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"Welcome to the spring, 2022 Journal of Personal Finance. This volume showcases deep dives across personal finance, financial planning and risk management. I am proud to present seven innovative and diverse articles studying crowdfunding, risk-aversion, wealth accumulation, hedge fund performance contrasted to simple investment strategies, financial knowledge shaping investment decisions, gender differences in education loan use and the relationship between emotions and financial time horizons. Themes of consumer behavior, investment and risk choices run deep in our current edition."
Editor Craig Lemoine, Ph.D., MRFC®, CFP®
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Volume 21 Issue 1, 2022
No Good Deed Goes Unpunished: The Hidden Complications of Donation-Based Crowdfunding
Christine A. McClatchey
On March 23, 2021, a GoFundMe was launched by a friend of Officer Eric Talley, an 11-year veteran of the Boulder, Colorado Police Department. Officer Talley was killed the day before while bravely responding to a mass shooting at a local grocery store. The public responded with enormous outreach and support; in less than 10 days, the campaign raised over $1 million from more than 11,500 individuals. GoFundMe has generated over 120 million donations, helping individuals raise more than $9 billion since its debut in May 2008 (“A Year in Giving: 2019,” n.d.). The site supports incentive-based crowdfunding activities, but also receives donations for personal causes like unexpected medical bills, tuition assistance, and help during tragedies. While crowdfunding growth has been explosive there may be severe tax and income-based eligibility complications, which are often disregarded until
it is too late. The IRS has been slow and opaque to adopt rules that clarify how campaign donations are treated for both federal income tax and gift purposes. This lack of clarity has created significant and unexpected tax liabilities. Crowdfunding efforts have also been anecdotally documented to undermine one’s eligibility for common income-based assistance such as Medicare, Medicaid, Section 20 Housing, SSDI, and SNAP in some
circumstances. These effects are multipronged in that they might have implications for parents, children, other household members, or even friends who receive assistance outside of the campaign’s originator or designated beneficiary. We disentangle a crowdfunding campaign’s far-reaching and often overlooked consequences, to provide insights for creating a well-designed campaign, including the end transfer of funds from the designated beneficiary to the end-recipient. Our discussion addresses nuances related to (a) federal income taxes, (b) gift taxes, and (c) income-based assistance programs, for campaign participants, family
members, and friends.
An Evaluation of the Consistency of Financial Risk-Aversion Estimates
John E. Grable, Ph.D., CFP®
Eun-Jin Kwak, M.A.
This paper reports results from tests designed to determine whether financial risk aversion—the opposite of which is financial risk tolerance—varies based on the at-risk dollar amount presented in a risk-aversion evaluation. Risk aversion was observed to decrease slightly when respondents were presented with a low at-risk dollar amount, although the difference in observed scores across three at-risk dollar scenarios was less than one point on a 10-point scale. It was also noted that survey respondents were relatively risk averse and that females and older respondents exhibited greater risk aversion. When presented with a high at-risk dollar choice, those who self-identified as Black and those with high incomes exhibited less financial risk aversion.
The Impact of Financial Advisors on the Subsequent Wealth of Older Adults
Benjamin F. Cummings, Ph.D., CFP®
Russell N. James, III, J.D., Ph.D., CFP®
Despite the growing use of financial advisors, relatively little is known about the impact that financial advisors have on actual wealth outcomes among older adults. Using data from the Study of Assets and Health Dynamics
Among the Oldest Old (AHEAD), we find that using a financial advisor is positively related to subsequent net worth, especially on net worth values more than a decade after initially reporting the use of professional
financial advice. Having a financial advisor is also positively associated with current and subsequent investment returns, largely due to greater allocations to equities.
No Hedge Funds, No Cry
Hedge funds raise capital largely from institutional investors. Small individual investors may feel left out but probably do not realize what a blessing that really is. Simple strategies way within their reach have outperformed hedge funds in terms of return and risk-adjusted return over the last 10, 15, and 20 years. Worse still, neither hedge funds really provide investors with returns uncorrelated to stocks nor do they protect portfolios from losses, at least as well as gold does, in turbulent times.
Financial Knowledge and the Relationship with Using Professional Investment Advice and Granting Trading Discretion
Matthew Sommer, Ph.D., CFP®, CFA
HanNa Lim, Ph.D., CFP®.
Using the 2018 National Financial Capability Study (NFCS) Investor Survey, this research investigated the relationships between financial knowledge and the decision to use investment advice and to grant trading
discretion. Among a sample of 1,203 respondents, objective financial knowledge was negatively related to making investment decisions based on recommendations from a financial professional, although no relationship
was found with subjective knowledge. Among a restricted sample of 710 respondents who use financial advice from a professional, subjective knowledge was negatively related to granting trading discretion to a financial
professional while no relationship was found with objective knowledge. Overconfidence was positively related to relying on recommendations to make investment decisions but negatively related to granting trading discretion.
Financial professionals can use these findings to better understand the implications financial knowledge has on client engagements and adjust their communication practices and service offerings accordingly..
Gender Differences in Education Loan Use Among Unmarried Americans
Shan Lei, Ph.D., CFA, CFP®
Oscar Solis, Ph.D.
This study uses the 2019 Survey of Consumer Finances to investigate gender differences in the use of education loans. This study finds that unmarried women are more likely to hold education loans and have higher current
education loan amounts compared to their male cohorts. Economic and demographic factors, such as net worth, income uncertainty and education level, are significant determinants in shaping individuals’ decisions regarding
education loan use. Additionally, this study discusses the implications to the individuals, financial professionals, educators, and policymakers.
The Relationship Between Emotions and Financial Time Horizon
Martin Seay, Ph.D., CFP®
Sarah Asebedo, Ph.D., CFP®
David Wang, Ph.D., AFC®
Megan McCoy, Ph.D.
This study justified and tested the relationship between emotions and financial time horizon (i.e., the tim period used for spending decisions) using the broaden and build theory of positive emotions. Upon testing a
structural equation modeling of positive emotions, negative emotions, and financial time horizon using and a sample of 993 American adults, positive emotions were found to predict an expanded financial time horizon
while negative emotions were found to predict a narrowed financial time horizon. The results offer evidence that individual differences in emotions are associated with attitudes that have been shown to materially impact
household financial behaviors. Furthermore, our results demonstrate unique pathways through which different types of emotions differentially impact financial behavior.
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