Personal finance: new market devices for the burnt-out consumer

June 8, 2009

Today, the Wall Street Journal opens the week with a special section on personal finance. The topic has been attracting my attention and blogging for the past months. Why? The foolish decisions on the part of consumers and savers have been a key contribution to the crisis. The question, then, is clear: how is it that people decide how much to save, buy, invest, etc?

This not just important but theoretically relevant. It goes at the heart of the “market materiality” literature: economic calculation can only take place with the requisite tools… be it calculating implied volatility with Black-Scholes or, as the case now suggests, budgeting the weekly veggies shopping. But the issue, at a personal finance level, has been largely unexplored by academics… as much as by over-indebted consumers themselves.

In an editorial piece, the Journal comments on this neglect, and on the existence of a host of new websites that facilitate this sort of planning:

Your personal finances used to be on automatic pilot. You can’t afford that anymore. You have to monitor your investments, think about how much you’re saving, keep tabs on your spending. Fortunately, it’s easier than ever to do all that.

In an excellent main article, the Journal discusses the different websites that have cropped up to assist in personal finance.

The first and perhaps most effective step to managing your money online is signing up for basic budgeting sites such as Mint.com, from Mint Software Inc. of Mountain View, Calif., Wesabe.com, from San Francisco-based Wesabe Inc., or Geezeo.com, from Geezeo of Hartford, Conn.

To help you avoid bank or credit-card fees, these sites can alert you via email or text message when a bank account is low or when a credit card is approaching its limit. And the sites can slice and dice the information to help you budget better. For instance, they will automatically show you how much you spend in any given category, such as restaurants or gas stations, and can compare your spending habits with those of other users, so you can identify areas where you might need to cut back.

Personally, I am particularly interested in mint.com (not available, I think, outside the US), and found it absolutely fascinating. For those non-Americans interested in understanding the site, I would recommend a visit to the competitors, or even a visit to the online forums of mint, where fanatical users rave about its capabilities.

I am one of them.

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9 Responses to “Personal finance: new market devices for the burnt-out consumer”

  1. Jeff Lundy Says:

    Daniel,

    I couldn’t agree more that this is an area that needs to be studied. In fact, it is precisely these consumer decisions about when to save and spend (and how much to save and spend) that are the subject of my dissertation. I’m using the Consumer Expenditure Survey to measure the annual change in households’ net wealth. I’m particularly interested in the component of negative change that is actually related to overspending (versus say asset depreciation).

    I’m still in the early part of putting the data together, but early results are showing that the proximate cause of most negitive changes in wealth is an unexpected loss of income (not shocking). However many questions remain unanswered. What makes households vulnerable? How much of it is overspending, and what drives households to overspend?

    If anyone is interested in hearing more as more results come in, feel free to email me at lundyj@umich.edu

  2. danielbeunza Says:

    Jeff: right on. Great project. I wonder if there is any way to track in your data the effect of the tools that consumers are using.

  3. Ron Shevlin Says:

    Daniel —

    I think your comment on the WSJ site about understanding “how these tools are reshaping how people deal with their money” is right on the money (no pun intended).

    One of the budgeting sites — iThrive — employs behavioral scientists because it believes (rightly, I think) that driving behavioral change through the tools is the key to success.

    Simply giving consumers the ability to track and chart their finances has been around for a while (i.e, Quicken, MS Money). While the new sites offer more convenience in terms of data aggregation, tracking/charting appeals to a very small percentage of consumers (in the US, at least).

    The sites that offer a social component — like Wesabe — are the ones that I think offer something really new, and should warrant attention.

  4. danielbeunza Says:

    Thank you for the hint. I will check iThrive. And — agreed: social investing and the construction of communities of practice around personal finance is the ultimate frontier.

    My hunch, however, is that the interface is where the battlefront is being fought nowadays. It beats me why I still have to re-categorize my expenditures in Mint.com. For instance, my last hotel expenditure got categorized as “printing”, forcing me to manually re-categorize.

