Francisco Gomes is a Professor of Finance at London Business School. He received his PhD from Harvard University, and his BA from the New University of Lisbon.
Dr. Gomes' research has been published in leading journals, such as the Journal of Finance, the Review of Financial Studies, the Journal of Financial Economics and the American Economic Review.

He has also given numerous seminars worldwide and has appeared in The Financial Times, BBC, Bloomberg and Le Monde, among others. His areas of expertise include household finance, capital markets, asset allocation and macroeconomics.
Professor Gomes is also a research affiliate of the Centre for Economic Policy Research, a founding member of the CEPR Network on Household Finance, and an Associate Editor at The Journal of Finance and The Journal of Financial Economics.

Household finance has grown considerably as a field of study in recent years. And with the decrease in defined benefits pension plans, households are increasingly needing to take more responsibility for their own financial fates (much more so than they needed to in the past). Joining us today to discuss household finance and the growing importance of households in the economy, is Professor Francisco Gomes. Francisco is a Professor of Finance at London Business School and earned his PhD in economics at Harvard with his main areas of expertise being household finance, capital markets, asset allocation, and macroeconomics. In our expansive conversation with Francisco, we discuss the increasingly important role of households in the economy, how this has contributed to household finance becoming a more prominent field of study, and what can be done to make sure that academic findings reach, and positively impact, households. Francisco shares a detailed outline of what he’s learned from his research, covering topics like level of education, automation at work, peer effects, and culture, with explanations of how these elements can impact household financial decisions. We also learn about his passion for financial literacy, why he is such a big proponent of ensuring that everyone has access to a quality personal finance education, and the personal finance course he currently teaches at London Business School. To learn more from Francisco about the study of household finance and how to improve outcomes for households, be sure to tune in today!

Key Points From This Episode:

• What it means to maximize your wealth over your lifetime and the crucial ratio determining optimal asset allocation. (0:02:53)

• How optimal asset allocation changes over your life cycle and how our human capital diminishes with age. (0:08:08)

• Building a buffer stock of wealth and the evidence that people become more comfortable with risk as they get richer. (0:10:03)

• The importance of simplifying life cycle asset allocation models to help households make decisions and have a tangible impact on people’s lives. (0:16:28)

• The biggest gap between theory and what households do; not investing in stocks. (0:20:32)

• An overview of the biggest mistakes people make when they invest in stocks and why it ties back to financial literacy. (0:23:49)

• How the process of optimizing asset allocation changes at retirement, the importance of hedging longevity risk, and why annuities are so useful. (0:25:40)

• A rundown of some of the reasons behind why annuity uptake is so low and why it is often referred to as the annuity puzzle. (0:29:20)

• The impact of automation in the workplace on household wealth accumulation and how exposure to automation is measured. (0:35:02)

• How one’s level of education affects the interaction between automation and wealth and how households should respond to automation at work. (0:38:12)

• Lessons from Francisco’s research for households thinking about the future after a change in their financial situation. (0:45:18)

• Why household finance has become more prominent as a field of study in recent history and what economists need to do to ensure their findings positively impact households. (0:47:30)

• How culture can influence household financial behaviour and the evidence that people learn from their peers. (0:50:47)

• Insights into the potential for financial advice to improve the finance of households and why Francisco is such a big proponent of personal finance education and financial literacy. (0:52:35)

• Learn about Francisco's personal finance course at London Business School and what he’s most excited about in his upcoming research. (0:54:01)

Read The Transcript:

Ben Felix: This is the Rational Reminder podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix, and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: Welcome to episode 262. And this week we welcome Professor Francisco Gomes, who is currently professor of finance at London Business School. And he has his Ph.D. in economics from Harvard. And, Ben, after we stopped recording with Francisco, you made a comment that is so true. There's so many brilliant people doing great work. And there's so much information coming out of academia. And today's conversation is an absolutely perfect example of that. And it is so much fun to bring those findings to light.

I mean, this is real practical findings that can impact anybody. And as Francisco said, households do care more. They need to have access to this information. And it matters. This kind of information does matter.

Ben Felix: Yeah. He was talking about how there's less defined benefit pension plans now. So households are responsible for their own financial fates today more than in the past. So a lot of this stuff is really important. But, yeah, my comment was that there's so much information like this, great information like this that gets sort of stuck in academia.

For the average person, it's just not accessible because the average person, even our average listener, is probably not going to go and proactively read papers like this to help them make better decisions about the future. And that's kind of our objective with this podcast. And we certainly accomplished that with Francisco today.

Francisco's research has been published in top journals like The Journal of Finance, The Review of Financial Studies, the Journal of Financial Economics and The American Economic Review. His main areas of expertise are household finance, capital markets, asset allocation and macroeconomics.

But he's got a practical bent to his research where it's like how do you take this information and make it useful to households who are making real decisions with real information and real limitations? All that kind of stuff. And I think that's a lot of the takeaways that we got from this conversation were practical on that level.

He's also a research affiliate for the Center for Economic Policy Research and one of the founding members of the CEPR network on household finance and household finance. We focus on this conversation. And as I've already mentioned, I think it was very valuable and, again, very practically useful.

Cameron Passmore: He's such a clear communicator. This is just a fantastic conversation. You get to go, Ben, to our conversation with Professor Francisco Gomes.

Ben Felix: Let's go.

***

Professor Francisco Gomes, welcome to the Rational Reminder podcast.

Thank you, Ben. Thank you, Cameron.

Francisco, when we talk about optimal asset allocation over the life cycle, what exactly is being optimized?

Well we're optimizing what academics call a lifetime expected utility. Think about maximizing wealth. After all, who doesn't want to be rich? As much wealth as possible. But then we're going to convert that wealth into what we call a consumption or expenditure stream for our life.

Given that wealth, how much can we afford to spend every year of our lives? That's kind of a first stage. And then the second part is that, since the future is uncertain, we do the optimization based on what we expect our income to be or expect returns on our assets to be. But at the same time, we do an optimization of expenditure process that is going to be robust. So that we're prepared in case things don't go the right way. What we call risk-adjusted. In a nutshell, it's a bit like we want a high-level, low-risk expenditure pattern over our lives. That's the goal.

Wow. That is a very, very clear explanation. Thank you. What are the determinants of optimal asset allocation for individuals?

Just to – first, a brief disclaimer, to say my research is mostly about investments in broad asset classes. That's what I'm going to be talking about. You know investing in risky assets. It is not about stock picking. It's not about investment in different asset styles even along that I mentioned. So kind of sticking with those.

