In her feature article in the latest issue of NAPA Net the Magazine, Judy Ward outlines how behavioral finance has changed.
“The first generation of behavioral finance is very focused on finance and economics,” says Joshua Dietch, Boston-based vice president and group manager-retirement thought leadership at T. Rowe Price. “The second generation extends the lens to include both psychology and sociology.”
Impactful as “BeFi” was to plan design, the emerging second generation of behavioral-finance thinking encompasses more than utilitarian factors in peoples’ decision making about what they do with their money. And in adopting what is arguably a more real-world view, this school of thought may challenge long-standing maxims such as the idea that everyone needs to save at least 15% of their pre-tax income for retirement.
“We all talk about ‘save more, save more, save more,’” says Meir Statman, the Glenn Klimek Professor of Finance at Santa Clara University, whose research focuses on behavioral finance. It’s worthwhile to help people understand more about both saving and spending their money smartly, he says. “But the notion that the good people are the people who always save their money is just stupid,” he says. “There is more to life than doing well in retirement—there is doing well throughout my life. We need to keep things in balance.”
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