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Investor decision making within retirement savings schemes

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Robert Durand discusses the investment allocation decisions of over 32,000 investors in a retirement savings program using data from 1994 to 2019.

Image courtesy of interviewee. July 24, 2024

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This video is a detailed presentation on the Australian superannuation system, co-authored by the speaker and two colleagues. It discusses the system's inception in 1992, where an 11% salary contribution is mandatory for retirement savings, allowing investors to choose their investment options. Despite its design to encourage savings and reduce national budget pressure by minimizing public pension reliance, the system is currently facing a crisis, with retirement balances falling short of what individuals need for a comfortable retirement. The speaker shares average retirement balances, which are significantly lower than the required amounts for a basic lifestyle.

The study highlights individual behavior in making investment decisions, emphasizing that a majority of people (85%) do not alter their investment choices over time, which can result in poor financial outcomes. The paper draws on concepts from behavioral finance, examining how individuals cope with complex choices in funds. The result shows that those who choose riskier investments tend to achieve better returns, while those opting for safer choices suffer from lower returns.

The analysis utilizes a unique dataset covering a lengthy period (1994 to 2019), showcasing investment trajectories and decisions. The findings suggest a disparity in risk perception and behavior influenced by external market conditions, age, and gender, noting that older individuals tend to be less flexible in their investment choices. Additionally, the speaker reflects on the need for better education regarding superannuation to empower individuals in making informed decisions about their retirement savings, advocating for a shift in focus towards encouraging greater risk-taking in investments in earlier stages of financial planning. Overall, the study underscores the importance of understanding behavioral patterns in managing retirement funds effectively.

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Here are some key quotes extracted from the video you've :

1. **Introduction of Co-authors:**
- "This paper is co-author with my two young friends, Chris Bebington, who's a PhD student, and Joyce Coup, one of my colleagues at Curtin University."

2. **Overview of Australia's Superannuation System:**
- "The Australian superannuation system was started as it is in 1992... it requires 11% of your salary to be compulsory contributed to a savings program."
- "However, investors have the choice about what they invest in."

3. **Current Status of Retirement Savings:**
- "Sadly now that it's been in operation for about 30 years, the retirement balances are significantly below what people would require for a comfortable retirement."

4. **Retirement Balance Statistics:**
- "The average balance per man of between 65 and 69 is about 453,000 Australian dollars. And for a woman, just a little bit over 400,000."

5. **World Economic Forum's Findings:**
- "Most Australians will outlive their superannuation men by 10 and women by 12 years."

6. **On Decision-Making in Superannuation:**
- "When you join a superannuation fund, you're faced with a menu that's extraordinarily complex and people can't cope."

7. **Behavioral Insights:**
- "Procrastination... 85% of the investors in our sample did nothing."

8. **Risk and Return Relationship:**
- "In finance, there's lots of evidence... higher risk of a certain type leads to higher returns."

9. **Decision-Making Effects:**
- "What we are looking at is the decision to go into a riskier or less risky option."

10. **Implications of Changing Decisions:**
- "Those who made a change to a less risky portfolio obtained... statistically significantly lower returns."

11. **Conclusions on Gender Differences:**
- "Males tend to have high-risk portfolios and then in the long run, higher risk, higher return."

12. **General Conclusions on Superannuation:**
- "People have not accumulated as much in their pensions as they would have liked."
- "This data... by a commercial provider who really is interested in the interests of its members."

These quotes encapsulate the main ideas and findings from the lecture or discussion related to the Australian superannuation system, the complexities of investment choices, and behavioral finance insights.

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First, might I say this?

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Uh, this paper is co-author with my two young friends,

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Chris Bebington, who's a PhD student.

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And this is one of the chapters of his dissertation.

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And Joyce Coup, one of my colleagues at Curtin University,

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the Australian superannuation system was started

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as it is in 1992.

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And it requires 11% of your salary

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to be compulsory contributed to a savings program.

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However, investors have the choice about

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what they invest in.

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So you can choose your company,

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but within that company you can choose a variety of options,

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whether they be shares which are slightly riskier

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or bonds, fixed interest investments, which are less risky

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property international shares.

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So you can choose one of those options

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or you can create a cocktail.

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So that's the system we're in.

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And in the moment, it's in a crisis.

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Um, it was designed to encourage national savings

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and that it has, but it was also designed,

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by the Hawke Keating Labor government

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to reduce the pressure on the national budget

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through paying people's public pensions.

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'cause we don't have public pensions is just like any other

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form of welfare in Australia.

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So what they wanted was an independent, you know,

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something was run and owned by each,

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each member, each individual.

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And sadly now that it's been an operation

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for about 30 years, the retirement balances

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are significantly below what people would require

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for a comfortable retirement.

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So over the weekend, the average balance is here.

