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By Christine Benz | 11-17-2010 01:05 PM

Behavioral Finance Research in Action

Behavioral finance research has played a part in the accumulation of billions of dollars through auto enrollment and auto contribution escalation, says Allianz Global Investors Distributors CEO Brian Gaffney.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

I'm here at the Financial Behavior in Retirement Summit, and I'm joined today by Brian Gaffney. He is the CEO of Allianz Global [Investors Distributors].

Brian, thanks so much for being here today.

Brian Gaffney: My pleasure, Christine.

Benz: So, you and your firm, Brian, have recently done a lot of work on the area of behavioral finance, and I'm wondering if you can talk about some of the key takeaways from all that research?

Gaffney: Yes, the reason that we've done the study is, there are 79 million people heading for retirement, and many of them are very poorly prepared. The Department of Labor is concerned, Department of Treasury, so they issued a request for information. And our view is, if we put our asset management lens on, we could give some technical guidance, but we felt that it was better to understand that decision making is critical to the end results of being able to retire with dignity.

So, we engaged professor Shlomo Benartzi to engage 10 experts in the area of behavioral finance in our response to just understand particularly how people make decisions after they stop working and they're in retirement.

Benz: Right. So, one of the things that you brought out in your presentation was extreme loss aversion on the part of some retirees. So, they would rather risk nothing even if it means a minimal or zero gain. How does the financial services industry combat that tendency? How do you work against that and get retirees to take appropriate risks?

Gaffney: The common set of understandings up until the most recent study was that people are twice as averse to risk. So, you feel the pain of loss twice as much as you feel the gain of winning a $100. The importance of understanding as it relates to how we create solutions is that when you're asking people to make decisions about giving up control of their assets, giving up control for protection, people see that as loss.

And so the solutions need to be framed in a way that liquidity may be available rather than giving up complete control or encouraging a feeling that could very much feel like loss but you don't know the way you've constructed the products.

Benz: So, a related question Brian is, how you see the financial services landscape evolving so that insurance products increasingly intersect with traditional financial products like stocks and bonds?

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