Video: Behavioural economics and retirement

Tracey Spicer talks to Professor Anup Basu from QUT Business School about behavioural economics and how it can help us understand our decisions around superannuation and retirement.

Transcript

Tracey Spicer

Do you wonder what factors are behind your decision making when it comes to finances? I often do, and they’re not always rational. Professor Anup Basu is from the Queensland University of Technology. He teaches and researches in the fields of investments, behavioural, experimental economics and data analysis and they’re areas that I’m particularly fascinated by. So thanks very much for joining us, Professor.

Professor Anup Basu

Thank you.

Tracey Spicer

In simple terms, what is behavioural economics and how does it influence our decisions around say superannuation and retirement?

Professor Anup Basu

Yeah, so behavioral economics is something which is being popularised in the last two decades. Economics traditionally had assumed that people always make rational decisions based on all the information that is available. But there has been a strand of economics since 1950s, starting with Herbert Simon, who said that we cannot process all the information floating around us and we are not like a human computer says we are made to be.

So we don’t make optimal decisions in various ways and we are irrational at times in making decisions in our daily lives. It has, as I said again, credence in the last two or three decades, and particularly when Daniel Kahneman got a Noble Prize in 2003 and he was a psychologist.

So now there is a general acceptance that people do behave irrationally and those could be addressed by different interventions so that we can get good outcomes for people. So in the context of superannuation, we see a number of ways behavioural economics actually works. For example, when we join a superannuation fund, many members actually do not make any kind of investment choice. They are asked to take a box in its superannuation application about the investment option they are going to opt for, but many people do not do that. And that’s why their money gets transferred to a default option, which is nominated by the trustee of the fund.

And that is something which is pretty influential in what kind of retirement outcomes they will get later in their life. So that’s an important decision. And that’s why it’s so important that we choose a reasonable default, which gives the member a good outcome and looks after the member during their retirement.

And similarly, there are other things like we have our different biases, like inertia or procrastination. So people, when they are enrolled in an investment option, they are not likely to change it throughout their working life. So if you are enrolled in a balanced fund or conservative fund, let’s say, you are likely to be enrolled in it throughout your working life and you really make a change. And people who generally do not think about superannuation until they get very close to their retirement. So but by the time, you know, your destiny would be more or less decided because the money has been invested in that for that many years. And you never thought about it, actually.

So these type of biases could be addressed by designing some kind of sensible default options. And in Australia, we call this increasingly as MySuper options. And so basically our job is to enrol people in defaults which make better outcomes for them in retirement and then keep the costs as low as possible.

Tracey Spicer

It’s incredibly fascinating to look through a magnifying glass at our own biases and irrational decisions and to a degree the role of government is to help us make better decisions for ourselves and for society and for the economy. Through that lens, what are your thoughts about the recent changes announced in the federal budget?

Professor Anup Basu

That’s a good one again. And that’s an example, as we’re discussing with behavioural economics. One very useful change, I think, is to the federal government’s effort to reduce the number of multiple accounts people have when they change jobs and move into different workplaces. So I think that’s a very useful change that now you’d be able to carry your super fund with you wherever you move into. And again, that is the result of people’s inertia.

We have multiple accounts spread here and there, and we do forget that, and we incur unnecessary fees on that. And as we know now, that that amounts to about more than $450 million a year for these unnecessary fees incurred by members who hold multiple accounts. So that’s pretty much a very useful thing. The implementation, obviously, will be the key.

The other change, which is about the performance of funds, which is an area which is more controversial because how do you actually rank funds into outperforming or underperforming funds is something I think is going to be a lot more challenging. And because when we think about underperformance, we think about returns. But it’s not always the case. In investments you always think returns as well as risk.

So, for example, a fund may offer you higher returns for the last 30 years, but that may be a result of the higher risk they have taken in their default options. That means they allocate more to the stock market and other risky assets, whereas you have another fund B, which is probably less into stocks and more into other fixed income kind of assets. Now, is it fair to compare these two funds? Are they not apples and oranges?

So this is something which we need to be very, very careful about, that we compare funds based on their risk-adjusted returns and just not look at the headline returns they’re offering to the members. So I think the Productivity Commission has done some work on this before about how we actually can control for that different allocation effect into different assets like stocks, bonds, and then be able to bring those funds into a common platform and compare that. But nonetheless, it is a very challenging task, and I look forward to how the government is willing to go about it.

Tracey Spicer

Time will tell. Through the lens of behavioural economics, what impact has the COVID-19 pandemic and the consequent recession had on people’s investments?

Professor Anup Basu

Yes. So investments wise, I mean, we are not too bad, as you see, that people have often observed this, that the economy is not doing so well, but the stock market has not actually behaved that badly of late. So I would not say that the investment outcomes have been poor in this period, but we are certainly in very uncertain times in terms of what’s going to happen next.

The jobs of the government worldwide is now to look after the people in this time of crisis. And obviously, getting people to jobs is the main focus of the government. And as you would assume that to keep people employed in Australia, we have a very high unemployment, but not as high as other countries. So we have been (lucky) in that respect.

The main job of the government would be to boost demand. And then that’s what all governments around the world are trying at some level. Because if you if you boost demand, then obviously, you know, businesses would be willing to produce more and willing to hire people and to boost demand temporarily. So we we have this kind of, you know, government financial support for people. Obviously, it will not continue for a very long time, but it has been a keystone of our effort in dampening the impact of COVID had on our economy.

With the budget, obviously, the government is again going for a sort of fiscal support. You can hardly find a fault with that – people are getting tax cuts and money in hand. Where the behavioural team would come into play is, and again, I’ll also mention, obviously, the government support for the businesses in providing them the provision to write off any new assets, they purchase for in the near future.

So basically what happens is – how the people are going to respond -that is the key. OK, so you give me cash as a government, but would I be willing to spend that money, which the government hopes they would. But if I feel uncertain about the economy, if I feel uncertain about my job prospect, then probably I would keep that money as precautionary savings.

So that is something of a challenge. So the government’s challenge is to display or to actually evoke that kind of confidence from people in the economy. And that is the key. Otherwise, no matter how much handouts you provide to people, they will not be willing to spend. The way it has to be addressed ideally is provide more support to low income people because then you have a better chance of that money would be spent pretty quickly. So people who are in real need.

The other thing is obviously pumping more money into infrastructure projects because those kind of projects actually generate a lot more employment. The government is doing something about that. But I would have been happier to see a little bit more effort on that infrastructure spending, taking on some big projects. Infrastructure spending has a lot of benefits. For example, they not only employ people, but they create a kind of productivity boost for the future.

So the money is just not spent. But if you build roads, or airports or upgrade those projects, then obviously it’s an investment into the future. Also, this type of infrastructure…. I mean, people can see them right. A school building is constructed or bridges is being constructed, people actually take note of that. And that actually evokes that kind of confidence that, well, things are moving on in the economy.

And so that has a kind of impact on people in a psychological sense that people that feel more confident about their future prospects and that impacts the consumer confidence and people’s willingness to spend. Which is ultimately the goal.

Tracey Spicer

Professor Anup Basu, thank you so much for your insights.

Professor Anup Basu

Thank you so much for having me.