That being said, my research essentially has given that you're going to be investing in a broad asset index. Academics don't agree necessarily on many things. But they do agree that, for most households, that's the best way you should invest in the stock market. Just take a low-cost broad stock market index. So no market timing. No stock picking.

If you take that as one asset class and then they take, for example, risk-less asset, not asset class or savings account, money market, mutual fund, whatever your favourite is, one area of research is essentially kind of how do you choose between these two asset classes? And how does this change particularly over our life? How does this change over the life cycle?

Why over the life cycle? What's so important about the life cycle is that a lot of our sources of income, sources of expenditure, our wealth accumulation, all of those change dramatically throughout our lives. And that matters brutally. As we get older, our expected income path is changing.

Now that income, if you think about it, now the income that we earn for our lives is effectively an implicit holding of an asset. We call that human capital. Human capital is the present value of all our wages, all our future labour income. Where the specific wages and labour income we earn every year, like the dividends that asset is paying. So like just when you have a stock, it pays dividends every year. This is kind of the same idea.

If you look at it from that perspective, you already have this asset and you want to think about how you're going to optimize your portfolio. I think that kind of this implicit asset is already there basically. That's one important factor.

Another important factor is that you have your liability side. Of course, you have your expenditures. And those expenditures are not guaranteed. Those expenditures are not given. Mortgage payments. Interest rates go up, your mortgage go up. Late in life, you face medical expenditures. Those are very uncertain. It can be very high in certain countries.

It's a bit of this asset-liability matching essentially that you want to do. And then you kind of combine this with how much wealth ultimately you have to invest. For example, suppose you have 100K of wealth and your target was I'm going to want to have 50-50 in stocks and bonds. I want 50-50. 50 in stocks. I'll put 50 in the bank. I'm done.

But when you think about what I said before, you think about this human capital that you have, this implicit asset that you have. Well, then, you already have some other asset out there and you should take that into account when you think about how to invest your financial assets.

For example, suppose the value of your human capital is also 100. What is this human capital? Is this a particular risky asset? Is it a particularly safe asset? Well, for most people, it's a particularly safe asset. It just doesn't change that much from year-to-year. Our salary changes a little bit. There's a little bit of volatility. There might sometimes be a big shock. Like you'll get unemployed, of course. But for most people, it doesn't change that much.

First approximation, and I'm going to obviously going to be more precise later. But the first approximation is very safe. It's like a safe asset already. If we have a lot of this out there – when we're young, for example, we have a lot of this coming for the rest of our lives. We have this steady income that's going to come anyway, so we can afford to take much more risk with our financial wealth.

If I have a hundred of financial wealth but I have, say, a hundred of human capital, then it's like those hundreds of human capital is already an investment in the safe asset. It's going to pay these regular dividend. It doesn't change very much. What should I do with those 100 financial wealth? Well, I should invest it all in stocks. And then I have my 50-50 again.

And if human capital is only 50, then what I do? Well, I invest 75 in stocks, so that I have 75 in stocks. 25 plus 50 gives me 75. Again 50-50. The crucial ratio that determines this allocation is basically this ratio of how much human capital I have relative to my financial wealth.

If human capital is very large relative to my financial wealth, then I have a lot of these implicit riskless assets. I can afford to take much more risk in my portfolio. If this human capital is not very high…, then I have to be a bit more conservative in my allocation essentially.

Can you expand on that a bit? How does optimal asset allocation change over the life cycle?

Building on this, so when we're young, we still have kind of our whole trajectory of income or wages coming up for the rest of our lives, right? And so, this human capital is gigantic. It's huge. It's at its maximum. We still have all our human capital ahead of us and we haven't accumulated that much wealth.

Therefore, this ratio I was just talking about is very, very large. A lot of human capital. Very little financial wealth. We can afford to take significant risk in our financial wealth. Because if things don't go well, we have kind of this human capital fall back on.

As we get older, we start having less and less years remaining in which we're going to earn our wages. At the same time, if we're being prudent, we're saving for retirement. So our wealth is growing and growing. This ratio is actually falling significantly because the numerator is falling and the denominator is increasing. The ratio is just falling, falling very rapidly, which means we're now should be converted to a more and more conservative portfolio.

This kind of gives rise to sort of this standard target date fund predictions or recommendations, right? If you invest in a target date fund, which these days is default option many retirement, DC retirement plans. They have this decreasing profile. And it's kind of based on this intuition that you kind of – early in life, you can afford take more risks.

As you approach retirement, you can afford to take less risk because you depleted more and more of your human capital. So you have sort of this glide path until retirement.

Now this is a good rule of thumb for retirement allocation. But, of course, when you think about our whole portfolio, it has to be a bit more complicated than that because now we have to think about the expenditures side. We have to think about those income shocks.

Early in life, since I don't have much wealth, if I have an unemployment spell. I have some major expenditure, or my car breaks down, or some major house repair, or medical bills. Those can happen even early in life. If I haven't saved enough in liquid safe assets, then I might not have enough to cover those bills.

First, we want to make sure we build what is called a buffer stock of wealth. We have like a pot of wealth we can fall back on if things go bad in terms of the income side or in terms of the expenditure side. First, we want to build that buffer stock. And that buffer stock, since it has to be available, there's sort of an emergency fund, it has to be invested in relatively safe asset and relatively liquid assets. And this should be about six months to a year and a half of our wealth. Basically, depending on how large these risks are.

And as we accumulate more and more wealth, then we should just start putting more and more in stocks because we can afford to take risk. And also, at some point, we have enough wealth, this buffer stock becomes less relevant. Because if I have significant amount of wealth, even if I lose 10%, 15% on the stock market, I still have enough. And if I invest in that low-cost broad index fund, losing more than 15% in a year in the stock market is very, very rare. If I kind of follow in that trajectory, then I'm just going to be investing a lot in stocks.

If you want to think about a simple rule is if you have like a graph where you plot sort of on your horizontal axis your age and on the vertical axis you have your allocation to stocks or risk assets in general, it should be kind of like a hump shape. Start more less moderate early in life because you want to have that buffer stock in a relatively safe asset to a large extent. Then you increase sort of towards 35, 40 years old, you kind of max out over there. And then it kind of sort of gradually decrease towards retirement. That's kind of the standard profile or standard prediction that most of these early models predict.

More recently I've kind of deviated a little bit from that I must say to the extent that we're on the last part... There's a bit of dispute among academics about how much more comfortable people are in taking risks as they get richer or not. Some academics think that there's not much evidence that people become more risk lovers as they get richer.

