So What?

So What?

And Other Responses To Research

Sherman Hanna,(1) Ohio State University

As a coffee addict, I read with interest research on the
effects of coffee on humans and close relatives of
humans. Over the years, coffee has been found to have
been correlated with a small increase in some diseases,
then later research has contradicted that research.
Although I have never brought myself to quit drinking
coffee after reading the more alarming research results,
it remains interesting nonetheless.

I do not read most social science research with quite the
same level of interest. Much of it is not directly
applicable to ordinary human life, although the better
theoretical research may ultimately provide useful
insights. My goal for Financial Counseling and
is to have many articles in each issue that do
not produce a So what? reaction. Not every article needs
to be directly useful for practitioners, as there is a great
need to develop better theoretical models of family
financial behavior and build the knowledge base in the
field. Every author should, however, attempt to describe
the implications of research.

Given the diverse readership of this journal, I cannot
guarantee that every article will be of interest to every
reader. However, I believe that each reader will find a
number of articles of interest. One article that should be
of interest to many readers is Bajtelsmit and Bernasek,
Why Do Women Invest Differently Than Men? There are
gender differences in investing and in risk tolerance.
Some of these differences may be due to lower economic
status of female-headed households, but other differences
may be due to socialization or even biology. Bajtelsmit
and Bernasek provide an insightful coverage of literature
and concepts related to the question of why women seem
to be more conservative in their investing. The research
question is of great importance, as overly conservative
investing before retirement, and even after retirement,
may be a road to poverty. This is especially true for
women, some of whom may live for 40 years in

The Sung and Hanna, article, Factors Related to Risk
, provides an empirical analysis of responses to
a series of question on the 1992 Survey of Consumer
Finances — including “When you save or make
investment, would you take no risks?” Although the
responses to this question on earlier Surveys of
Consumer Finance have been analyzed, Sung and Hanna
attempt to discern differences between objective factors,
such as the number of years until retirement, and
subjective factors, such as gender/marital status (after
other variables have been controlled). Female-headed
households were much less risk tolerant than were
otherwise similar male-headed and married couple
households. Xiao, Effects of Family Income and Life
Cycle Stages on Financial Asset Ownership
, found that
married couples were significantly more likely to own
stocks than were otherwise similar households with the
head not married, which would consist mostly of female-headed households. How should financial planners and
educators use this information? There is ample evidence
that using diversified stock portfolios for long-term goals
is rational even for risk averse investors. Hanna and
Chen provide additional evidence in Efficient Portfolios
for Saving for College
. As long as you believe that the
next 20 or 30 years will be no worse for stocks relative to
other financial investments than the worst period since
January 1, 1926, then for periodic investing for 20 years
or more, a diversified small stock portfolio would
provide the safest investment, as well as providing far
higher returns than any other portfolio on the average.

I believe that groups such as female-headed households
that are not tolerant of rational risk should be targeted
for education about the nature of financial risk.
DeVaney, Gorham and Haldeman report on the effects
of an educational program targeted at women in Cash
Flow Management and Credit Use: Effect of a Financial
Information Program
. Although they focus on effects
such as budgeting practices, clearly the program they
studied has the potential to improve the investment
decisions of women.

The 1995 issue of Financial Counseling and Planning
had six articles related to retirement. This issue also
several articles related to retirement — three directly
related and other articles indirectly related. As members
of other generations have noted with dismay, the hot
topics since 1950 in the United States have been tied to
the concerns of the Baby Boom Generation, born
between 1946 and 1962. Retirement is in sight for the
oldest Baby Boomers, so this will continue to be a hot

Li, Montalto, and Geistfeld, Determinants of Financial
Adequacy for Retirement
, used a longitudinal survey of
men to analyze factors related to financial adequacy in
retirement. They found that only 46% of the sample had
accumulated financial resources adequate to maintain
their preretirement consumption level at the age by which
they had planned to retire. This type of finding is not
surprising — in fact, one reviewer had a So what?
reaction to an earlier draft of the article. However,
careful analyses of longitudinal surveys, following the
same people over many years, are not common. One
interesting finding from the multivariate analysis is the
effect of income. All other things equal, going from very
low income to higher income, predicted adequacy
decreases. I believe this is a result of the structure of
Social Security retirement benefits, which provide a
relatively high replacement rate to low wage workers.
Middle income workers should be prime target of
education and counseling on retirement, both in terms of
investing and in carefully considering their desired
retirement age.

Yuh and DeVaney, Determinants of Couples’ Defined
Contribution Retirement Funds
, analyzed levels of
defined contribution retirement funds for couples, using
the 1992 Survey of Consumer Finances. They found that
nonfinancial assets seemed to be a substitute for
retirement funds, and that most couples 30 or more years
from retirement had predicted retirement fund levels of
zero. All other things equal (including income), less
educated couples and those who were not risk tolerant
had lower levels of funds. This result has clear
implications for financial education, as those who are
less risk tolerant will invest less aggressively, and
therefore will be even worse off in retirement.