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I've just, I just happened to have the, my,

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the average balance per man of between 65

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and 69 is about 453,000 Australian dollars.

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And for a woman's just a little bit over 400,000,

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now they're saying for a reasonable retirement.

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So not a, not a luxurious retirement, the odd retirement

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where you can eat, go out occasionally

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and have a domestic trip every, every year or so.

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You need about 600

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to 700,000 in your superannuation balance to achieve that.

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So people aren't going to achie achieve a retirement

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that is moderately comfortable.

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The other thing is, is the World Economic Forum wrote a few

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years ago that most Austral Australians will outlive their

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superannuation men by 10 and women by 12 years.

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So in terms of meeting its original goals, as we get

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to the first generation, people about my age say,

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who, who are approaching retirement

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or have retired while working in that scheme for most

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of their working lives, they're not happy.

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Sorry, it's a very much like the 401k plan in America. Okay?

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So people have discretion on where to put their money,

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but the Americans have an additional discretion.

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Uh, they have the choice of whether to put it in

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or not, where no Australian worker can avoid this.

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There have been very few studies, if any,

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which have had data like we have.

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So what we have are the trans are quasi

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transactional level data for investors

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and superannuation fund over an

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extraordinarily long period of time.

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So our data starts two years after Super started in 1994.

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Well that super started in 1992.

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Our data starts in 1994

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and it ends in May, 2019.

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So we've got a great sway of history

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and what we gonna do is fundamentally a typical finance

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study where we're gonna look at people's investment choices

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and influences that they have when making those choices.

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We are not really aware of any study

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that has done anything like this.

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Our paper takes its inspiration from two seminal papers,

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which are about 20 years old now, one's by

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Schmo Bazi and Richard Taylor.

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Um, how much is investor autonomy worth?

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And the other one is Ted o Donahue and Matthew Rabin Choice

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and Procrastination.

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And it actually deals with this well,

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the Nazi and Tyler specifically about the

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sort of choices we're after.

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Okay? And when you join a superannuation fund, you're faced

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with a menu that's extraordinarily complex

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and people can't cope.

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Um, so they tend to simplify it

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and tend to choose the default.

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So when you go into a coffee shop

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and they've generally got three takeaway cups,

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there's the big greedy one,

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there's a little one which won't satisfy

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you when there's a middle one.

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And always most, well, most people choose the middle one,

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the one by O'Donohue.

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And Robin is fascinating too,

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as they talk about the complexity of decisions in finance,

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how people really like to simplify them,

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but they also talk about procrastination,

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just delaying making a decision.

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And these of course, are decisions you can make.

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Uh, so you can spend 40 years

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between joining a superannuation fund and

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and getting the funds.

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And so as decisions make become more complex, you tend

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to put them off in many respects.

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It's unfortunate we can't talk to the people who are invest,

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who are investing in the superannuation scheme.

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But the data starts in 1994 and ends in 2019

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and there are 32,000 people.

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There are a lot of conversations

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and perhaps you can't track everybody down.

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Indeed, this data is anonymized.

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So what we are doing is we have data,

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we have data given to us by a company and that's the good

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and the unfortunate thing.

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So it's real data, but we don't have all

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of the information we'd like.

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So we have information about where people put their money.

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So which choice did they make in that menu

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of options that they have?

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And then how long did they take

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before they made another decision?

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We have informa.

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So what we're looking at best go back,

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what we're looking at is not the initial decision people

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make when they join superannuation.

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It's not the decision they make when they retire,

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it's the decisions they make in between.

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So you've got your fund

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and you decide to rebalance it in some way.

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So we have the returns of their funds.

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We know when investors made a decision

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where they put their funds, whether it be in one fund,

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say the international fund or the Australian Shares Fund,

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or a cocktail, one third international,

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one third Australian, and one third real estate.

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Yes, we've got that date.

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Um, but we dunno how much

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we just know the returns of what they're holding.

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Um, we have people's age

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and we have people's self-reported gender,

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which I'll just call gender.

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Um, in the days where we had it,

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it was only male and female.

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Although we've been working with the subsequent dataset,

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which is more nuanced.

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We've also got information about the markets.

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So we're looking at the all ordinary index, which is the,

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s and p 500 or the FS e index of Australia.

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So that's the main representative index.

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And we've also got a measure of expected re risk,

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which is called the vix, the Volatility Index.

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And that's a measure of

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how the market perceives future risk to be.

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And it's a tr really quite a bizarre

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thing 'cause it's traded.

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So we have of about 32,000 investors,

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much to our horror, when we sat down to look at the data,

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and this is where we started looking at was the decisions

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you make between at the end

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of your period and superannuation.

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Talk about procrastination.

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Uh, 85% of the investors in our sample did nothing.

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So that made the computation job a a a little easier.

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So we then, we then went to look at the, the,

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the 15% who did.