I think that by now, especially in this context, the evidence is around that they do. That people feel more comfortable taking more risks as they have more wealth. And so, that kind of counteracts this idea to decrease significantly your allocation as you get older because you're becoming richer and richer.

Now my recommendation is more kind of a mild decreasing path or even a flat one. For example, myself, I'm following a flat one. I'm not increasing my allocation. And I have no plans to increase it as I approach retirement. That's kind of in a broad sense the wide path of the allocation of our life.

That's really interesting. You mentioned – so, clearly, human capital was important or labour income was important, everything we just talked about. How important though is pinpointing the exact riskiness of labour income in making asset allocation decisions?

The risk itself is actually not super important for the asset location. The risk matters quite a bit early in life for that buffer stock that I was talking about. That's why I said to kind of convert between, say, six months, 18 months if income is very risky. We have a lot of risk in terms of expenditure side. You want a bigger buffer stock. If it's smaller, you need a smaller buffer stock. But that's mostly it.

The risk of low income matters more is actually for determining your savings. When you think about saving for retirement, then you want to think about sort of these more persistent, this career uncertainty. And you want to think about how much do I need to save for retirement? I need to have a sense of kind of what's going to happen to the growth rate of my income over life. And what's the trajectory I need to have in terms of savings. That is extremely important for determining savings, right?

I mean, the asset allocation is less important. Understanding that it is low income and how much we have is crucial. The risk itself matters a bit. But it's not. To a first order, we can kind of leave it out, which is why I kind of started with this idea. Suppose level income is safe. Try and keep a kind of a simple mess in a simple rule. Because the first approximation is not a huge deal if we kind of leave that out.

What effect does flexible labour supply have on optimal portfolio allocations?

It's actually kind of a similar story. For portfolio allocation, not too much. But it matters a lot for the savings decision. When I think about saving for retirement, I don't know what my future income is going to be. I don't know what future returns are going to be. If I start the savings path and then I approach retirement and I haven't saved enough, I'm in trouble. If I have flexible level supply, if I can adjust my retirement date, if I can work a few years longer if that happens, then I need to have that much pressure on my early savings. I need to over-save if you want. Because I can sort of adjust gradually. That's extremely important.

For asset allocation, on the same logic, I don't need to be as conservative. I can be a little bit more aggressive because I know I have that extra margin to adjust. But in most calibrated models, the difference is not huge. The big difference is essentially the savings dimension. That can be very, very important.

Okay. This is really interesting. Labour income – the relative safety of labour income affects how much you need to save. How does level of education affect the riskiness of labour income?

That's very interesting because the upright is actually different ways at different levels of education. For the less educated households, they face a lot more of what we call these transitory income shocks. Meaning they have higher probability of being unemployed. They have less steady jobs. More fluctuation of their earnings from year to year, which means they exactly have a higher demand for these precautionary savings for this buffer stock. They really need to have a bigger pot to insure against all these things. So they need more conservative portfolio allocations. More liquid assets because they need to be sure against these.

Higher educated people, people with college degrees and so on, what they typically have is more what you call career uncertainty. Their income is higher. But the difference between income of college graduate and, say, high school graduate is particularly noticeable from age, say, 35, 40 onwards. It starts being kind of similar and then just grows fast typically. And so, they become very, very different over time.

But what we don't know, what there's a lot of uncertain is exactly how fast it's going to grow. There's a lot of variability there. And so, it kind of goes back to this notion about optimal savings for retirement that for more educated households they can be more aggressive for allocation. But you have – in a sense, you have more understanding about the optimal savings because you have a lot of uncertainty about exactly what trajectory is going to be. If your income grows a lot, then, ideally, I won't save too much now. I'll save more when I can afford to save later in the future. But if later on it doesn't growing as much as I thought, well, then all of a sudden, I have to catch up in a few remaining years.

For more educated people, it's more on each in terms of the savings. For less educated people, it's definitely an issue. You really need to … against these shocks. You need to have a big buffer stock and a more conservative portfolio essentially.

How can households practically use a life cycle asset allocation model to make asset allocation decisions?

The models can be as complex if one wants almost because there's so many things you can fit into them, mortgages, rentals, medical shocks, expenditure shocks, income shocks. And we'll talk about transit or permanent retirement account, non-retirement account, tax incentives, et cetera. That's why it's important to focus on sort of simplify the kind of takeaways from those models.

And so, that's why, for example, talk about human capital being kind of riskless. Even though it's not 100% riskless, that's kind of an approximate insight. Some main takeaways you take from those models are these ideas of build that buffer stock early in life. It's very important. We don't have much wealth when we start off. So we can't afford to take much more risks. We need to make sure you kind of … if we kind of get on to investing in Bitcoin or whatever you want to do. We need to make sure we have that pot there.

And then the second takeaway is that retirement, investing for retirement. You can start by investing significantly in stocks because you have this labour income coming in. And then you can, I don't know, decrease gradually from trust initial advice. Or if you feel confident, taking more risk as your wealth grows. You probably can even remain more or less flat.

This other takeaway, now that the safer your labour income is, the more aggressive you can invest in your portfolio. The more uncertainty in general in your expenditures and everything else the more conservative your portfolio should be. Basically, the takeaway is about risk and the human capital essentially. These are the main lessons that I would want to kind of express.

Yeah. Interesting. People don't have to necessarily compute – run the model. They can just use the intuition to think about their asset allocation decisions.

Yes, that's absolutely important because there's – well, in many things, people are not specialists in these issues. If you're going to try and give very complex messages and very complex rules, people won't understand them or just won't follow up. Even though as an academic you have, "Oh, my exact rule goes here and goes down there and whatever." That just doesn't fly.

As much as kind of pains after you solve a complicated model to kind of strip it down and simplify it, if you want your research to be useful for anything, you have to do it. Otherwise, it's not going to have something of an impact on people. And ultimately, that's what you're doing research for.

How does owned housing affect optimal portfolio allocations?

Housing affects mostly through sort of two channels. One is kind of an indirect one, which is that when we buy a house, we typically spend a lot of our money buying that house. Our wealth falls significantly. If you think about that ratio I was talking about as being crucial, human capital to financial wealth, a lot of times we just deplete a lot of our financial well. That ratio just jumped a lot. So that kind of indirect channel there.

And the second one is basically the fact that when you buy a house, all of a sudden, we typically increase our background risks and expenditure commitments. What I mean by this, expenditure commitment is basically sort of some expenditure that we sort of kind of committed to. And it'll be unbelievably costly to cut.

