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As the new editor of the Journal of Personal Finance, I am pleased to introduce the Fall 2018 issue, which is full of the latest
research and current thinking in the field of personal finance. I am honored to follow in the footsteps of the previous editors of
this key journal serving the academic and practitioner communities in the financial planning profession. Here, I will provide a brief
overview of the great articles in this issue. - Editor Benjamin Cummings, Ph.D., CFP®, RFC®
Members of the IARFC can earn CE credits through the Journal of Personal Finance (JPF). Register to take the IARFC JPF Online CE quizzes and receive two for $20. Two hours of IARFC CE will be awarded to anyone who achieves a score of 13 or higher per quiz. Only one submission per member is allowed, quizzes are available as JPF issues are published. To register for a the quiz click here.
Volume 17 Issue 2, 2018
Creating Understanding and Interest in Charitable Financial and Estate Planning: An Experimental Test of Introductory Phrases ……………………………...9Russell N. James III, Ph.D, JD, CFP®, Professor, Texas Tech University
AbstractCharitable financial planning is an important and growing segment of personal financial planning. However, client understanding and interest in learning more about such topics can vary substantially depending on the language used to introduce the topics. This paper reports results from a series of experiments investigating the effectiveness of different phrasing in generating understanding and interest in learning more regarding “planned giving,” “estate giving,” “estate planning,” and “charitable gift annuities.” Results support the proposition that using these standard industry terms to introduce such information reduces both understanding and interest in learning more as compared with simple functional descriptions, such as “other ways to give,” “gifts in wills,” “will planning,” and “gifts that pay you income.” Although formal industry terminology may be technically correct, it can also be detrimental to client understanding and interest in learning more about such topics.
Sidharth Muralidhar, Freshman, Virginia Polytechnic Institute and State University
The Consistency Smile: How Consistency of Investment Decisions Relates to Risk Appetite?……………………………………23
AbstractUsing the Kahneman and Tversky (1979) definition of risky gambles, consistency of decision-making is defined as selecting the “same” gamble, regardless of how he gamble is presented. Both expected utility theory (EUT) and prospect theory (PT) make implicit assumptions about the consistency of individual behavior as it pertains to risky gambles that are not borne out in laboratory tests. EUT assumes that individuals are perfectly rational and implicitly consistent in their decisions, whereas, PT implicitly concludes that, in the aggregate, there is zero consistency. This paper develops a new methodology to examine consistency in risky gambles and tests it on a diverse database of 442 people - investment professionals (81), teens (297), and adult non-professionals (64) - to account for factors like literacy, experience, age, and gender. First, consistency of individuals and groups lies well between levels assumed by EUT and PT. Second, using the Risktyle model to calibrate the strength of risk preferences for Kahneman-Tversky gambles, we discover a “Consistency Smile” – individuals with strong risk preferences, across all but one of the sub-groups, tend to have greater consistency in decisions than those with weaker risk preferences. Third, non-investment professionals have the highest level of consistency followed by teens, and investment professionals. This result has interesting investing implications, especially for advisors designing portfolios or a diverse group of clients.
Identifying Overvalued and Undervalued Stock Market and Market Timing in Retirement Funds…………………………………………37Weishen Wang, Ph.D, College/University of Charleston, SC, USA
Seung Hun Han, Ph.D, Korea Advanced Institute of Science and Technology, South Korea
This study predicts overvalued or undervalued market ex ante. Based on the arguments of price reversion and momentum in the stock market, the study forms and tests a market timing strategy in managing retirement funds. It provides a simple algorithm for automated trade, which is able to provide performance consistently surpassing the overall stock market in the long run.
Defined Benefit Plans Versus Defined Contribution Plans: An Evaluation Framework Using Random Returns………………………………….43Julie Cumbie, Ph.D, Associate Professor of Finance, University of Central Oklahoma
Randal Ice, Ed.D, Professor of Finance, University of Central Oklahoma
V. Sivarama Krishnan, Ph.D, Emeritus Professor in Finance, University of Central Oklahoma
AbstractThis paper develops a general framework to compare defined benefit (DB) plans and defined contribution (DC) plans. We analyze
a proposed defined contribution plan and the current defined benefit plan for a regional university of a mid-western state. We use
random investment returns to generate distributions for defined contribution plan accumulations and compare these with the
present values of the defined benefit plan under different employee service assumptions. The results indicate no clear dominance
for one structure over the other; however, the defined contribution plan appears to be well suited for employees who consider
shorter employment tenures with an institution. Employees, in general, should find it beneficial to be offered the choice of both
structures, with the ability to choose one or the other, depending on one’s expected longevity with the employer and personal
Post-Retirement Spending Discomfort and the Role of Preparedness, Preferences, and Expectations…………………………………………51Christopher M. Browning, Assistant Professor, Texas Tech University
AbstractThere is much debate about the retirement preparedness of Americans. Despite the debate, many recent studies have found that
Americans spend very conservatively in retirement, and in many cases continue to save. Using proprietary data from a survey on
retirement risk tolerance, this study explored explanations for such conservative attitudes towards spending. Perceived preparedness,
preferences for risk and spending, and expectations for medical costs and longevity were considered. Perceived preparedness
and preferences for risk and spending showed consistently strong relationships with spending discomfort, while income,
wealth, and estimated longevity were not significant. Better understanding the retirement spending concerns of individuals will
help the retirement planning industry improve the framing and structure of retirement products and develop income plans that
result in more optimal spending patterns
2018 IARFC National Financial Plan Competition: Case Solution by Bryant College..…………………………………………63Solution Written by Victoria Albanese from Bryant College
Edited by Walt Woerheide, Ph.D., ChFC©, RICP©, MRFC©, CFP©
The IARFC completed its 2018 National Financial Plan Competition at its Biltmore Conference in Asheville, North Carolina. The winner
was Victoria Albanese from Bryant College. The other two finalists were Bonnie Dang and Ashley Nobel from California State
University Northridge and Jocelyn Li and Presley Fee from University of Illinois. The competition began with students being given
a fictional case study of a family along with an overview of their financial picture. From that data, all of the participants produced a
financial plan with recommendations for current and future actions. Selected participants advanced to the semi-finals and the top
three teams made in-person presentations in Asheville. The authorship of a plan was limited either to individuals or a team of two.
This year, there were ten submissions.
The case distributed to the teams is provided first, followed by the winning presentation. Although we would like to provide the
entire winning solution, the formal report was quite lengthy. What follows are the edited, salient points and recommendations
from the report. Many tables and graphs were deleted to meet pagination requirements for publication.
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