well, why are you in a dividend fund if you're reinvesting the dividend? I think this is something that Again, it would drive economists nutty because it makes no sense. It's kind of quote unquote irrational. But there is, as you say, there's this psychological utility that comes from this steady stream of. I think some people believe that dividends are sort of free money without realizing, hey, it comes out of the stock, right? There's no such thing as free Money Aside from 401k matches, by the way. That's the only thing that I can think of that's truly free money in finance. And so it is a little bit of a head scratcher. But again, this is sort of the emotional side of finance rearing its head and kind of overriding the rational side, if you will.

D (41:18)

Another popular thing for retirees is using a bucketing approach to manage their retirement spending, where they have kind of a separate, separate bucket carved out for cash needs over the next couple of years and then other buckets for longer term growth. What's your take on bucketing as a tool for managing retirement spending?

B (41:44)

Yeah, it's interesting. It's a bit of a double edged sword because on the one hand, people mental account all the time, right? So they sort of earmark like money is fungible. And economists, again, this kind of drives economists nutty because a dollar is a dollar, right? It shouldn't really matter what it's earmarked for, but people earmark money all the time. So cash under the mattress is different than cash in your savings account, is different than cash in your brokerage account, and even cash for different goals is evaluated differently and might have different psychological value or utility. So on the one hand, bucketing is kind of a natural fit for people's tendency to mental account. And if you just have one big account with a bunch of different goals and a bunch of different time horizons, it can be very confusing to sort things out. At the other end of the spectrum though, if you do too much bucketing and you have too many accounts, it's almost impossible to manage things in a holistic way or even just keep track of everything, right? So one of the things that we see in our research is this sort of small pots problem. So I mentioned earlier that people might change jobs nine or ten times over the course of a career. If every time you change a job you're spinning off a new 401 or IRA or pocket of money, things get very unruly very quickly, right? So you might have accounts at many different providers, many different account types, and it's easy to kind of lose track of what's really in your overall Financial picture. So I think sort of finding the sweet spot of like the right number of buckets, the right number of accounts, knowing when to consolidate it, to keep things simple, and to make sure that you're not losing anything, either psychologically or in some cases truly financially, is really important.

E (43:23)

So stocks have had a great year so far in 2025, part of a long stretch of great returns. Wondering if you have any thoughts on how can investors avoid common behavioral pitfalls at times like this when valuations appear relatively high?

B (43:41)

It's a tricky one. So our research shows that, and we've been doing a survey of investor expectations for the last eight or so years. And one of the most consistent findings is that when you ask people to predict the next 12 months in the stock market, the strongest predictor that they seem to be anchoring on is the last 12 months in the stock market. So they're extrapolative in their expectations. But unfortunately those forward expectations are almost always wrong in our survey. That's the sad news. So I think the solution is really to zoom out, right? So in other words, bubbles pop, right? It's not a matter of if, it's a matter of when. And investors would do well to remind themselves of historically, hey, when the market's overheated, corrections are more likely than not going to happen at some point. And so then the question is, are you prepared if the market takes a turn, are you prepared? Right. Do you have a plan in place? Do you have the right mix of assets? And the question I think that investors might want to ask themselves is, is this a good time to rebalance? Right. One of the consequences of inertia is that over the last few years, as the market's gone up and hitting all time highs, people's equity mix has changed pretty dramatically over time. It's drifted with the market. And so if an investor set up a portfolio and said, you know what, 70, 30 is the right mix for me, by now it might be 90, 10, right? It might be 80, 20. And so then the question is, is it the right time to consider rebalancing? So I think there are steps that investors can take to kind of, of, let's say, hedge against the reality that the market might be in for a correction at some point in the future. And if you kind of take those proactive steps, it's a lot more adaptive than waiting until the market sort of does something, let's say, and then being in an emotionally heightened state where you're making sort of potentially a knee jerk reaction.

D (45:36)

Another topic we've been hearing a lot about is artificial intelligence. And I'm curious, what type of role do you think AI should play in investing in personal finance? Is it something that you think could help investors make better decisions or is there a danger that it could kind of feed into potentially destructive tendencies?

