Which questions are you currently working on?
The theme that encompasses a lot of my current work is the effect of the environment, within which a household operates, on its financial decisions. One of my recent papers showed that being placed close to neighbors with economics or business education significantly improves one’s chances to participate in the stock market and in private retirement products much later on. There is no such effect when peers’ education is at the same level but without this content. Another paper shows that a higher share of peers who are informed or participating in the stock market is associated with more accurate perceptions of past stock market performance and thus expectations about future returns, as well as with increased tendency to undertake stockholding risk. Both papers suggest that there is an information content in peer influences that generates a social multiplier to efforts to boost financial literacy and awareness.
A third paper utilizes the experience following the German reunification to show that sudden access to financial products, such as securities and consumer loans, can be met with a rapid and stable participation response when the financial sector providing these products is well-informed and properly incentivized. In a new project, I am starting to explore the link between perceived or actual mobility opportunities in the environment and the tendency to undertake financial and other types of risk. Finally, I am completing a review for the Journal of Economic Literature, of the overall development of the area of Household Finance since its beginnings 30 years ago and of promising future research directions.
How is your research connected with the work at the IMFS?
As we saw vividly in the US financial crisis, but also in some of the episodes in the European fiscal crisis, household financial behavior and its amplification through social interactions can be detrimental for financial stability. Understanding the process through which policies, institutions, and financial firms affect household financial behavior and the spread of risk taking, indebtedness, or financial distress, ties in well with the Institute’s agenda on financial stability and on policy relevance.
What does the IMFS’s interdisciplinary approach of legal and economic research mean for your work?
I have now had the chance to co-edit two volumes that blend together insights from legal scholars and economists: one is on regulation published by Cambridge University Press and the other on the Capital Markets Union published by MIT Press. If we are to design effective investor-borrower protection, we need to combine insights on retail behavior from household finance with legal insights coming from consumer protection. If we are to progress smoothly towards a capital markets union that provides access to financial products regardless of the country in which the household is located, we need to find ways to overcome lack of information and trust, as well as other behavioral biases of households, and to enable companies to overcome uneven regulations and legal constraints across countries. It is important that law and economics researchers sit together, if we are to balance the need for transparency, typically stressed in legal approaches to regulation, with the limited absorption capacity of households, brought out by household finance research, as an example.
How do you view the rise of big data and the digital transformation in relation to household finance?
I view household finance research as a powerful instrument to empower people in their financial behavior, and utilizing the tools provided by digitalization and big data is a powerful way forward. Digital transformation is the key to democratization of finance. It is a means to reach households that would not otherwise have access to saving and borrowing opportunities in the formal sector, and to support them in their wealth accumulation and the financial handling of numerous risks to which they are exposed. Big data is not an opportunity to spy on people, but to learn and help them learn from their actions and mistakes, in order to guide their future behavior and to prevent financial distress.
Of course, I can think of disaster scenarios, where digital transformation allows the more financially literate and better connected demographic groups to earn higher returns and to move higher up in the wealth distribution, leaving weaker demographic groups behind. Or, where big data are used to manipulate and exploit people’s biases and weaknesses in order to sell inappropriate products, or to discriminate against them in subtler ways than was possible before. We can train our systems to recognize need and potential but we can also point them to detecting weakness and fragility. In this context, I welcome an emerging trend in business schools, at least in the U.S., to promote social responsibility among the future finance professionals and managers, which we can also emulate and develop here in Europe, and at Goethe University in particular. This goes well beyond introducing ethics courses, to promoting learning areas that can serve the public at large and sensitive groups in particular.
What do big data and the digital transformation mean for your research?
My own current contact with big data is in building a flexible hybrid data set, combining extensive administrative bank data on transactions and exposures with elaborate survey data on aspects that banks do not know about their customers, including their attitudes, expectations, overall positions, financial literacy, social interactions, decision-making processes, budgeting and planning activities and objectives. This hybrid data set is an idea that I have had for more than a decade, but it is only now that the numerous obstacles, some substantive and some unexpected, have been overcome. I expect it to provide a basis for meaningful household finance research that takes advantage of the amounts of data held in financial institutions but also brings subjectivity, awareness, and individual ability into the picture.