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And the decision we are looking

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at is also really simple.

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What we are looking at is the decision to go into a riskier

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or less risky option.

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So whether the, so we look at the expected risk of the,

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of the, the cocktail or choice they make.

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Now that's really important

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because in finance there's lots of evidence, lots

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and lots of evidence that risk

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and return are joint at the hip, higher risk

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of a certain type leads to higher returns.

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And all of these, funds, all

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of these choices really have nice risk return trade offs.

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So what we're looking is that,

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that statistical technique we'll use is

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called survival analysis.

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And so this is familiar

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to everybody who's done medical research, which will be none

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of your listeners perhaps,

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and certainly very few of my finance colleagues.

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So survival analysis talks about how long you are in a state

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and for in, in medicine that would be a state of illness.

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So you can either recover or you don't recover.

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And so what we're saying that you're in a state

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and that state is the state of your investment portfolio.

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That's your, that's where you are.

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And rather than recovering

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or dying, you'll either choose a higher risk,

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higher return option

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or you'll choose a lower risk, lower return option.

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And then we'll do something crueler.

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We'll take our cue from a very famous paper called Boys Will

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Be Boys by Barbara Node.

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And we'll look at how well you prospered

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or didn't prosper against a benchmark.

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And that benchmark is your own self is yourself.

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So what would you have got had you have done nothing

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compared with what you got, when you,

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did something.

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And, we're taking our cue here from behavioral finance.

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And behavioral finance differs from say,

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traditional rational expectations.

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Finance is, it says that people

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are not fully rational.

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And the phrase I use is quasi rational.

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So good thing is it's still rules based,

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but it doesn't re relate, re relate to any rational response

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that a traditional economists might, might expect.

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Um, but still rules based.

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And we can still begin to, to sort of quantify

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and, and, and the rules and find out what they are.

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The results were really fascinating.

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And I'll go to the own benchmark results

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'cause we were able to look at those for a 10, 10 year,

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five year, and two year horizon.

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And as we would've predicted, those who made a change

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to a less risky portfolio obtained

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and statistically significantly lower returns,

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then they would've had, they have just kept their hands in

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their pocket, okay?

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That action was disastrous. Okay?

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They, and, and think about what's driving me in this study,

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I've worried about why people don't have

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enough money when they retire.

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Okay? So they're making one or two decisions

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and they're going the wrong way.

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Um, and if you've got 40 years to take advantage

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of the long run relationship between risk

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and return, that's bad.

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As to the people who move to a more risky option,

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happy days, they got a larger return.

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Okay? But when we look at the details than, than than the,

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the, the estimates of the relationships that we find,

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the attitude to risk is really fascinating

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because of the people who choose, who chose

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either higher risk options

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or lower risk options, both were motivated

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by higher values of expected risks.

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So this fixed instrument tells me how,

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how people are perceiving the future

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volatility of the market.

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Same stimulus, two different results, okay?

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A lot of people saying, great, let's take on more risk.

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A lot of people saying, my goodness,

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let's take less risk.

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And that's extraordinarily strange.

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In rational expect economics,

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we expect the same relationship between risk and return.

12:28.275 --> 12:30.785
You'd expect people to be perhaps

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selling riskier portfolios and,

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and flying a little bit to quality.

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But we do see that in the neuroscience literature. Okay?

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So there's a one paper in, neuron by,

12:44.985 --> 12:47.205
one of the authors is nuts,

12:47.285 --> 12:48.965
I can't remember the other who in nuts.

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And I think, and they, they found that the,

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these different responses

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to expected risk when they were conducting,

12:58.935 --> 13:02.485
brain imaging, that the different responses were driven

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by the sort of priming people,

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received before the decision.

13:08.105 --> 13:09.965
So some people were primed at risk is good

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and some people are prime, that risk is bad.

13:12.585 --> 13:14.845
And that seemed to play a great role in

13:14.845 --> 13:16.205
responding to the same stimulus.

13:16.425 --> 13:18.125
So really strange results for risk.

13:19.175 --> 13:22.995
Really strong, strange results for the effect of the market.

13:24.045 --> 13:25.975
Okay? So we look at the current state of the market

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and we look at the six months, but

13:27.655 --> 13:30.475
before,

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now people see patterns.

13:33.745 --> 13:37.205
But the important thing to recognize is that in the sort

13:37.205 --> 13:38.205
of markets we are looking at,

13:38.625 --> 13:40.085
you might see patterns in the past,

13:40.265 --> 13:43.765
but they don't, they won't reoccur in the future, okay?

13:43.765 --> 13:47.165
Markets are efficient, not for our investors,

13:47.915 --> 13:51.045
they're all contrarian, okay?

13:51.065 --> 13:54.685
So if the market's up, they go, my God, this can't last.

