Three years ago, Yale SOM’s James Choi was putting together the syllabus for a new course on personal finance. It seemed only natural to check out a few popular books on the topic to see if they might contain any useful material.
But when he delved into the bestselling titles, “I was taken aback by how at odds some of the advice was with what we as economists thought was the right thing to do from economic theory,” he says. The experience “planted a seed in my mind: wouldn’t it be interesting to do a systematic survey of what this marketplace of books is telling readers to do?”
For the next several years, and with the help of a small army of undergraduate research assistants, Choi did just that. He selected the 50 most popular personal finance books on Goodreads and, in a new paper, catalogued their advice on issues including mortgages, savings strategy, debt management, and investment allocation.
In contrast to most economic models, personal finance gurus were intensely focused on how psychological factors such as willpower and motivation play into financial decisions.
In some cases, the advice was just plain incorrect. But much of it departed from economic theory in ways that Choi found harder to diagnose as straightforwardly good or bad. In contrast to most economic models, personal finance gurus were intensely focused on how psychological factors such as willpower and motivation play into financial decisions.
For example, many of the books advocated for saving 10 to 15% of your income, regardless of what your income is. Economists, by contrast, would argue for consumption smoothing—that is, keeping spending constant over time and saving more as you make more.
“Economic theory says your savings rate should be low in your 20s and super high in your 40s to make up for the fact that you weren’t saving very much in your 20s,” Choi explains. From this standpoint, not saving much in your post-school years is “perfectly fine, and in fact it’s optimal.”
Still, he sees why personal finance books don’t recommend the strategy. “I think it comes from a different conception of human nature,” Choi says. These authors see saving as a discipline, so the earlier you establish the habit, the better. Developing the willpower to save is “not a problem for the fictional economic agent in our models.”
(Here, Choi notes, economists may be guilty of a “do as I …….