    At the bottom of all this, I believe, is that banks and credit cards –the natural protagonists of the story — have been doing very little effort in making personal finance simple… because in fact they were profiting from late fees and over-indebtedness. Now, of course, the Obama administration is pressuring them. And it is very interesting that it’s taken outsiders to the industry to come in and transform it. Perhaps we should expect some acquisitions soon in this space…

  5. Daniel Engler Says:

    Daniel,

    This is a very, very interesting discussion on many levels. It is not news that financial instruments such as credit cards have enabled individuals to act in ways that go against their long-term interest. The pervasive ways in which they affect our lives is not yet realized by most people, I think. A common reaction to the financial crisis that I have heard is “those greedy bankers”. But that is neither correct, nor fair. First, the banking system does serve an important function in our society. Second, blaming the individual bankers rather than the system represents an attribution error.

    Are sites like Mint.com a panacea? I’m not sure. They are a step in the right direction in the sense that they give more information to the individual. But the way that Mint.com is planning on making money is by advertising ways in which consumers can “save”; for example, by making offers such as credit cards and bank accounts that are an “improvement” over the consumer’s current accounts.

    This technology (that is, Mint.com), like any technology, is not inherently good or bad. The only way to assess it is by looking at who it affects and how. If the technology stimulates banks to help consumers act in their own best interests, then good. But as soon as Mint.com starts offering its own credit card (as Quicken does), then I am a bit worried.

  6. marthapoon Says:

    Daniel,

    It seems to me that an alternative question to ‘how do consumers make (foolish) decisions’ is: What are the conditions under which consumer decisions are (foolishly) made?

    A major part of the crisis is about change, and the confrontation of the consumer by new and unforseen financial choices. Their actions may (retrospectively) seem foolish, but it might be interesting to trace how logics from old conditions that were once true (i.e. housing prices don’t fall) mix with new conditions to create these difficult outcomes.

    A potential pitfall with the ‘better calculation apparatuses for consumers’ thesis is that, depending on how it is framed, it can temptingly take for granted that calculation is singular when, in fact, calculation is mutable and constantly changing. The inability to adapt to this mutability, more than calculation per se, maybe the the central issue…

    Martha

  7. danielbeunza Says:

    Dan and Martha — welcome to the discussion. To Dan’s point, I would say that if we are to take your point seriously, then a credit card is neither good nor bad in itself; it is the asymmetries in the use that credit cards create… easy to spend, tough to plan. So I’d be happy to see mint develop its own card.

    Things brings up Martha’s comments. Agreed, foolish or not depends on the context in which decisions were made: positive house price appreciation vs low. But i’d say that the decision was: given the high costs of scrutinizing our expenditure, we’ll just not worry about it, since our house is worth a ton. With a more economical technology of budgeting, calculating expenditures makes more sense in both a high and low house prices context.

  8. JeffL Says:

    As someone studying social influences on personal finances, I can’t tell you how happy I am that this post has generated so much discussion.

    To weigh in on the importance of these sites, I have to agree with Daniel that they are going to be increasingly where “the rubber hits the road” in terms of how individuals conceive of their finances and their relationship to the economy. I have no doubt that as the technology of these sites gets better, more people will use them, and also that most major banks and credit cards will probably introduce Mint.com-like tracking in their particular websites.

    In terms of the positive impact of these sites for consumers, I kind of have to side with Martha. Unless Mint.com would have warned consumers that the skyrocketing value of their homes was probably not realistic, then I’m not sure users would have refrained from refinancing mortgages on their homes. I’m sure that, within the context of having refinanced, Mint.com would have made consumers better managers of their quotidian, micro-financial decisions (how much to spend on entertainment, etc.). Such an improvement would have been positive. But, would Mint.com have suggested to them, at the bigger level, that they shouldn’t be taking out equity from their homes, or that the equity they believed they had might be overstated?

  9. danielbeunza Says:

    Jeff and Martha — I wonder if we are asking too much from a free website. I think it’s important to recognize the difference between the different functions that go under the heading “personal finance”. As I see it, Mint replaces the simple budgeting process of using paper bills in your wallet: you had five $20 bills in your wallet, now you have only four. This means that you spent $20. That simple, but at the same time, very complex once digital means of payment exist. Just as we don’t expect our wallet to tell us the future of the housing market… I don’t expect mint to do so either.


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