13:55.385 --> 13:57.485
And if the market's been up over the previous six months,

13:57.485 --> 13:58.925
they go, my God, this can't last.

13:59.615 --> 14:01.805
We're gonna time it, we're gonna time it,

14:02.415 --> 14:04.845
we're gonna take advantage where we're all Australians,

14:04.845 --> 14:07.085
we all surf and we're at the top of the wave, let's get off.

14:08.155 --> 14:10.895
Um, and of course that's bad news

14:11.205 --> 14:15.125
because prices have no, no, happens.

14:15.835 --> 14:17.045
Okay? So that contributes

14:17.065 --> 14:20.405
to the lower performance we find age, okay?

14:20.625 --> 14:21.885
Age is associated.

14:21.985 --> 14:25.695
So people who are born close to the war were,

14:25.875 --> 14:27.695
are less likely to change their minds.

14:27.775 --> 14:30.095
And people who are born more recently there, there seems

14:30.095 --> 14:31.895
to be an age and culture phenomenon,

14:32.435 --> 14:35.375
but whatever your age is, you're more likely

14:35.555 --> 14:40.125
to choose a less risky path than a more risky path.

14:40.125 --> 14:44.795
Lower risk, lower return, gender as identified.

14:45.535 --> 14:49.275
Uh, the literature says that males are more risk seeking

14:50.355 --> 14:52.005
than, than than women.

14:53.305 --> 14:56.305
I might argue against that because I think male, male

14:56.405 --> 14:58.785
and maleness and femaleness is,

14:59.005 --> 15:00.105
and they're very broad churches

15:00.245 --> 15:02.385
and contain a lot of divergence.

15:02.535 --> 15:05.145
What we do see is that males tend to have

15:05.655 --> 15:07.185
high risk portfolios

15:07.185 --> 15:10.465
and then in the long run, higher risk, higher return.

15:10.885 --> 15:13.745
So basically we see patterns in Australia

15:14.565 --> 15:18.105
and also it's not just Australia, that from Finland,

15:18.365 --> 15:21.345
has also shown that individual investors are contrarian,

15:21.345 --> 15:24.345
whereas professional investors tend to follow trends.

15:24.405 --> 15:26.225
So we're just like the fins,

15:26.225 --> 15:28.965
except our weather is better, okay?

15:29.145 --> 15:32.365
And, and we clearly don't believe good times will last.

15:33.275 --> 15:35.525
Okay? So that's really quite irrational.

15:36.145 --> 15:38.325
Our response to risk is fascinating.

15:38.995 --> 15:42.485
Some of us will, will take more risk when it risk seems high

15:42.745 --> 15:45.775
and other people will take, less risk

15:46.205 --> 15:47.215
with the same stimulus.

15:48.035 --> 15:49.935
And you know, for gender, we are finding

15:49.965 --> 15:52.495
that identified males are tending

15:52.515 --> 15:55.855
as the literature would suggest to, take more risk.

15:57.045 --> 15:58.185
And it's all bad.

15:59.055 --> 16:01.715
On average, you are going whatever you do,

16:01.815 --> 16:03.715
you would've been better not doing clearly

16:03.855 --> 16:05.875
by the time you get to have gray hair

16:05.975 --> 16:08.835
and a gray view that, you are not as well off

16:08.835 --> 16:09.835
as you expect it to be.

16:09.835 --> 16:11.995
But that perhaps doesn't hold the professors of finance.

16:12.775 --> 16:15.515
Um, this, remember

16:15.515 --> 16:17.835
that superannuation started in Australia

16:18.705 --> 16:21.045
and it was given to individuals to manage, to

16:21.565 --> 16:22.565
maintain their self dignity

16:22.745 --> 16:24.285
and give them a sense of ownership.

16:24.345 --> 16:28.925
And I, I even now the wisdom of that, that rings

16:28.925 --> 16:32.195
through the ages, sadly,

16:32.655 --> 16:36.315
people have not accumulated as much in their pensions

16:36.775 --> 16:37.995
as they would have liked.

16:39.265 --> 16:42.245
And so, there will be, you know,

16:42.865 --> 16:45.405
people will enter their eighties.

16:46.385 --> 16:48.765
That's I guess after the fun use of your retirement,

16:48.765 --> 16:51.205
but I don't want to speculate on that at the moment.

16:51.745 --> 16:55.445
Um, reliant on a very poultry public pension

16:56.025 --> 16:58.605
and given that Australia's population is aging,

16:58.605 --> 17:00.125
that is serious,

17:01.715 --> 17:04.415
but it also has implications for younger investors.

17:04.875 --> 17:09.245
Um, and I do, B Nazi,

17:10.805 --> 17:13.985
b Nazi and Tyler, the American scholars I referred

17:13.985 --> 17:17.225
to earlier have this scheme of the 401k program,

17:17.475 --> 17:18.905
which says save more tomorrow.

