A recent study of eight thousand Charles Schwab customers in Germany offers some potential insights into human behavior and psychology. Schwab offered those customers, for FREE, recommendations (driven by a tested algorithm) to improve the performance and efficiency of their investment portfolio. Of those 8,000 customers offered this generous investment service, only 5% accepted it. The study results revealed that, of the 5% who accepted, most were older, male, wealthier, and had a longer-lived relationship with Schwab (with accounts that had been doing well).
The most discouraging (or insightful?) part of the study is the fact that, within that 5% group who accepted the service, not very many of them actually followed through and acted upon the advice coming from the service. In retrospect, those individuals missed out on a great opportunity—since those who did follow through experienced much better investment results in their portfolio. A co-author of this study (carried out in cooperation with professors from Goethe University in Frankfurt) was Utpal Bhattacharya, who serves as a professor of business at Indiana University. One of the conclusions he drew from the study results is as follows: “we make these resolutions with respect to financial health, such as saving more, investing better and diversifying – but few of us actually follow it unless we are guided by professionals we trust.”
So I ask you, what might this study suggest about our mental discipline (such as in a “New Year’s Resolution”) regarding our overall financial condition or an intended commitment to change our financial habits?
Let me quickly remind us all, by the way, that we cannot write this study off as merely reflective of German investors – rather than investors in general (including those in the U.S.)! The Germans have clearly demonstrated that they are the most financially responsible people in Europe, since it is their savings and productivity which have created the region’s strongest economy.
Unfortunately, I think this study reflects an unfortunate truth about human nature – namely, financial change is very difficult for us. This fact may account for the success of (and need for) credit repair agencies and vendors, as well as the prevalence of court-ordered wage garnishment and child support scofflaws. This study also illustrates the vital importance of the “auto enrollment feature” in an employer’s 401(k) Plan (to help people automatically begin saving for retirement, since (otherwise) it is so much easier to keep putting it off).
As Dr. Bjattacharya offered in a succinct summary of the study: “We found ourselves with a modern, financial version of a ‘horse we’d led to water, but couldn’t make drink’”. http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCAQFjAA&url=http%3A%2F%2Fwww.investmentnews.com%2Farticle%2F20120101%2FHOLD%2F301019973&ei=7dcUT4CtFI3gggf_5q3TAw&usg=AFQjCNEr39rahls-Hw9b330lqf5pnmoETA