B (45:59)

Yeah, I think you sort of hit the nail on the head with your prompt, which is there's some exciting opportunities in the space, but also some considerable risks that will have to be managed. So on the opportunity side, the question is, could you use AI to bring hyper personalized education, guidance and advice to the masses? Because if you could, that would be pretty phenomenal. Right? In an ideal world, some of these AI tools might be able to know more about you than your advisor does or even you know about yourself. Right. It's picking up on these subtle behavioral patterns, tendencies, biases and heuristics. We have a bit of a blind spot when it comes to observing our own behavioral tendencies. Right. It's actually called the bias blind spot. It's ironically one of the behavioral biases is that we don't see ourselves as biased. And so if you could have sort of this hyper aware, hyper sentient tool that's kind of keeping an eye on you and kind of giving you this self insight and self awareness that you would never be able to get otherwise, that could be truly powerful. On the risk side, the question is how do you avoid bad advice? So AI hallucinates, right? Gen AI, it's sort of baked into the system. There's always a chance that it's just going to make something up.

F (47:11)

Up.

B (47:12)

If you had a human advisor who hallucinated on a regular basis, you would probably be really worried, right? You might want to refer them to a psychiatric hospital. That would be cause for concern. And so I think the key for widespread deployment of AI in this space is can you make it trustworthy? Can you make it reliable? Can you put those safeguards in place? And if the answer is yes, then you might see widespread adoption and hopefully a lot of people benefiting. Because I think the population of people that could benefit, benefit from advice, guidance and education is way bigger than the population who are currently benefiting today.

E (47:50)

You referenced Mayor Statman and he's written about what he calls the third generation of behavioral finance, which focuses more on holistic well being. That's been a big thrust for him in his work. Is that the direction you see the field moving in? And what are some of the more interesting topics that academics or practitioners are doing research on, which I realize is a Big question.

B (48:15)

Yeah, it's certainly a compelling idea. And as a psychologist, I think I'm obligated to say yes, well, being is incredibly important and we should focus on it. I think part of it boils down to this question of what is the outcome that investors are trying to optimize on? Is it wealth? Is it consumption, Is it happiness, Is it joy, Is it peace of mind? Is it something else? Now, odds are the answer probably depends from person to person. And I truly and sincerely hope that the future of the field figures out how to capture this and how to take it into account when you're nudging people, when you're guiding people, or when you're advising people. And I think the future of advice, the future of behavioral finance, might mean a very different portfolio for each person depending on the shape of your own utility curve. And I think if you go back to the origins of behavioral finance, it was really this, aha, that hey, the utility curve, how people derive utility from gains and losses isn't what economists think. It's a lot funkier than that. And the current, I think, state of the art is that the utility curve varies a lot from person to person. And even the meaning of utility might mean something different for you versus me versus somebody else. So I think the hope is that behavioral finance can really amplify the personal side of personal finance and make it truly personalized rather than one size fits all. In terms of topics, I would say zooming out a little bit. The origins of behavioral finance, behavioral economics really were focused on the negative side, let's say. So if you look at the foundational work of Kahneman and Tversky and Thaler and others, it was really look at all the ways in which people aren't rational. And so there was a lot of focus on problems and gaps. And I think in the last, I would say two decades or so, ever since, I think Nudge was really a turning point, there's been an increased focus on solutions. So how do we translate what we know about how people think, how they behave, and the source of these gaps into ways to close the gap? And to me, that's the most exciting thing is that we've gone from a focus on problems to a focus on real solutions that can benefit millions of people and help them live better lives?

D (50:31)

You mentioned the book Nudge. Are there any other books you would put on your must read list for individual investors or financial advisors?