17:18.965 --> 17:20.305
But these systems voluntary.

17:20.685 --> 17:23.805
So basically you can't save a little bit now

17:24.185 --> 17:26.205
and then pre-commit to saving more

17:26.955 --> 17:28.135
as you go through your life.

17:28.805 --> 17:31.415
That doesn't address the question we're seeing in Australia.

17:31.955 --> 17:35.175
And I, and now I've looked at the initial results,

17:35.175 --> 17:36.455
they're very much the same.

17:36.875 --> 17:39.095
People are making the wrong decisions.

17:39.195 --> 17:41.015
So they, unlike the Nazi

17:41.095 --> 17:43.575
and Taylors Americans, we're, we're saving 11%,

17:44.615 --> 17:48.715
but we're not doing as much with it as you would like

17:49.675 --> 17:51.975
or as, as the government would like.

17:52.595 --> 17:55.805
Um, the government's re the,

17:55.805 --> 17:58.045
the debate in given its compulsory

17:58.045 --> 17:59.845
and we have many large superannuation funds,

18:00.805 --> 18:04.625
we also have a significant, sector of private advising.

18:04.645 --> 18:08.105
People don't tend to access until later in life,

18:08.445 --> 18:09.465
but the government is arguing

18:09.535 --> 18:12.745
that we should be educating people more.

18:13.445 --> 18:18.345
But the education they provide is, is pretty basic.

18:19.395 --> 18:21.215
You know, it's, this is superannuation

18:21.315 --> 18:23.375
and this is where your salary and wage goes

18:23.675 --> 18:26.415
and you've got a few choices and one's risky.

18:26.695 --> 18:28.055
I go, everyone goes, no.

18:29.725 --> 18:32.385
Um, and this is safe and perhaps you can mix 'em

18:32.565 --> 18:35.955
and you know, savings is associated with growth

18:35.975 --> 18:38.115
and perhaps you might want a wee bit more.

18:40.795 --> 18:42.815
And yet they can't do anymore

18:42.815 --> 18:45.415
because, you know, they can't provide favorite advice

18:45.435 --> 18:46.695
to some investors than others.

18:46.695 --> 18:51.175
They can't, they can't give a fund is supposed

18:51.175 --> 18:52.815
to treat all of their investors equally.

18:53.315 --> 18:56.055
And so to provide more information to people

18:56.195 --> 18:57.655
who should be paying for it, you know,

18:57.655 --> 19:00.535
it's a little bit dodgy, but I really do think they should

19:01.535 --> 19:03.175
reconsider their education strategies

19:03.875 --> 19:08.615
and really show people the long run implications of the sort

19:08.615 --> 19:09.775
of path they have chosen.

19:10.715 --> 19:12.895
And I might commit these, you know,

19:12.995 --> 19:15.215
and I might change the save more tomorrow

19:16.345 --> 19:19.815
motto into Save more tomorrow, but risk more today.

19:21.225 --> 19:24.645
Um, and perhaps as your portfolio grows

19:25.865 --> 19:26.965
and you get a little bit older

19:26.985 --> 19:28.405
and a little bit closer to retirement,

19:28.405 --> 19:31.395
you might ratchet it back a wee bit.

19:31.455 --> 19:33.715
But I've gotta say there's another problem there

19:33.785 --> 19:35.755
because if you retire at 65

19:35.775 --> 19:38.875
and you're gonna retire, if you're a man about about 82,

19:39.175 --> 19:41.475
you still need a wee bit of growth in your portfolio.

19:41.615 --> 19:45.315
So you can't really crystallize it into a risk-free asset at

19:45.315 --> 19:47.075
the age of 65, 67

19:47.695 --> 19:50.355
and expect to make it past your seventies.

19:51.135 --> 19:54.595
Um, so a number of implications.

19:55.415 --> 20:00.075
Um, I would, this, this data, can I say this?

20:00.475 --> 20:04.665
I was, there are some things we can't look at. Okay?

20:04.725 --> 20:08.185
So we can't look at how much people are in getting in

20:08.605 --> 20:10.385
and we can't look at their other assets

20:10.785 --> 20:13.505
'cause we just don't have that data.

20:14.445 --> 20:15.585
We could have proxy.

20:15.595 --> 20:19.635
Their other, one way you could have proxy their wealth is,

20:19.815 --> 20:21.155
is through real estate.

20:21.215 --> 20:23.155
If you had where they were located.

20:23.855 --> 20:26.075
And we've recently done that in another work.

20:26.095 --> 20:27.315
We are looking at what people do

20:27.335 --> 20:28.635
and when they retire, so we know

20:28.635 --> 20:29.635
where they live when they retire.

20:30.335 --> 20:33.155
Um, and there would appear to be great wealth effects

20:33.655 --> 20:35.155
and people would, or

20:35.155 --> 20:36.875
basically gambling with the house money.

