00:00I get sent a lot of books here. Most of them I don't read. When I saw your bylines on both on the bottom of the copy there, I had to know what you had to say.
00:07And I want to start off with you, John, because it seems like the narrative over the last few years has been about the broadening of the middle class.
00:14Yet at the same time, I see so many papers written, so much economic data that seems to suggest a middle class that, if not shrinking, at least is maybe not keeping pace with the upper classes.
00:26And I am curious as to why you think personal finance might be a contributor to that problem.
00:33Well, thank you, Romain. It's great to be here. We absolutely think that personal finance contributes to the evolution of inequality of wealth in our country.
00:44And the reason basically is that richer people earn higher returns on their investments and pay less when they borrow.
00:53Now, you know, some of that is inevitable. Small accounts are always going to be more expensive to operate.
01:01And, you know, wealthier people have collateral. They have houses and other assets against which they can borrow.
01:07But some of it, we feel, is due to the design of the financial system that is overly complex and actually encourages poorer and less educated people to make mistakes with their money that lowers the returns they can earn and causes them to fall behind wealthier people as they try to accumulate wealth over their lifetimes.
01:30Well, Tarun, I mean, not to be cynical, but there are some people would say that that system might be intentional.
01:38You know, this is part of the reason that we wrote this book, which is that there is a feeling that the market system is going to solve for these problems because the forces of competition should essentially reduce prices and increase quality for various things, including financial products.
01:57But our book makes the argument that because of the fact that we make decisions in a way that is sort of confused by our human biology.
02:06Finance is hard, after all. It's not something that we were we've sort of naturally evolved to do, that the system itself is competing over the wrong things.
02:15That is to say that the system is competing to give us products and services that we might want but may not need.
02:24And so part of our thesis in this book is that we need to find a way to fix this system, which seems to be operating with entirely the wrong incentives at the moment.
02:33Well, Tarun, to draw that point out more, I mean, who fixes the system?
02:38Is this something that you can do on an individual level or does this fall to governments or does this fall to private companies?
02:44I mean, who goes about actually repairing some of these structures, if you will?
02:49So, you know, we are both finance professors.
02:52So in that sense, we are very strong believers in the market economy because, of course, it's the best system we know of that has generated sustained prosperity.
03:00And we believe we'll continue to do that.
03:02It's just that it feels like the guardrails of that system are not set appropriately at the moment.
03:07And that's why we are in the situation that we are in at the moment.
03:11So a different way to put this is we think that government and regulation should be there to provide the guardrails within which the capitalist innovation can flourish and financial products and services can return to their original purpose of delivering the highest possible quality, suiting people's needs at the lowest possible price.
03:31Mm hmm. And and John, I do wonder, you know, you mentioned investing and how, you know, wealthier people have bigger accounts and it's the smaller accounts that cost more to operate.
03:41So some of that is going to be the case.
03:43I think we lost John.
03:45So to ruin the question comes back to you.
03:47How does personal investing come into the conversation that we're having about personal finance?
03:52For some, that's the same conversation.
03:54I wonder, though, if it is here.
03:58I mean, I think we have both sides of this that we talk about.
04:02Of course, the household balance sheet is it has both an asset side and a liability side.
04:08Of course, it is true that personal investing is something that we encourage all people to do.
04:12I mean, an article article of faith in finance and for good reason is that everybody should be participating in the stock market.
04:19It so happens, however, that if you participate in a way that kind of destroys wealth, you know, you don't diversify appropriately, you don't pick the lowest cost index funds or mutual funds or any such funds, then, you know, you could end up actually squandering some of that well earned wealth over over the course of your lifetime.
04:37But it's also the liability side that we think about in this book, which is to say, you know, if you don't have the right way of thinking about debt, if you pick the wrong mortgage, if you don't shop appropriately for that mortgage, if you're not very good at managing that mortgage by refinancing it on time, that can also be a real contributor to negative returns on your wealth.
04:59John, with regards to the solutions, though, I mean, when you look at I mean, we talk about this idea of things being complex and maybe the system is set up that way.
05:07But we have seen a lot of efforts to kind of democratize finance, if you will.
05:12There are a lot of technological tools.
05:13There are a lot of new platforms out there like Robin Hood and a few others that in their own way, right or wrong, have tried to make things a little simpler.
05:22Does that not move the needle?
05:23Well, well, we think tech financial technology is extraordinarily helpful and promising.
05:30And, you know, it's only just getting started.
05:32I think AI has tremendous applications in finance.
05:36The technology has made it possible to offer financial products at reasonable cost on a much smaller scale to to poorer people with less money to invest.
05:47And it makes it possible to customize.
05:50It makes it easier to shop.
05:51So there are many advantages of technology.
05:54But unfortunately, technology can also be used to exploit people's biases, for example, to to to to gamify trading, to encourage people to to trade too much, to trade in a very speculative manner.
06:08It can be used to price discriminate.
06:11So one of the most troubling things is that you leave a trail as you go around the Internet.
06:18And this can be used to identify whether you're the kind of person who likes to shop or a person who's likely to take the first offer that's made to you.
06:28And products can be priced accordingly.
06:30So there are many ways in which technology can be used, but it can also be misused.
06:35And that's why we feel that some deliberate product design is needed to make sure that the products on offer are simple, easy to shop for.
06:48I do want to compare price and quality in a straightforward way.
06:52I do just want to point out to John, and I know both of you obviously have worked for a long time in the U.S.
06:57But I mean, growing up for myself, I mean, personal finance was not something that was really taught, certainly at the primary or high school level.
07:04I mean, once you got to college, if you took an elective, maybe.
07:07So you were basically just dependent on what you learned from your parents and your family.
07:11Have you seen any sort of meaningful shift here in the United States, at least, to sort of make finance and personal finance much more of a core curriculum much earlier in the student process?
07:24Yes, there's a tremendous movement in this country to teach financial literacy in high school.
07:31I'm actually on the board of the Council for Economic Education, which is a nonprofit that promotes this effort.
07:36And more than half of U.S. states now do have a mandate that in order to graduate from high school, you should have studied some personal finance.
07:46We think this is an excellent effort, and it should be continued.
07:51And personal finance should also be taught in college.
07:54I teach more than 300 Harvard undergraduates personal finance at this moment.
08:01But we think this is insufficient in itself.
08:04There's a race, if you like, between financial literacy and the complexity of the system.
08:09And unfortunately, complexity has been winning the race.
08:12And we think we need to slow down that complexity, rethink product design, and bring it more in line with what people are actually capable of managing.
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