What is one of those things? Well, example is a mortgage. Okay? Typically, if we buy a house or buy it with a mortgage, if we don't pay the mortgage, that's going to be extremely painful for us. Okay?

All of a sudden, we have that commitment. We need to make sure that you know that buffer stock of wealth that we talked about kind of covers that commitment as well because it has to basically.

And the other thing is once we have a house, in the US, a little bit less because you guys – not you guys. Sorry. This is Canada. I don't know if in Canada you have the same. This idea of a very long mortgage, fixed-rate mortgages are possible. In most other countries they're not.

And so, households, when they buy a house, they're typically exposed to lot of interest rate risk. And so, that's a significant background risk. If interest rates go up tomorrow, then mortgage rates are going to go up. And then you're stuck. Okay? You need to kind of insure against those risks.

Households, when they buy a house in a mortgage, in most countries that's variable rate mortgage are only fixed for a few years, which means you're going to be exposed to a lot of interest rate risk. If interests go up in the future, then, well, all of a sudden that commitment just went up. Just went up significantly. For that reason, again, you need to have a much more conservative portfolio when you're stuck with this risk. So it kind of goes back to this background risk channel again.

How did the empirical lifestyle asset allocations of households compared to theoretical predictions?

So if you take this simple model, and I'll explain in a moment what I mean by the simple model, the major gap between theory and what households do is the fact that about half of households, even in most developed countries like the US, for example, just don't invest in stocks at all. Okay? That's like the biggest gap. People don't even invest in stocks at all.

If you go to several other countries, it's even less than that. You have many Western countries where it's 10%, 15% of people who invest in stocks. And that's by far the biggest gap and the most costly gap relative to theory is not invest in stocks.

I have this very simple example I have in my personal finance class. And I kind of have the numbers. Yes. And I don't remember the exact numbers obviously. Is take somebody who invests – who started investing for retirement in 1981. So 1981 puts ,say a thousand dollars aside to invest retirement. And then 40 years later you collect that money. 40 years later, you retire. 2021, you collect that money.

If you invested in T bills or savings account, then inflation adjusted. Those $1,000 would have become $1,284. That's a 28.4 cumulative return. If you invest in a diversified stock market index, and my example is the MSCI world index, those same $1,000 would have become $12,410. Again, inflation adjusted. That's a staggering difference. That's nine and a half times more wealth that you have here.

And I didn't pick any particularly nice … for the stock market. This purely includes the.com bubble crashing because the financial crisis. That's the worst ticket in the history of the stock market period. That's just a massive return. If the first person saved enough for one nice vacation a year, the other person is enough for nine nice vacations a year and some money to spare. Okay? That's basically what we're talking about, okay?

Of course, I know I'm exaggerating a little bit because you'll be saving every year. So not all money accumulate over the whole 40 years. But that's kind of the idea. And the thing is most people just have no sense of these numbers actually. If you don't have a finance background, if you were to just go on the street and post this as a question to individuals, to random individuals, put the money on a savings account, put the money in a stock market. How much would you get 40 years later?

Most people probably give you very similar numbers. They're not aware of kind of this massive return that a stock market offers. And that's one of the reasons… One of the reasons why people don't invest so much in stocks or don't invest at all in stocks. And that is basically the biggest deviation from what I call the simple model, the most costly one.

Why do I say simple model? Because, of course, that simple model assumes that people know those returns, right? And that's why they should invest, right? If you have a model where you assume executive people need to collect that information about those returns that not everybody is a finance specialist. Just like everybody's a specialist in law, or in medicine, or in engineering. You know, we know what we know, right? And the world has become more and more specialized and becoming harder to know many things.

And so, those who know finance know this. Those others who has a hobby like finance and research stuff, they will know this. There's no need to know. Just like those are not interested in law don't know law. And so, that is basically kind of – once incorporated in the model, then you can sort of match that.

Now for those who actually invest in stocks, I know we have – we know a lot of other things. Such a lot of people don't invest in those low-cost broad index funds that I was talking about. They pay high fees and they face unnecessary risks because they don't have … portfolio. Some people trade too much. So they trade frequently because of an overconfidence or other reasons. And so, that means they end up paying a lot of fees. Even if you invest in a broker, has zero trading costs, you're still paying bid ask spreads and other things, okay? So you're still going to be paying.

People tend to be return chasers. That's another thing that we see. For example, if You observe a mutual fund that does well two or three years, people just slow money into it. Even academic research overwhelmingly shows that there's absolutely no performance persist – close to non-performance persistence there. There's those sets of mistakes even for people to invest in stocks. Those I would say are kind of the biggest sort of deviations from what the model would recommend basically.

Did you think a lot of that ties back to financial literacy?

Oh, yeah, absolutely. I mean, a lot of it is financially – some of it is behavioral biases, right? I was saying like the overconfidence. You know, the trading too much. Especially you trade once, you made money or something called great investor. I'm going to keep on trading and trading and trading. Some of it is some of those behavioral biases that we have. But a lot of it is lack of financial – it is a big, big problem. And again, it goes back to it's getting harder and harder to be a specialist and everything. Everything is getting more complex.

If you want to know – want to be good at our job, we have to focus more and more and more and more on it. It's harder to know anything else. And a lot of people are just not interested in knowing right. Just like some people are not interested in learning medicine. The doctor would tell me something. I'm not interested in learning how to fix the plumbing and I'll hire a plumber. The same thing for finance. People are not interested in learning that. But then, of course, that can come with a big cost in terms of financial decisions.

Back to asset allocation. How does the process of optimizing asset allocation change at retirement? There's no more human capital. How does that process change?

Yeah. At retirement, our sources of income is pretty much set exactly. We have social security. We have defined benefit pension plan if we were lucky enough to have been enrolled in one and still we have one of those. It's basically about two things. It's basically about managing our expenditures. That's where the lot of the uncertainty is going to come now. Particularly now, in some countries, which might not have great social welfare system. In particular, great public health care system. Then things like medical expenditure bills can be huge. Life care can be very expensive as well.

And the second thing is about managing longevity risk. Making sure that your money lasts for as long as you need it. And if you time it right, not too long. Okay? We don't know how long we're going to live for. And that's a big thing. I can save gradually to make sure money, money lasts for a long time. But then you know if I die early, that money went unused. And If I run out quickly and I live longer, then it's great I'm living longer. But I'm really suffering in those last years. Those are two important things.

And then, of course, there's another maybe more complex part or more tricky part just kind of if you think about leaving the quests for our loved ones or someone else. We have to kind of think about what are the best vehicles for doing that in terms of tax reasons. And when they're going to get access to funds and all that? That's a different type of optimization there essentially.