20:37.865 --> 20:38.605
You know, the more money

20:38.605 --> 20:39.845
you've got, the bigger risk you take.

20:39.845 --> 20:43.365
So wealth in some way increases wealth,

20:43.945 --> 20:46.365
but that's only speculation at that stage.

20:46.545 --> 20:47.545
Um,

20:48.465 --> 20:51.325
So happy to have got so grateful to have got this data

20:52.235 --> 20:53.725
that once again is data

20:54.125 --> 20:56.125
provided this by a commercial provider

20:56.705 --> 20:59.485
who really is interested in the interests of its members

21:00.225 --> 21:02.365
and not the interests of Robert Joyce

21:02.365 --> 21:05.645
and Chris, who really want to kinda pay for out of it.

21:06.145 --> 21:07.565
Um, that the sort

21:07.565 --> 21:11.525
of questions we've been asking are not ones that, that they,

21:11.865 --> 21:15.325
as well as the academia have, have considered.

"Challenges and Insights into the Australian Superannuation System: A Decadal Analysis"

00:00:00 - First, might I say this? this paper is co-author with my two young friends, Chris Bebington, who's a PhD student. And this is one of the chapters of his dissertation. And Joyce Coup, one of my colleagues at Curtin University, the Australian superannuation system was started as it is in 1992. And it requires 11% of your salary to be compulsory contributed to a savings program. However, investors have the choice about what they invest in. So you can choose your company, but within that company you can choose a variety of options, whether they be shares which are slightly riskier
00:00:44 - property international shares. So you can choose one of those options or you can create a cocktail. So that's the system we're in. And in the moment, it's in a crisis. it was designed to encourage national savings and that it has, but it was also designed, by the Hawke Keating Labor government to reduce the pressure on the national budget through paying people's public pensions. 'cause we don't have public pensions is just like any other form of welfare in Australia. So what they wanted was an independent, you know, something was run and owned by each,
00:01:24 - And sadly now that it's been an operation for about 30 years, the retirement balances are significantly below what people would require for a comfortable retirement. So over the weekend, the average balance is here. I've just, I just happened to have the, my, the average balance per man of between 65 and 69 is about 453,000 Australian dollars. And for a woman's just a little bit over 400,000, now they're saying for a reasonable retirement. So not a, not a luxurious retirement, the odd retirement where you can eat, go out occasionally
00:02:05 - You need about 600 to 700,000 in your superannuation balance to achieve that. So people aren't going to achie achieve a retirement that is moderately comfortable. The other thing is, is the World Economic Forum wrote a few years ago that most Austral Australians will outlive their superannuation men by 10 and women by 12 years. So in terms of meeting its original goals, as we get to the first generation, people about my age say, who, who are approaching retirement or have retired while working in that scheme for most of their working lives, they're not happy.
00:02:48 - So people have discretion on where to put their money, but the Americans have an additional discretion. they have the choice of whether to put it in or not, where no Australian worker can avoid this. There have been very few studies, if any, which have had data like we have. So what we have are the trans are quasi transactional level data for investors and superannuation fund over an extraordinarily long period of time. So our data starts two years after Super started in 1994.
00:03:27 - Our data starts in 1994 and it ends in May, 2019. So we've got a great sway of history and what we gonna do is fundamentally a typical finance study where we're gonna look at people's investment choices and influences that they have when making those choices. We are not really aware of any study that has done anything like this. Our paper takes its inspiration from two seminal papers, which are about 20 years old now, one's by Schmo Bazi and Richard Taylor. how much is investor autonomy worth?

"The Complexity of Investment Choices and the Impact of Procrastination in Superannuation Funds"

