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Spring 2012

Latest update: 10/31/11

COLUMBIA UNIVERSITYGraduate School of Business

The Psychology and Economics of Consumer FinanceB8901-001

Tuesday / Thursday, 10:45AM to 12:15PMUris 301

Professor Eric J. JohnsonNorman Eig Professor of BusinessColumbia Business School

514 Uris [email protected]

Professor Stephen P. ZeldesBenjamin M. Rosen Professor ofFinance and Economics,Columbia Business School

825 Uris [email protected]/~spz1212-854-2492

Introduction

Business schools all teach multiple courses in Corporate Finance. Until recently none

taught Consumer Finance. Yet Consumer Finance is a much larger segment of theeconomy. In the U.S., households hold $64 trillion in assets, and $17 trillion in liabilities.Corporations hold 1/3 as many assets, and 1/2 as much debt. This course provides aremedy to the imbalance.

The course will be inter-disciplinary -- Johnson is a psychologist and a professor in theMarketing division, and Zeldes is an economist and a professor in the Finance andEconomics division. We will bring different perspectives to every topic:

o What is the economic theory describing how people do behave?o What does psychology and behavioral economics contribute to

understanding behavior?

o What are the facts about how consumers actually behave? What are theexisting markets, institutions, firms, and regulations, both in the U.S. andabroad?

o What are the opportunities for and barriers to innovating in these markets?

We will examine markets for borrowing (mortgages, credit cards, peer-to-peer lending,payday loans), saving (401(k)s, strategies to promote saving, optimal asset allocation),and insurance (including life, health, and longevity). We will emphasize both how


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people do and how people shouldmake financial decisions, and the implications forfinancial services firms.

We will use the tools of behavioral economics and psychology to better understandconsumer financial decisions and the consumer finance industry. Important newresearch illustrates how combining insights from psychology and economics can

improve our understanding of consumer financial behavior. In their book Nudge, forexample, Cass Sunstein and Richard Thaler argue that firms and policymakers candesign mechanisms to guide peoples choices in a way that improves outcomes yetmaintains freedom of choice. The recent financial crisis and continuing debate aboutconsumer financial protection will keep the class lively and yield lots of class contentthat is torn from the headlines.

Students will use the tools of traditional economics, behavioral economics, andpsychology to develop new and improved financial products, financial markets, and/orfinancial public policy.

Why consumer finance?This will be the second time that we have taught this course together. When thinkingabout introducing this course, we identified several trends that suggested that theintroduction of an MBA consumer finance elective was overdue:

Over the last 30 years there has been a global shift from defined-benefit todefined-contribution pension plans, putting decisions about the management ofretirement wealth increasingly into the hands of households.

Consumer debt in the U.S. has doubled in size since the late 1970s, whilesaving rates have dropped, until recently, to near 0.

This is a hot area of research, and new and interesting results are beingpublished in journals in economics, psychology, and marketing. One of ourgoals is to translate these findings into products that will lead to better outcomes.

The recent financial crisis highlighted the importance of consumer decisions toconsumer well-being and to the overall economy (e.g. 401(k) asset allocation,sub-prime mortgages, home foreclosures). There has also been renewed interest(and employment opportunities) in government regulation of the consumerfinance sector. We plan on having a speaker from the Consumer FinancialProtection Bureau.

Who should take this course? Why?This course should appeal to a wide variety of students:

First, those who want to work for financial services firms, including assetmanagement, banking, and insurance.

Second, those who are interested in consulting, investment banking, or privateequity, and need to understand and value firms that provide financial services toconsumers.


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Third, those interested in marketing and consumer decisions more generally. Fourth, those interested in broader public policy issues (consumer finance is at

the heart of many important public policy debates, including proposals to create aconsumer financial protection agency.)

Finally, the course will be helpful to anyone interested in learning how to bettermanage hisor herown personal finances.

Course structureThe course will include lectures, class discussions, guest speakers, case analysis, smallassignments, and student group projects and presentations. It will be highly interactive,and you are expected and encouraged to take part in class discussions. Bothprofessors will participate in all of the classes -- we bring different perspectives to thesequestions, sometime disagree, and we look forward to some lively debates!

Student projects

The student team projects will be an important component of the course. Each team willcreate or design a new financial product, strategy, financial market, or policy reform thatis drawn from the concepts covered in this course. While teams should draw on pastexperiences, both in the U.S. and abroad, the focus should be on designing somethingnew.

Teams will be responsible for preparing a short paper summarizing their proposal.In addition, we have allocated two class sessions toward the end of the semester for theteams to present their projects to the class. Each team must turn in a short mid-semester progress report on their project.

Cases and assignmentsWe will use cases during the semester. Some will require short write-ups. There willalso be short assignments. We will specify which cases and assignments are to bedone individually and which are to be done in teams (one write-up per team).

Panel discussions / outside speakersWe will have at least 3 sessions with outside experts In the past, we have includedindividuals whose companies are start-ups, decision makers featured in the cases,executives with responsibility for introducing new products for large firms, and wellknown financial writers.

Class participationWe will be grading your participation in the cases, class discussions, and exercises.We will also use interactive technology in the form of audience response indicatorsprovided by Turning Technologies. The clickers will be distributed during the firstclass and you will carry the same clicker with you throughout the semester. Pleasebring your clicker to every class, and do not lose it. In the case that you do lose it youwill need to purchase a replacement. Note that the clickers will be registered to you, sothat your responses will available to us to use for class discussion and participationgrading. We will not use your specific responses for grading without prior


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announcement, but your attendance in class can be ascertained by your responses andmay be a part of your participation grade. When asking for your opinions on sensitiveissues, we will put the clickers into a mode that makes your responses anonymous.

Class meetings and attendanceClasses will be held on Tuesdays and Thursdays, from 10:45 12:15, in Uris 301.

Class attendance and participation is important. If for some reason you need to missclass, please let us know in advance via e-mail.

Course materialsThere is no textbook for the course. Most of the cases and readings will be included inthe coursepack and also posted in Angel. Additional materials, including class notes,will be posted in Angel and distributed during the semester.

Course requirements and gradingGrades will be based on the assignments and short case write-ups, class participation,a team project, and a final exam, as follows:

Weights for gradingAssignments andcase write-ups

25 %

Class participation 25 %

Team project 25 %

Final exam 25 %

Office hoursWe will have weekly office hours (times posted on Angel), and can also meet at other

times via appointment. We are also generally available via e-mail. Please feel free tocontact us with any questions or feedback about the course.

Teaching assistantsThere will be two TAs for the course. Their contact information and office hours will beposted in Angel. The TAs will be available to help with the material covered in classand provide guidance on team projects. You can also contact the TAs with questionsrelated to teams, calendar, etc.

pecf_syll_2012_10_31_2011-columbia

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