How important is hedging longevity risk to retirement portfolios?

Very, very important. This is what we're talking about. I mean, if we just don't know how long we're going to live, if we end up thinking we're going to leave until age 85, time to run everything down until age 85. Then if I live until age 90, I mean, that's five years. That's a lot to finance at a time in my life where it's very hard for me to earn any extra income. I'm 85. I'm not going to find a job. I'm not going to be able to just earn new income.

In that sense, I want to be cautious. But if we're too cautious, again, if suppose I say, "Okay, let me then plan for 90," and then I end up dying at 75. Hey, I could have had twice as many vacations or whatever. And the money goes unused. Longevity risk is a big problem and hedging is important.

There's this financial instrument exactly designed for that, which are annuities, right? Annuities is a financial product that's exactly designed to have its longevity risk. I know it is a financial product that you buy it and then it pays you a regular payment every year as long as you're alive.

Exactly converted your money into a stream of payments. Pays exactly while you're alive. Doesn't stop before. Doesn't stop any longer. If you live longer, the payments continue perfectly essentially. Annuities should be an important part of the portfolio of all retirees.

And in fact, if you want to be even more financially sophisticated, I would say you might even want to start thinking about deferred annuities even during working life. Annuities allow you to have this longevity risk when you retire. I have a pot of money. I don't know how long I'm going to live. I'm going to convert a fraction of that into an annuity so I'm guaranteed I have that payment during retirement. I kind of manage this allocation of wealth of retirement.

But when I'm saving when I'm 30, 40, whatever and I need to think about how much do I need to save for retirement, I have the same problem back then. And you think how much I need to save for retirement? Depends on how many years I think I'm going to live in retirement, right?

I haven't kind of hedge longevity risk yet. I can sort of do it by what is called a deferred annuity, which is basically an annuity that starts paying off at a different date. Say, the retirement date. If you want to be even more sophisticated, I can already start investing some of my money in these deferred annuities and start kind of already hedging a little bit of that risk early in life and making financial planning easier even before retirement essentially.

We agree that all makes sense. But we have this thing of course that you know about called the annuity puzzle. Why do you think annuity uptake is low?

A lot of reasons there so. For low income households, it's not so much an issue. Because low income households have social security. We all have social security. Social security is an annuity, right? Social is exactly that what I described it. Pays us money every year as long as we're alive. We already have that annuity.

For low-income household, social security has a high replacement rate relative to your previous income. Meaning you get a very high fraction of your pre-retirement income. You already have a high level of annuitization there. You don't need necessarily more.

Historically, a lot of people are also enrolled in defined benefit pension funds in most countries. In several countries, they still are, right? That's also an annuity because that's also going to give you a payment when you're retired.

So historically – and in several countries from middle-income households, you're also kind of largely covered with annuities to some extent. Now, of course, again, countries are removed to define contribution. That's no longer the case. And as you move beyond that, it's no longer the case as well.

A lot of issues relates to fees, for example. Annuities are expensive. And, particularly, variable annuities are expensive. What do we mean by this? I can buy an annuity that's called a fixed annuity, a fixed payment annuity, which means you're just going to give you a fixed payment every year.

But what gives me a fixed payment every year? Well, it's investing in a riskless bond, right? That's what gives me fixed payment every year. Effective variable annuity is like a position, a fixed bond. It's going to give me kind of that return in a sense. That's how the annuity provider is going to price it to me. That's effective return I'm getting.

If I put everything in this fixed payment annuities, I'm basically going to the equivalent of having like this low return on the risk-less asset, which we already said is very sub-optimal. It puts this huge pressure on my savings owning that return.

Ideally, when I'm retired, I want to continue having exposure to the stock market. For that, I can buy a variable annuity. Variable annuity, which payments are say linked to a basket of stocks? For example, the S&P 500 or something like that. And it pays related to that and continues to give me that exposure. That's great. Those, unfortunately, have fees.

And actually, they often have fees unnecessarily or kind of prying a little bit on – or high fees are necessarily. Kind of taking advantage a little bit of some of our behavioral biases, our fears. Because a lot of these annuities, for example, what they have is something like a minimum return guarantee. Say, okay, you're retired. So we're going to give you the S&P 500. But we'll give you a floor of, say, zero, for example. So you can't lose. The return can't be less than zero.

Now return… with floor, of course we have to take a fee. But it's like you're giving you the index plus a put option, right? We have to charge it for that good option, which you can't have yourself because you can't manage that position. You can't buy a long data good option anyway. We're going to charge you a fee. And those fees, every time you kind of go and price these things, you see that the implicit value that put option is just gigantic basically.

to have kind of that open portfolio, continue to have that equity exposure at retirement, you typically have to pay a lot for it essentially. You kind of have that trade-off. Do I want to kind of annuitize more? Or do I want to kind of pay these fees?

Then the other issue, of course, is we have – if I annuitize everything and then something happens and I have a big expenditure shock, then I don't have money for that. There's only so much we kind of want to annuitize. There's a combination of these factors. But as you pointed out, it's called the annuity puzzle for a reason. We're going to put all these things into models. We can't fully explain it yet. There's certainly more to it than what I'm saying. Absolutely.

Interesting. I like those comments on the variable annuities with the floors and stuff like that. We did an episode not too long ago on structured products and I think made a lot of the same points.

Okay. Yeah. Absolutely. Yeah. Who was it by the way?

That was just us. We alternate between guests and just us talking about stuff. So yeah.

Oh, okay. Okay. Okay. Right. Cool. Cool. Cool.

Francisco, you mentioned limited stock market participation. Can you talk about how stock market participation changes over the life cycle?

Yeah. So it starts by being relatively moderate. Because early in life, we just don't have that much wealth. So we're not going to invest too much into the stock market just yet. Then it increases sort of rapidly until age like 40 as people start accumulating wealth and start saving for retirement. And that is even more the case if you start focusing on people who actually have defined contribution pension plans. Because, obviously, there you typically automatically become enrolled in a pension plan where these days most cases the default has some equity exposure.

And then it pretty much stays flat until sort of retirement and after retirement. Then it's starts dropping as people start using up their wealth or people kind of converts or too worried about the risk of retirement and go to more conservative portfolios starting with people kind of decreasing their participation in the stock market.

Sort of related, how do wealth and human capital affect stock market participation?