00:04:09 - and Procrastination. And it actually deals with this well, the Nazi and Tyler specifically about the sort of choices we're after. Okay? And when you join a superannuation fund, you're faced with a menu that's extraordinarily complex and people can't cope. so they tend to simplify it and tend to choose the default. So when you go into a coffee shop and they've generally got three takeaway cups, there's the big greedy one, there's a little one which won't satisfy you when there's a middle one. And always most, well, most people choose the middle one, the one by O'Donohue.
00:04:48 - as they talk about the complexity of decisions in finance, how people really like to simplify them, but they also talk about procrastination, just delaying making a decision. And these of course, are decisions you can make. so you can spend 40 years between joining a superannuation fund and and getting the funds. And so as decisions make become more complex, you tend to put them off in many respects. It's unfortunate we can't talk to the people who are invest, who are investing in the superannuation scheme. But the data starts in 1994 and ends in 2019 and there are 32,000 people.
00:05:29 - and perhaps you can't track everybody down. Indeed, this data is anonymized. So what we are doing is we have data, we have data given to us by a company and that's the good and the unfortunate thing. So it's real data, but we don't have all of the information we'd like. So we have information about where people put their money. So which choice did they make in that menu of options that they have? And then how long did they take before they made another decision? We have informa. So what we're looking at best go back, what we're looking at is not the initial decision people make when they join superannuation.
00:06:11 - it's the decisions they make in between. So you've got your fund and you decide to rebalance it in some way. So we have the returns of their funds. We know when investors made a decision where they put their funds, whether it be in one fund, say the international fund or the Australian Shares Fund, or a cocktail, one third international, one third Australian, and one third real estate. Yes, we've got that date. but we dunno how much we just know the returns of what they're holding. we have people's age
00:06:58 - which I'll just call gender. in the days where we had it, it was only male and female. Although we've been working with the subsequent dataset, which is more nuanced. We've also got information about the markets. So we're looking at the all ordinary index, which is the, s and p 500 or the FS e index of Australia. So that's the main representative index. And we've also got a measure of expected re risk, which is called the vix, the Volatility Index. And that's a measure of how the market perceives future risk to be. And it's a tr really quite a bizarre
00:07:34 - So we have of about 32,000 investors, much to our horror, when we sat down to look at the data, and this is where we started looking at was the decisions you make between at the end of your period and superannuation. Talk about procrastination. 85% of the investors in our sample did nothing. So that made the computation job a a a little easier. So we then, we then went to look at the, the, the 15% who did. And the decision we are looking at is also really simple. What we are looking at is the decision to go into a riskier

"Understanding Risk-Return Dynamics in Investment Decisions: Insights from Behavioral Finance"

00:08:19 - So whether the, so we look at the expected risk of the, of the, the cocktail or choice they make. Now that's really important because in finance there's lots of evidence, lots and lots of evidence that risk and return are joint at the hip, higher risk of a certain type leads to higher returns. And all of these, funds, all of these choices really have nice risk return trade offs. So what we're looking is that, that statistical technique we'll use is called survival analysis. And so this is familiar to everybody who's done medical research, which will be none
00:08:59 - and certainly very few of my finance colleagues. So survival analysis talks about how long you are in a state and for in, in medicine that would be a state of illness. So you can either recover or you don't recover. And so what we're saying that you're in a state and that state is the state of your investment portfolio. That's your, that's where you are. And rather than recovering or dying, you'll either choose a higher risk, higher return option or you'll choose a lower risk, lower return option. And then we'll do something crueler. We'll take our cue from a very famous paper called Boys Will
00:09:43 - And we'll look at how well you prospered or didn't prosper against a benchmark. And that benchmark is your own self is yourself. So what would you have got had you have done nothing compared with what you got, when you, did something. And, we're taking our cue here from behavioral finance. And behavioral finance differs from say, traditional rational expectations. Finance is, it says that people are not fully rational. And the phrase I use is quasi rational.
00:10:24 - but it doesn't re relate, re relate to any rational response that a traditional economists might, might expect. but still rules based. And we can still begin to, to sort of quantify and, and, and the rules and find out what they are. The results were really fascinating. And I'll go to the own benchmark results 'cause we were able to look at those for a 10, 10 year, five year, and two year horizon. And as we would've predicted, those who made a change to a less risky portfolio obtained and statistically significantly lower returns,
00:11:06 - their pocket, okay? That action was disastrous. Okay? They, and, and think about what's driving me in this study, I've worried about why people don't have enough money when they retire. Okay? So they're making one or two decisions and they're going the wrong way. and if you've got 40 years to take advantage of the long run relationship between risk and return, that's bad. As to the people who move to a more risky option, happy days, they got a larger return. Okay? But when we look at the details than, than than the, the, the estimates of the relationships that we find, the attitude to risk is really fascinating
00:11:52 - either higher risk options or lower risk options, both were motivated by higher values of expected risks. So this fixed instrument tells me how, how people are perceiving the future volatility of the market. Same stimulus, two different results, okay? A lot of people saying, great, let's take on more risk. A lot of people saying, my goodness, let's take less risk. And that's extraordinarily strange. In rational expect economics, we expect the same relationship between risk and return.

