Prof. James Choi: Practical Finance | Rational Reminder 260

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:
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Links From Today’s Episode:
Rational Reminder on iTunes - itunes.apple.com/ca/podcast/t....
Rational Reminder Website - rationalreminder.ca/
Shop Merch - shop.rationalreminder.ca/
Join the Community - community.rationalreminder.ca/
Follow us on Twitter - / rationalremind
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Benjamin on Twitter - / benjaminwfelix
Cameron on Twitter - / cameronpassmore
James Choi - faculty.som.yale.edu/jameschoi/
'Behavioral Household Finance' - www.hbs.edu/ris/Publication%2...
'Finance for the Rest of Us' - www.linkedin.com/posts/james-...
'Popular Personal Financial Advice versus the Professors' - www.aeaweb.org/articles?id=10...
'Millionaires Speak: What Drives Their Personal Investment Decisions?' - www.nber.org/papers/w27969
'What Matters to Individual Investors? Evidence from the Horse's Mouth' - onlinelibrary.wiley.com/doi/a...
'Are Empowerment and Education Enough? Underdiversification in 401(k) Plans' - www.jstor.org/stable/3805120
'Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds' - www.nber.org/papers/w12261
'$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans' - www.nber.org/papers/w11554

[@russellsawatsky167]

What a tremendous guest! I'll be looking for his name in the future!

[@Eddynatorr]

This was absolutely brilliant. Consumption smoothing is a concept I’ve never thought about. Thanks!

[@freedomlife3623]

This is one of my favorite episode, so relatable and very enlightening. We all need to strive to have better understand of ourselves in money matter and learn to better manage it. Personal finance starts with ourselves.

[@michaelwan6245]

This is such a great episode!! James is a tremendous communicator and he made so many solid take home points. Spend more time on eulogy virtues - nailed the landing :)

[@misterr2359]

This was excellent! Thank you!

[@AnhNguyen-bi6vg]

Really enjoying this episode that I listen again. Thank you

[@albertofoti4152]

incredible episode! great guest

[@Kafkaesque786]

Excellent. Thank you

[@omarlemfadel1344]

Les débats de classe! 💯

[@donpeters9534]

40:00 - Chaos based on imperceptible variations in initial parameters.

[@AlfonsoSanchez-yr8kd]

An enjoyable conversation. You may consider interviewing Larry Kotlikoff on "Economic based financial investment". He's a very original economist & has unconventional views about the tools & content of financial advice. Rather different approach to "practical advice" than that of your current guest

[@ElektrikaCo]

Ahh yesss, more behavioural economics 😁

[@sh5810]

Hey Ben (or anyone), do you have the paper (or other references) to the concepts discussed at at 24:11? Especially the idea that you shouldn't change your allocation depending on your horizon. Great episode. I don't usually comment, but this episode really caught my attention. From a purely aesthetic point of view, I agree with the point others have made that the fluidity of the conversation, follow-up questions, transition between questions, etc., could be improved a little.

[@s1003yyds]

I think American stocks are a good investment. I have been playing the stock market for 15 years. We can communicate. Do you have any friends who buy stocks?

[@michelangeloserpico5971]

It seems that most financial thinking here is about investing to fund retirement. It would be nice to understand how some of these concepts may change in respect to other goals with different time horizons and probability of achievement (sort of a goal-based asset allocation view).

[@rossmacintosh5652]

What sort of goals were you thinking about?

[@michelangeloserpico5971]

All sorts of expenses, like buying an house or a car, or paying for university tuitions of your children

[@cbqmrbqm8972]

It‘s so wrong 😂. The disbelief is so genuine it hurts.

[@johng4790]

Big fan but do the interviews seem to be moving towards more robotic Q&A vs follow ups and deeper discussions? Getting a lot of “wow, interesting” and then just moving to the next question.

[@rationalreminder]

Good feedback. We study the guest’s research and design the questions to get the information. In many cases the potential follow ups are built into the set of questions. We can make the transitions more natural though. -Ben

[@s1003yyds]

I think American stocks are a good investment. I have been playing the stock market for 15 years. We can communicate. Do you have any friends who buy stocks?

[@SeaJay4444]

I think that's kind of always been the RR style, hammering out A LOT of questions and just letting the interviewee talk about stuff without interjecting much or going into tangents. It's definitely very unusual compared to most of the other podcasts I've listened to, but I kind of like it.

[@timelston4260]

Good stuff, except he seems to think his god is something more than an idea in his head. The irony is that a world with no religion is equally wishful thinking.

[@s1003yyds]

I think American stocks are a good investment. I have been playing the stock market for 15 years. We can communicate. Do you have any friends who buy stocks?

[@timelston4260]

@@s1003yyds I would never refer my friends to your scam

[@jasonhobbs2405]

So I take it you BELIEVE… that there is no God

[@timelston4260]

@@jasonhobbs2405 I noticed you didn't say I BELIEVE... he has a head.

[@jasonhobbs2405]

@@timelston4260 God? Yes, I believe that God has a head.