Both positively. The more human capital we have, the more risks we can afford to take. So you find an uptick in participation when you have more human capital. But the bigger one is by far wealth. I mean, if you want to think about what's the biggest thing that explains participation in any cross-section, in any data you look at? It's just 12. That's very religious. Like jumps 100 times more than anything else.

The more wealth we have, the more incentive we have to learn about different investments, to learn how to allocate that wealth. The more cost-effective activities to hire financial advisors or wealth managers or things like that. Wealth has a strong, strong and positive impact and participation.

Interesting. Okay. That would support the comments you made earlier about the costs of participation being what prohibits people with lower wealth from participating.

Exactly. Exactly.

Interesting. Okay. I want to move on to an incredible paper that you did on automation and wealth dispersion that I think touches on a lot of the points that we've been covering. What effects does automation at the workplace have on household wealth accumulation?

In that paper we find that exposure to automation. If you look at workers in industries that have higher expert automation, lower expert automation. Kind of competitive differential. We find that if you say group one-third highest exposure, one-third lowest exposure. The difference in the growth rate of wealth is about 2.5% per year. That's huge. That's a very, very large difference in wealth accumulation over time for the ones who have more and lower exposure to automations. It's a very big impact. Very big impact there.

How do you measure exposure to automation?

We have a data set that kind of sees the number of robots that get added. And we kind of figure out exactly how much each industry has. It's industry by industry basically. We don't have exactly kind of this occupation that's replaced versus that occupation is replaced. But you see, in this industry, more automation came in more jobs got displaced versus that industry. Which is why we're talking about grouping workers. They work in industries with higher displacement for workers who work in industries with lower displacement basically.

Through what channels does automation affect wealth accumulation?

The main one is income, right? As we get displaced and we end up losing job. But the thing we bring up, the point we bring up in this paper is sort of a novel channel people and looked at, which is a portfolio relocation channel. Which is the idea that workers who are in industries with higher displacement risk due to automation, they're actually going to change their portfolio location. They become more conservative. They're more likely to exit the stock market. They are more likely to move to more conservative portfolios. And that means a lower return on their wealth. And that lower return the wealth means, well, less wealth going forward. And it's a non-trivial component of the differences in wealth promotion that you actually find.

That's incredible. That's like the buffer stock conversation we had earlier where their human capital gets riskier because of displacement risk. And that's why they change their portfolio. Is that kind of the idea?

Yeah, absolutely. That's why it's kind of a nice application of what we've discussed before into this context as well as kind of sort of a nice, "Okay, let's bring this to this channel. I think it's going to be operative here and we think it can be a significant channel." And it was there in the data. We found that it was and we're happy to discover that.

In one sense, makes a contribution to this particular study is that this particular literature. And also goes back to kind of making contribution in terms of kind of providing evidence of these background risks in this context. So you kind of you know, sort if you want shed light on both literatures.

How much of the effect is explained by changes in household portfolios in response to the automation?

We find it's about one-sixth the effect, which is big enough to be important. And, of course, you'd expect income to be the major one. So shows more than that. We would probably look at it for much more than that would certainly looked many, many times at the data and say, "Okay, we must be missing something." But yeah, it's large enough to be quite important.

That's incredible. People are more exposed to automation, they're going to be affected by their income being reduced or lost. But one-sixth of the difference in wealth accumulation is explained by changes in portfolio allocation as opposed to changes in income.

Exactly. Exactly.

That's incredible. That's an incredible finding.

Thank you.

Really interesting and surprising. How does education level affect the interaction between automation and wealth?

We talked before about how this is a world where it's becoming harder and harder to know about a lot of things. Where if you want to be good at our job, we have to keep specializing and specializing. Because every task, everything just becomes more and more complex. Workers are becoming more and more specialized.

Unfortunately, that means we're becoming more and more vulnerable to displacement shocks. Some new technology comes, automation affects a particular industry or a particular job. And suddenly some task become obsolete or sometimes even the whole sectors can become obsolete. And so, that's a bigger risk that we're facing these days essentially as we become much more and more and more specialized.

And so that's exactly what we find, that workers that have human capital is less transferable across industries as proxied by having education is above the average within your industry. And those are less affected because they can sort of reallocate more easily to another job to another industry when automation comes. Those that have less transferability of human capital, those that get hit the most essentially.

Education makes human capital more transferable. What makes it less transferable? Is it just lack of education? Or are there other factors there?

Lack of education. I mean, I guess the type of industry you're in. Certain industry that have knowledge that is more transferable than others. In that sense, I mean, it depends on the tasks and depends on the industries. And if you're an older – if you're a secretary, it can be a secretary in many different industries. A secretary in IT, IT … secretary in a bank. It depends a little bit on the tasks basically that you're on.

Given this information, how should households respond to automation at work?

We talked before about investing in abroad, diversified stock market index, diversified financial wealth. Well, this says that we should diversify our professional skills as well. Try not to have all our eggs in one basket. It's great to be becoming better and better and better in our job. But it's always good to broaden our skills. To keep refreshing our skills and to keep our options open. To keep our human capital valuable and resilient to these shocks.

If it's too costly, continue taking courses, of course, in terms of either money or time or whatever. Just read books, tutorials. Listen to fantastic podcasts like the one you guys have. Just try and get knowledge on different areas more and more and get ourselves more resilient to all these shocks. I'd say that's a strong message that comes across.

That's a huge takeaway. And having empirical support – that's kind of a thing that I think a lot of people recognize that is probably a good thing to do. But having this type of empirical support for it is just – I find this paper to be mind-blowing personally.

Thank you. I appreciate it.

This next paper is actually also mind-blowing. This one, you looked at how household expectations change based on changes to finance. How do changes in someone's financial situation affect their expectations about the future?

So we have evidence. In many different concepts, people tend to be what we call extrapolators. If you see too much of something, you think that that's going to continue. I mentioned before like the mutual fund case. People see mutual fund doing well for two, three years. Then money pours into it because they think it's going to continue doing well. That's sort of called kind of extrapolation.

It doesn't happen in all settings. Actually, our setting is not – doesn't happen always. But it's sort of fairly common and general rule. Here we look at the X, Y individuals' expectations of their financial situation. And we find that, although individuals extrapolate when income increases. So they expect it to increase again. Or extrapolate when the expenditures increase, they expect it to increase again. Or the expenditures decrease, they expect them to decrease again.

When it comes to income drops, when an income falls, it's the opposite. People actually expect a reverse. Expect income to recover. Which to some extent is fine because that's typically the nature of things. We get unemployed. We can't get any lower typically. So income should rebound. The problem that we find is that people expect it to happen too quickly and too much. People expect that recovery take place too quickly relative to what it's observed in the data essentially. That's the concern.

