Conference on “How to Increase the Effectiveness of Financial Education” at Dartmouth College

1. Conference on “How to Increase the Effectiveness of Financial Education” at Dartmouth College Published in the Journal of Behavioral Finance, 2005, Vol. 6, No. 2 By Julie Agnew and Lisa Szykman The College of William and Mary October 2005 Asset Allocation and Information Overload: The Influence of Information Display, Asset Choice and Investor Experience

2. Motivation • Despite the important role 401(k) assets play in an individual’s retirement, evidence suggests that many defined contribution participants follow the “path of least resistance” in their financial decision making [Choi, Laibson, Madrian and Metrick, 2002] • One theory that may partially explain this phenomenon is that individuals are experiencing information overload • Experimental techniques offer a unique way to test how different 401(k) plan designs influence information overload and investment decisions

3. Research Goals • To explore how three common differences among defined contribution plans… 1) the number of investment choices offered, 2) the similarity of the choices, and 3) the display of the choices … lead to varying degrees of information overload and satisfaction • To examine how the number of individuals opting for the default investment option changes based on these three differences

4. Related Literature: Information and Decision Making • Research suggests that rather than processing more information when decisions become more complex, consumers tend to reduce the amount of effort they expend [Payne, Bettman and Johnson, 1998; Payne, Bettman and Luce,1996] • Consumers tend to use information more extensively if it costs less time and/or money to acquire [Stigler, 1961; Nelson, 1970, 1974] • Consumer researchers find an inverted U-shaped relationship between information search and knowledge • In other words, consumers with moderate level of knowledge search the most before making a product choice [Bettman and Park, 1980]

5. Related Literature: Food, 401(k)s and Information Overload • How does nutritional labeling relate to 401(k) plans? • Consumer research finds that as dependable information becomes easier to utilize, consumers use the information more to determine food quality, acquire more nutritional information prior to purchase, and improve their overall decision quality [Roe, Levy and Derby, 1999; Ippolito and Mathios, 1990, 1994; Moorman 1990, 1996; Muller 1985] • Across 401(k) and 403(b) plans investment choices are not presented in one consistent and easy to use format

6. Related Literature: Food, 401(k)s and Information Overload (-Cont-) • Can there really be too much chocolate? • Interesting experimental research by Iyengar and Lepper (2000) demonstrates that too many choices can inhibit decision making • Some 401(k) evidence from home and abroad suggests that the number of choices can influence investment behavior [Sethi-Iyengar, Jiang and Huberman 2004; Weaver 2002]

7. Basic Experiment Setup: The Allocation Decision • In both experiments, participants were asked to allocate a factitious $1,000 in retirement savings among several mutual funds • They were also given the option to put their entire $1,000 in a conservative default option (money market fund) • To aid in the decision making, eleven commonly reported financial statistics were provided for each fund

8. Basic Experiment Setup: Measuring Overload and Financial Literacy • After making their allocations, participants completed a two part survey • Part one of the survey included questions designed to measure the participant’s feelings of information overload and satisfaction • Part two of the survey tested the participant’s financial knowledge with a ten question exam and included several demographic questions • Based on the mean of the exam score, participants were divided into two groups: high-knowledge and low-knowledge

9. Experiment Participants • Participants were solicited through campus mail, e-mail and flyers during the summer months of 2003 • Participants earned ten dollars for their participation and were entered in a $500 raffle • The participants’ ages were well distributed in the sample • A majority of participants were female, married and had children Source: Experiment One

10. Experiment Participants-Cont. • The sample included a broad representation of occupations, salaries and education levels Source: Experiment One

11. Financial Literacy • The mean scores on the exam were fairly low (3.73, 3.84) • Based on a simple OLS regression, test scores • were lower for females, • increased with age, • decreased with children, • increased with salary, • and increased with education • The correlation between participants’ test score and personal perception of their own relative knowledge varied based on occupation, salary and education • occupation- maintenance (.17) versus professor (.77) • salary- $0-$19,999 (.42) versus greater than $60,000 (.55) • education- high school (.10) versus graduate degree (.59)

12. Experiment One: Manipulating the Display and Number of Choices • Fund choices presented in either a table (low search cost) or booklet (high search cost) format • The number of investment choices varied from six funds (low number of choices) to sixty funds (high number of choices) • Individuals were divided into high or low knowledge categories based on their test score

13. Experiment One: Summary of Main Findings • Tested Financial Knowledge • The reported mean overload was lower for the high-knowledge group • The reported mean satisfaction was greater for the high-knowledge group • High-knowledge individuals chose the default less often than low-knowledge participants (2% versus 20%) • Number of Choices • The reported mean overload was greater for the group given more choices • Type of Information Display • The reported mean overload was not significantly related to the information display • The reported mean satisfaction was higher for participants given the table • Number of Choices and Tested Financial Knowledge • High-knowledge participants reported more overload when presented with more choices

14. Experiment Two: Manipulating the Similarity of the Options and the Number of Choices • The investment funds offered were either highly similar or very distinct • Similar options were found by choosing funds that were listed under the same Morningstar category, had comparable investment strategies and similar performance • The number of investment choices varied from six funds (low number of choices) to sixty funds (high number of choices) • All investment information presented in the low search cost table format used in Experiment One • Participants divided into high and low knowledge categories based on exam performance

15. Experiment Two: Summary of Main Findings • Tested Financial Knowledge • The reported mean overload was lower for the high-knowledge group • The reported mean satisfaction was greater for the high-knowledge group • High-knowledge individuals chose the default less than low- knowledge participants (4% versus 25%) • Number of Choices • The reported mean overload was greater for the group given more choices • The reported mean satisfaction was lower for the group given more choices • Similarity of Choices • The reported mean satisfaction was higher for the group given more distinct choices

16. Conclusions • Financial knowledge plays a role in the effectiveness of plan design • When designing 401(k) plans and educational programs, sponsors should consider that participants’ perceptions of their own relative knowledge may not be accurate • The paper’s findings suggest some interesting areas for future research • Area 1: How does an individual’s actual financial knowledge and perception of their own relative knowledge affect their interest and participation in financial education programs? • Area 2: Can a financial education program change the propensity for low knowledge participants to choose the default option? • Area 3: How does the default option influence investment choices for those who do not invest their entire portfolio in the default option? • Area 4: Are there other ways to improve the presentation of investment information?