B (50:42)

Yeah, I think there's three that come to mind. So one is I have to give a plug for Barry Schwartz and the Paradox of Choice. Not just because he was my mentor and really inspired me into this field, but also, I think it was one of the original, let's call it pop psych books that covered behavioral economics insights for laypeople. And it really kind of changed how people think about choice overload, right? You go into the supermarket, you see these endless aisles of options, and you just kind of stand there paralyzed. And I think we're seeing that in the world of investing, right? You open up a brokerage account, there's over a hundred thousand options to choose from, which is outrageous. And then you ask people, how much choice do you want? And they typically say, I don't know, 10 options, right? So there's just huge disconnect between how much choice we give people and how much choice they truly want and then how much choice is truly good for them. And so I think bringing all three into alignment, it's up to us as an industry to figure out how to solve that paradox. The second book, as you mentioned, so Nudge, is really hugely transformative and really, I think, inspired a vision for how do you counteract all the biases and heuristics that lead us astray? And how do you again, nudge people with the right messaging, the right design, the right defaults, et cetera, to sort of make better choices even though they're only human? The last book, which I think is in some ways a spiritual successor to Nudge, so Elements of Choice by Eric Johnson, I see that as really the definitive field guide for anybody who wants to become a better choice architect for other people, people. So it gives you really actionable insights on how do you help people make good decisions, from providing the right defaults to giving them dashboards and choice menus with just the right amount of options and information. And so I think those three books in my mind are super, super, both compelling and insightful, but also pretty actionable. Like I try to apply some of those insights to my own life. I'm not doing the best job there, but I'm trying to. Uh huh.

D (52:45)

So before we wrap up, I wanted to ask, are there any steps that you think parents can take to help their kids learn more about finance and investing and get off to a good start with developing healthy money habits?

B (53:02)

It's a great question. As a parent of two kids, I'm trying my best to figure that out. Right now what I will say is if know all the research, including Vanguard's research, shows that early conversations, early money experiences, can shape investor behavior decades later and so Vanguard as a firm, we are all in on children's financial literacy. And we actually have a program called My Class From Economy that's helped millions of school kids learn sort of the basics about money. And in the not too distant future, we're expanding the program to incorporate lessons on investing. So we're trying to kind of the tongue in cheek way is saying we're trying to train the next generation of bogleheads, but really we're trying to train a generation of kids to kind of do investing, right, to think about it, the right way to think about risk, the right way to make sound investment choices. The guidance I would give for parents is simple. So start young, keep it simple and make it fun and positive. I think a lot of kids can kind of grasp the upside of making good money choices. So whether that's sort of achieving the goals that are most important to you, whether it's living the life you want. And I think focusing on the positive is super important because many kids and many parents don't have a great relationship with money, right? And kids are really perceptive, like they pick up on very subtle cues from their parents, especially when it comes to things like money anxiety. The reality is anyone can save and invest, but not everybody is going to feel like it's for them. And so making kids feel included in the world of money, I think can go a long way and put them on this path towards a lifetime of better financial habits, decisions, and ultimately outcomes.

D (54:44)

Well, Andy, thank you so much. This has been a super interesting discussion. I think we had at least 10 questions that are on our list that we didn't have time to cover, but we really enjoyed talking with you.

B (54:56)

Thanks so much. Much.

E (54:57)

Thanks so much, Andy.

D (55:04)

Thank you for joining us on the long view. If you could please take a moment to subscribe to and rate the podcast on Apple, Spotify or wherever you get your podcasts. You could follow me on social media, AmyArnot on LinkedIn and hristinebenz on X.

E (55:22)

Or Christine Benz on LinkedIn.

D (55:25)

George Cassidy is our engineer for the podcast and Cary Gretchik produces the show Notes each week. Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us@thelongviewstar.com until next time. Thanks for joining us.

C (55:45)

This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording and are subject to change without notice. The views and opinions of guests on this program are not necessarily those of Morningstar Inc. And its affiliates, which together we refer to as Morningstar. Morningstar is not affiliated with guests or their business affiliates. Unless otherwise stated. Morningstar does not guarantee the accuracy or the completeness of the data presented. This recording is for informational purposes only and the information, data analysis or opinion it includes or their use should not be considered investment or tax advice and therefore is not an offer to buy.

D (56:26)

Or sell a security.

C (56:28)

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D (57:14)

Marks of Morningstar, Inc.

F (57:30)

Sam.