So what characteristics affect how an individual responds to a change in their finances?

Basically, the type of shock and the nature of the shock. If you think about these two-by-two matrix exactly like income expenditure and then increase, decrease. We find extrapolation across all except in that box of income and decrease. There, we find expectation of reversal basically.

How accurate are the expectations that individuals form based on their current experience?

Well, unfortunately, they're all exaggerated. Take any point on this box and it's all too much. When they expect extrapolation, expect it too much. If your income increases, people tend to expect or increase too much relative to – again, in the future, what it would actually observing the data. And as I mentioned, my next income drops and people expect to revert. They expect revert too quickly or too much relative to what is in the data. They exaggerate in all dimensions basically.

And how do personal experiences affect optimism or pessimism about the future?

There's this stranded research. There's a kind of suffering or going through some real salient events. Kind of stays with us and sort of shapes our beliefs going forward. For example, if you live for a big recession and you tend to be more pessimistic about employment outcomes. If you live to a period of high inflation, you tend to be more worried about hedging, increase in inflation. If you live for a stock market crash, you're less likely to participate in the stock market.

And here we find the same. We find people who lived through long recessions periods in the past and they're more pessimistic about changes in income going forward essentially. Believed kind of unemployment spells and so on. They don't average compared with everybody else. They tend to have more pessimistic beliefs essentially.

Interesting. Households have these expectation errors. What are the impacts on their future finances?

That's basically where we kind of take the second part of the paper. Because focusing on this idea that if your income drops, you've expected to revert too quickly. How bad is that? Well, if our income drops, what we're supposed to do? What a normal optimization models say? Well, that's why we save that buffer stock of wealth. That's why you had it. To ensure this drops in income. Tap on to it. Use that money to kind of smooth your consumption so you don't have a big drop in consumption.

Or maybe in some extreme cases, even borrow a little bit and then repay that later on when your income rebounds. But how much should you borrow and how quickly should you deplete that buffer stock? Depends, of course, on how long your income is going to stay low for.

If it's a small period, then you can deplete a lot because you're going to be back. You can borrow. When you're going to pay quickly? If that's what households think, that's what they do and that's what we observe, basically them decreasing their savings and increasing their borrowing. But since income does rebound that quickly, then you might easily find yourself in situation next year again. You need to deplete your savings but you don't have them anymore. You need to repay your loan but you can't afford it. And in worst cases, that can lead to the usual concerns of debt spiral. Now we have to repay your debt plus the interest. And just getting really obviously in a really bad situation there.

What are the lessons from this research for households thinking about the future after a change in their financial situation?

Well, the main lesson I'd say is don't take the future for granted. That's basically – don't think income is going to grow until it actually grows. Don't take that promotion, that new job. Coming out of the unemployment spell. The reduction in mortgage payments or whatever it is. To use the old expression, don't count your chickens before the eggs are hatched. So kind of be prudent before you kind of get thinking about future is going to be great and so on.

Incredible. All this stuff is so relevant to financial planning. Although, in finance, you call it household finance. We call it financial planning. But they're kind of the same thing in a lot of ways. Why is it important to the study of finance to understand all the stuff we're talking about? How households make financial decisions?

Households are key to any economy. We can think of economies without – or banks don't really matter. We can think of economies where financial capital markets don't really matter. We can think of economies where pension funds don't really matter. But you can't think of an economy where households are not there and they're not key. They're the lifeblood of any economy.

Two-thirds of GDPs private consumption. I will save more or less or consume more or less, recession expansion follow. Households allocate their savings determines who gets capital, who gets funding and economy. Determines the cost of borrowing for governments. Determines the cost of capital for firms. All of that comes from – that's a supply of funds for anybody in the economy. Understanding that is obviously very important.

That's kind of from a macro side. But then, of course, you can think of micro side and like what determines wealth inequality? How much risk sharing is there? We talked about retirement savings. Are household saving for retirement? Which percentage is saving well? Which percentage is not saving enough? If not, should we do something about it? And what's the best way of changing that?

Are households prepared in case interest rates go up? Or have they borrowed too much and borrowed too much at floating rates? Are households prepared for recession hits? Or have they have enough buffer stock that we talked about? That's going to determine what happens if we change taxes, if we change government expenditures.

For all of those things, households are crucial. And understanding households is I would say the number one thing we should do as economics. Of course, I'm bias. But that's my take basically. Yeah.

So why is household finance taken off as a field of study in relative recent history?

So let's say a combination of three reasons. One is data. We can write models, whatever we want. But if we really don't have data, writing models where it's like mostly for the sake of writing models. Now we have a lot data. We're studying more and more and more and more data. It allows us to look at a lot of issues we couldn't look at before. It allows us to learn new things that we hadn't learned before. That's been a major revolution in household finance, the amount of data available in the last couple of decades or so.

The second is the fact that households have become more and more important in the economy. Talking about exactly this transition from defined benefit to define contribution links exactly what I was talking about before. Now households are much more directly responsible through their decisions about how capital gets allocated in the economy.

And so, the cost of capital company is borrowing for governments, etc. And the third one is kind of related to that. Now households care more. If I have a social security and if I had benefit pension fund, then 80% of people don't need to think about how to save. Just a little buffer stock of wealth, that's how much you're going to have throughout your life. That's it. Just rich people need a wealth manager and that's it.

Now all of us need to think about, "Oh, my God. How much do I need to save for retirement? Where do I put my money?" In addition to, of course, other things you always said for about like how to get a mortgage and things like that. But there's just more and more financial decisions that we have to do as individuals.

In a way, households are now more important both for policy makers and for regulators. And there's just a lot of data out there basically. This combination just made the field explode, and that's fantastic.

We talked earlier about simplifying down the life cycle model to make it more practically useful for people. How do you think that the study of household finance more generally is best applied to improving outcomes for households?

Oh, I think kind of exactly what you touched. So on one hand, we're gonna need to be solving more and more complex models at the time because I want to incorporate all these different things. But we have to translate them into these simple rules of thumb that people can understand and people can follow. Otherwise, it's just not going to work. Otherwise, we're just running these models. Maybe they can get published. But it's not going to have an impact.

You have to understand, most people know a little about finance. Just like most people know about law, about engineering, about plumbing, about whatever it is. So we have to be able to convey these messages in a way that they're simple rules, simple guidelines that one can understand.