Vora, Breakeven Periods for Individual Retirement
Accounts With Partial Withdrawals
, considers an issue
seemingly against the goal of encouraging people to
provide for an adequate retirement. His paper
demonstrates that putting money in an Individual
Retirement Account is rational even if you might have to
withdraw some of the money within a few years, despite
the penalty imposed on most types of withdrawal before
retirement. Although the idea of using retirement
accounts for other goals is somewhat alarming when one
considers the lack of preparation for retirement among
many households, encouragement of any type of savings
may be good for individuals and for society.

This issue contains two articles that should be of great
interest to members of AFCPE and to employers.
Williams, Haldeman and Cramer, Effect of Financial
Concerns Upon Workplace Behavior and Productivity
and Garman, Leech and Grable, The Negative Impact of
Employee Poor Personal Financial Behaviors On
, review numerous studies on the impact of
employee financial problems. I hope that these articles
stimulate new research. I would also encourage
comments on the articles.

In the 1995 issue, Hanna, Fan and Chang’s article,
Optimal Life Cycle Savings, addressed the question how
consumers should plan to allocate their wealth over their
lifetimes. This is a daunting challenge, as most people
have uncertainty about earnings and when they will die.
On the one hand, we have the words of Robert Burton
from 1628:

A mere madness,

to live like a wretch

and die rich.

Anatomy of Melancholy

On the economist’s other hand, we have millions of
Americans with credit problems, and many others with
inadequate resources for retirement. In addition to the
articles on retirement, there are four articles that are
related to the life cycle issue. Chen and Finke, Negative
Net Worth and the Life Cycle Hypothesis
, directly
address the life cycle issue by analyzing factors related to
whether or not households have negative net worth.
They found that, all other things equal, young, college
educated households are more likely to have negative net
worth than otherwise similar households with less
education. One could interpret their results as being
consistent with the life cycle model, as more educated
people can expect greater income increases, or as
reflecting the ability of more educated people to obtain
more credit. Jayathirtha and Fox, Home Ownership and
the Decision to Overspend
have a similar result for
education — among home owners, college graduate
households were 3.6 times as likely as otherwise similar
households with less than a high school education to
spend more than income during a 12 month period.
They also found important differences between home
owners and renters in factors related to overspending.

Many financial counselors and educators will find these
results disturbing, as a simple message about
overspending — Just don’t do it! — may be easier.
Consider, however, the change in the way that people’s
weight has been evaluated over the past 40 years.
Previously, there were very simple guidelines on weight
and height. A 300 pound football player would be
considered as just overweight. Now there are more
sophisticated guidelines, taking into account fat versus
muscle components of weight. A 300 pound football
player who can sprint 100 yards in about 10 seconds is
perhaps not really overweight. In the same way, more
sophisticated financial guidelines should be developed by
rigorous research.

Godwin, Newlywed Couples’ Debt Portfolios: Are All
Debts Created Equally?
, tried to identify factors that best
predict potential for debt difficulty. She identified
several types of debt that seem to be the best predictors.
Lewis, Effect of Financial Resources and Credit on
Savings Behavior of Low-Income Families
, tried to find
variables related to low-income families’s increases in
net worth, or saving, between 1983 and 1986. For such
families, saving often consists of reducing loan balances.
All other things equal, those who had more education had
larger increases in net worth than those with less
education. The larger the initial debt balance, the larger
the increase in net worth, which provides evidence that
on the average, low income families are somewhat
successful in getting out of debt.

Woerheide, Marquardt, and Fortner, A Test of the HUD
Guideline For Borrower Selection of a 30-Year, Fixed-Rate Mortgage
, provide another example of the
limitations of a simplistic rule. Through careful analysis,
they show that their proposed method of comparing fixed
rate mortgages is far superior to the usual HUD rule of
thumb for comparison.

Alhabeeb, Teenagers’ Money, Discretionary Spending,
and Saving
, provides interesting insights into how teens
spend or save their money. His results should be useful
for those who provide formal or informal education to
teenagers about money management.

Montalto and Sung, Multiple Imputation in the 1992
Survey of Consumer Finances
, will be primarily of
interest to researchers, especially those using the Surveys
of Consumer Finances. However, practitioners may find
the response rates for the amounts of particular types of
assets of interest. For instance, of those who had tax-free
municipal bonds, only 67% reported the dollar value. I
would encourage financial planners to comment on
related issues of obtaining such information from clients.

During the past year there have been 53 submissions to
this journal, and 16 are published in this issue. I hope
that we will be able to move to two issues per year.
Perhaps the next issue will be ready in six months rather
than one year.

The journal’s web site has a wealth of information, and
I plan to add supplementary material for some articles in
this issue. The web address is:

If you forget the address, just find a web search engine
such as Alta Vista and do a search for AFCPE.

1. Professor, Consumer Sciences Department, The Ohio State University, 1787 Neil Ave., Columbus, OH 43210-1295. Phone: 614-292-4584. E-mail: