The Rational Reminder Podcast | Prof. James Choi: Practical Finance | Rational Reminder 260 @rationalreminder | Uploaded July 2023 | Updated October 2024, 4 hours ago.
Today we welcome James Choi, Professor of Finance at the Yale School of Management, to the show to share some of his insight into what he has dubbed practical finance. James has focused his research on behavioural finance, behavioural economics, household finance, capital markets, health economics, and sociology, and is turning this expertise into pragmatic knowledge marketed towards ordinary people. This reframing and reconfiguration of the theory for all people and the decisions they make, could not be more in line with what we are trying to do here at Rational Reminder, and this conversation with James was packed with so many surprising and informative responses to relatable questions. We ask James about index funds, the benefits of advisors, optimal equity, diversification, and much more. We also spend a little bit of time exploring the individual reasons that people have for their decisions, with James expanding on the disconnect between people's philosophy and their actions. Further topics include the role and impact of education, renting versus buying, and the formulation of his concept of practical finance, so make sure to join us and catch it all.
Timestamps:
0:00 Intro
3:34 In general, why economic theory often fails to describe how real people make personal finance decisions
7:22 What led James to start teaching a personal finance course at Yale
11:24 What James has learned from teaching this course about how normal people make personal finance decisions
16:51 How the actual behavior of households differs from economic theory
20:37 Who has more to learn from the other on savings and consumption-economists, or popular personal finance authors
25:21 How popular personal finance on equity share advice differs from theory
33:43 How James' survey research changed his perspective on equity share
36:01 How households can apply economic theory to their own asset allocation decisions without needing to solve a dynamic programming problem
42:47 Why many households fail to participate in the stock market at all
48:09 What investors say about their decision to invest in actively managed funds
52:38 Why households often hold under-diversified portfolios when diversification is theoretically optimal
1:00:08 How we differentiate between mistakes and behavior that is rational for some unobserved reason
1:06:50 The role financial advice can play in improving financial decisions
1:08:04 What interventions are most promising for improving the behavior of households
1:18:00 What work of James' own he is most excited about in this area of practical finance
1:20:22 James defines success in his life
Participate in our Community Discussion about this Episode:
community.rationalreminder.ca/t/episode-260-prof-james-choi-practical-finance-discussion-thread/24227
Links From Today’s Episode:
Rational Reminder on iTunes — itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — rationalreminder.ca
Shop Merch — shop.rationalreminder.ca
Join the Community — community.rationalreminder.ca
Follow us on Twitter — twitter.com/RationalRemind
Follow us on Instagram — @rationalreminder
Benjamin on Twitter — twitter.com/benjaminwfelix
Cameron on Twitter — twitter.com/CameronPassmore
James Choi — https://faculty.som.yale.edu/jameschoi/
'Behavioral Household Finance' — https://www.hbs.edu/ris/Publication%20Files/behavioral_household_finance_a3b33098-e0c7-40e0-bf2f-fa4ceb6e6d06.pdf
'Finance for the Rest of Us' — linkedin.com/posts/james-j-choi-finance_finance-for-the-rest-of-us-activity-6997910789097414656-5epq/?originalSubdomain=ba
'Popular Personal Financial Advice versus the Professors' — aeaweb.org/articles?id=10.1257/jep.36.4.167
'Millionaires Speak: What Drives Their Personal Investment Decisions?' — nber.org/papers/w27969
'What Matters to Individual Investors? Evidence from the Horse's Mouth' — onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12895
'Are Empowerment and Education Enough? Underdiversification in 401(k) Plans' — jstor.org/stable/3805120
'Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds' — nber.org/papers/w12261
'$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans' — nber.org/papers/w11554
Today we welcome James Choi, Professor of Finance at the Yale School of Management, to the show to share some of his insight into what he has dubbed practical finance. James has focused his research on behavioural finance, behavioural economics, household finance, capital markets, health economics, and sociology, and is turning this expertise into pragmatic knowledge marketed towards ordinary people. This reframing and reconfiguration of the theory for all people and the decisions they make, could not be more in line with what we are trying to do here at Rational Reminder, and this conversation with James was packed with so many surprising and informative responses to relatable questions. We ask James about index funds, the benefits of advisors, optimal equity, diversification, and much more. We also spend a little bit of time exploring the individual reasons that people have for their decisions, with James expanding on the disconnect between people's philosophy and their actions. Further topics include the role and impact of education, renting versus buying, and the formulation of his concept of practical finance, so make sure to join us and catch it all.
Timestamps:
0:00 Intro
3:34 In general, why economic theory often fails to describe how real people make personal finance decisions
7:22 What led James to start teaching a personal finance course at Yale
11:24 What James has learned from teaching this course about how normal people make personal finance decisions
16:51 How the actual behavior of households differs from economic theory
20:37 Who has more to learn from the other on savings and consumption-economists, or popular personal finance authors
25:21 How popular personal finance on equity share advice differs from theory
33:43 How James' survey research changed his perspective on equity share
36:01 How households can apply economic theory to their own asset allocation decisions without needing to solve a dynamic programming problem
42:47 Why many households fail to participate in the stock market at all
48:09 What investors say about their decision to invest in actively managed funds
52:38 Why households often hold under-diversified portfolios when diversification is theoretically optimal
1:00:08 How we differentiate between mistakes and behavior that is rational for some unobserved reason
1:06:50 The role financial advice can play in improving financial decisions
1:08:04 What interventions are most promising for improving the behavior of households
1:18:00 What work of James' own he is most excited about in this area of practical finance
1:20:22 James defines success in his life
Participate in our Community Discussion about this Episode:
community.rationalreminder.ca/t/episode-260-prof-james-choi-practical-finance-discussion-thread/24227
Links From Today’s Episode:
Rational Reminder on iTunes — itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — rationalreminder.ca
Shop Merch — shop.rationalreminder.ca
Join the Community — community.rationalreminder.ca
Follow us on Twitter — twitter.com/RationalRemind
Follow us on Instagram — @rationalreminder
Benjamin on Twitter — twitter.com/benjaminwfelix
Cameron on Twitter — twitter.com/CameronPassmore
James Choi — https://faculty.som.yale.edu/jameschoi/
'Behavioral Household Finance' — https://www.hbs.edu/ris/Publication%20Files/behavioral_household_finance_a3b33098-e0c7-40e0-bf2f-fa4ceb6e6d06.pdf
'Finance for the Rest of Us' — linkedin.com/posts/james-j-choi-finance_finance-for-the-rest-of-us-activity-6997910789097414656-5epq/?originalSubdomain=ba
'Popular Personal Financial Advice versus the Professors' — aeaweb.org/articles?id=10.1257/jep.36.4.167
'Millionaires Speak: What Drives Their Personal Investment Decisions?' — nber.org/papers/w27969
'What Matters to Individual Investors? Evidence from the Horse's Mouth' — onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12895
'Are Empowerment and Education Enough? Underdiversification in 401(k) Plans' — jstor.org/stable/3805120
'Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds' — nber.org/papers/w12261
'$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans' — nber.org/papers/w11554