"Contrarian Investment Behavior: The Influence of Risk Perception and Gender on Decision-Making in Superannuation"

00:12:32 - selling riskier portfolios and, and flying a little bit to quality. But we do see that in the neuroscience literature. Okay? So there's a one paper in, neuron by, one of the authors is nuts, I can't remember the other who in nuts. And I think, and they, they found that the, these different responses to expected risk when they were conducting, brain imaging, that the different responses were driven by the sort of priming people, received before the decision. So some people were primed at risk is good
00:13:12 - And that seemed to play a great role in responding to the same stimulus. So really strange results for risk. Really strong, strange results for the effect of the market. Okay? So we look at the current state of the market and we look at the six months, but before, now people see patterns. But the important thing to recognize is that in the sort of markets we are looking at, you might see patterns in the past, but they don't, they won't reoccur in the future, okay? Markets are efficient, not for our investors, they're all contrarian, okay?
00:13:55 - And if the market's been up over the previous six months, they go, my God, this can't last. We're gonna time it, we're gonna time it, we're gonna take advantage where we're all Australians, we all surf and we're at the top of the wave, let's get off. and of course that's bad news because prices have no, no, happens. Okay? So that contributes to the lower performance we find age, okay? Age is associated. So people who are born close to the war were, are less likely to change their minds. And people who are born more recently there, there seems to be an age and culture phenomenon,
00:14:35 - to choose a less risky path than a more risky path. Lower risk, lower return, gender as identified. the literature says that males are more risk seeking than, than than women. I might argue against that because I think male, male and maleness and femaleness is, and they're very broad churches and contain a lot of divergence. What we do see is that males tend to have high risk portfolios and then in the long run, higher risk, higher return. So basically we see patterns in Australia
00:15:18 - has also shown that individual investors are contrarian, whereas professional investors tend to follow trends. So we're just like the fins, except our weather is better, okay? And, and we clearly don't believe good times will last. Okay? So that's really quite irrational. Our response to risk is fascinating. Some of us will, will take more risk when it risk seems high and other people will take, less risk with the same stimulus. And you know, for gender, we are finding that identified males are tending as the literature would suggest to, take more risk.
00:15:59 - On average, you are going whatever you do, you would've been better not doing clearly by the time you get to have gray hair and a gray view that, you are not as well off as you expect it to be. But that perhaps doesn't hold the professors of finance. this, remember that superannuation started in Australia and it was given to individuals to manage, to maintain their self dignity and give them a sense of ownership. And I, I even now the wisdom of that, that rings through the ages, sadly, people have not accumulated as much in their pensions as they would have liked.

"Navigating Retirement Challenges: The Importance of Education and Risk Management in Australia's Superannuation System"

00:16:42 - people will enter their eighties. That's I guess after the fun use of your retirement, but I don't want to speculate on that at the moment. reliant on a very poultry public pension and given that Australia's population is aging, that is serious, but it also has implications for younger investors. and I do, B Nazi, b Nazi and Tyler, the American scholars I referred to earlier have this scheme of the 401k program, which says save more tomorrow. But these systems voluntary.
00:17:24 - and then pre-commit to saving more as you go through your life. That doesn't address the question we're seeing in Australia. And I, and now I've looked at the initial results, they're very much the same. People are making the wrong decisions. So they, unlike the Nazi and Taylors Americans, we're, we're saving 11%, but we're not doing as much with it as you would like or as, as the government would like. the government's re the, the debate in given its compulsory and we have many large superannuation funds,
00:18:04 - People don't tend to access until later in life, but the government is arguing that we should be educating people more. But the education they provide is, is pretty basic. You know, it's, this is superannuation and this is where your salary and wage goes and you've got a few choices and one's risky. I go, everyone goes, no. and this is safe and perhaps you can mix 'em and you know, savings is associated with growth and perhaps you might want a wee bit more. And yet they can't do anymore
00:18:45 - to some investors than others. They can't, they can't give a fund is supposed to treat all of their investors equally. And so to provide more information to people who should be paying for it, you know, it's a little bit dodgy, but I really do think they should reconsider their education strategies and really show people the long run implications of the sort of path they have chosen. And I might commit these, you know, and I might change the save more tomorrow motto into Save more tomorrow, but risk more today. and perhaps as your portfolio grows
00:19:26 - and a little bit closer to retirement, you might ratchet it back a wee bit. But I've gotta say there's another problem there because if you retire at 65 and you're gonna retire, if you're a man about about 82, you still need a wee bit of growth in your portfolio. So you can't really crystallize it into a risk-free asset at the age of 65, 67 and expect to make it past your seventies. so a number of implications. I would, this, this data, can I say this? I was, there are some things we can't look at. Okay? So we can't look at how much people are in getting in
00:20:10 - 'cause we just don't have that data. We could have proxy. Their other, one way you could have proxy their wealth is, is through real estate. If you had where they were located. And we've recently done that in another work. We are looking at what people do and when they retire, so we know where they live when they retire. and there would appear to be great wealth effects and people would, or basically gambling with the house money. You know, the more money you've got, the bigger risk you take. So wealth in some way increases wealth, but that's only speculation at that stage. So happy to have got so grateful to have got this data

"Exploring Independence in Superannuation Research: A Focus on Member Interests"

00:21:11 - provided this by a commercial provider who really is interested in the interests of its members and not the interests of Robert Joyce and Chris, who really want to kinda pay for out of it. that the sort of questions we've been asking are not ones that, that they, as well as the academia have, have considered.

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