And I think we haven't – some people were amazing at that. There are several academies I totally admire because they're really amazing at that. And they've been doing fantastic job in that. But in general, as a profession, I think we're lagging. I think we're not doing a good job of that. And I think we need to do better.

That's so interesting. It's like there are a ton of bad rules of thumb out there made by non-economists, I guess. But now economists have to make some good rules of thumb that are actually useful for people. We talked to James Choi recently. And he called this –

Oh, he's one of those I was thinking when I was saying that I admire. James – James is amazing. James is fantastic.

Yeah. Yeah. Yeah. We had a great conversation with him. But he called this practical finance. He wants to make that into a field.

Mm-hmm. Yeah. Absolutely. And James – yeah, I always love reading James's papers and see what he's doing. He's now started teaching this amazing personal finance course. Yeah. He's a fantastic guy. Yeah. Absolutely.

How do peer effects influence household financial behavior?

Peer effects, that's one of the great things that we can now study with all this data. Now we have data. No one tell us how people are connecting on Facebook, and neighbors, and co-workers and so on. And we found strong evidence that peer effects matter quite a bit. That people learn a lot or copy a lot in their peers.

If your co-workers are more likely to take on that default 401K allocation, you're more likely to do the same. If your neighbors are more likely to invest – or Facebook friends are more likely invest in the stock market, you're more likely to invest in the stock market as well.

We see copying kind of from all these channels. Neighbors, co-workers, social connections. And just explains a lot, effect is not second order. Which comes in line with this idea. People are not experts in all these things. You kind of follow different rules. And, okay, these people are doing this and it seems to make sense for them. And, of course, sometimes in the right way. Sometimes in a wrong way. Sometimes this person is not saving for retirement. He seems happy. Let me do the same.

Well, of course, you haven't seen when that person retires. Sometimes the copying is good. Sometimes it's bad. I'm not saying it's good. But it's in line with this idea that people are kind of grasping at getting information from anywhere pretty much.

What about culture? How does that affect behaviour?

It also matters. Naturally, we know we kind of carry our culture with us in many settings. And now we have evidence that financial decisions are also impacted by our culture. If you look at sort of immigrants from countries with high savings culture, they'll typically save more than the locals. Immigrants from countries which have a bigger trust in financial system, they're more likely to invest in the stock market.

We find that, actually, this cultural phenomena actually matter also in the financial domain, which is sort of another cool set of results that people have been able to kind of identify with these and in more recent times.

That is very cool. What role do you see for financial advice in improving the finances of households?

The potential is huge for the reasons we discussed before. So we don't fix our plumbing. We have the plumber. We don't learn medicine. We have the doctor. A lot of people don't know about finance or don't care or don't want to learn about finance. They want to be able to delegate to somebody. The financial advisors can have an important role.

Traditional, of course, problems there is a lot of them are not independent financial advisors. There's issues of conflict of interest. Those things have been improved in terms of what they have to disclose and the fees they have to charge. Things are getting better. But the potential in general for advising individuals is huge.

But in fact, I'll go even one step further. I'd say we should even start at even an earlier stage. One thing I've always argued is that we should be teaching personal finance at high school. High school is the point where everybody can learn about these things very easily. I mean, these are not complicated things if you actually explain them in a course, these simple rules. And just think about what it means if you teach people already when they start their life about the importance of saving for retirement. How much is a safe retirement? What's a mortgage and how you handle a mortgage? How you manage your credit card debt? The different types of insurance. I mean, the difference that it can make to people's lives is just huge. I think everybody should be learning these things in high school. That's one thing that I've been arguing for a long time basically.

Interesting. When did you start teaching a personal finance course?

The personal finance course I show is something that I only started teaching about five years ago because I'm in a business school. We don't have an undergraduate degree. We only have MBAs and business education courses. Personal finance traditionally was not part of that curriculum and pretty much any business school. But actually now even in business schools, you actually start having more and more business schools or personal finance courses are actually part of the curriculum there as well. And LBS also started having one. Yeah, it's been a good development.

Interesting. Yeah, we've talked to a lot. John Campbell's doing one at Harvard. James Choi at Yale. Annamaria Lusardi has one. This seems like a lot of people were talking to are teaching these courses now. Really interesting. What are you most excited about in your research right now?

Everything. Just kidding. One of the advantages of being an academic is that we choose what we work on. We better be excited about it. Otherwise, we chose something wrong. I'm excited about different things.

And so, for example, I have this project that I think is quite cool where we address actually a long-standing problem in household Finance, which is by empirical problem … is basically finding out what's kind of the shape of stock market participation over the life cycle or risky share of the life cycle should think is kind of one of the basic things we need to kind of get right to get to calibrate the models and figure out if things do. But there's some technical problems in estimating these things.

And so, therefore, people have struggled with kind of coming up with precise answers. And we have sort of somewhat technical contribution there to kind of address this question that has been there kind of since I started getting interested in this topic. That's something I'm quite excited about.

Another one that is actually quite excited about because it maps into this idea we talked about having impact on talking about things that actually matter to people's real lives is another project with a former Ph.D. student of mine Nuno Clara who's at Duke University and Michael Boutros actually at the Bank of Canada where we look at simple modifications to student debt contracts and that you can implement, which we find generate welfare gains that are pretty much on par with the welfare gains that you get from the current debt forgiveness proposed by the Biden Administration. Without having any fiscal implication at all. And while, actually, also reducing default rates on student loans.

A simple set of modifications that we just propose. Run for the models. Look at all the simulation outcomes, the whole evaluations and come up with that. That's another one that I'm quite excited about.

A few others – I have two others which are now at the NBR meetings are like the main meetings of the – actually, right now I have a bunch of stuff going on, which is cool. But it's a little bit overwhelming but good. Good.

Our final question for you, Francisco, how do you define success in your own life?

Success in my own life? I guess the same as everybody else. Like being happy. Whatever happy means. You can have family love. Have great friends. Have a job that you like and do that. I mean, those are I guess the things. It's too late to ask for hair. The rest I guess. Those are – I guess it's probably the same for everybody I'd imagine.

Oh. It's always a different answer. I think that was a good answer though.

What's the most unusual answer you've gotten?

Oh, geez. The most unusual. One that stood out. I can't remember who gave it to us. But they said that they take stock every day of whether they were happy. They have like an empirical approach to their own success. And I was like, "Well, that's impressive."

Every day. Wow. Okay.

Yeah. Yeah. Well, that was good. All right. Well, Francisco, this has been a fantastic conversation. We really appreciate you joining us.

Thank you very much, guys. I really appreciate the opportunity. This has been great. I appreciate it.

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'Optimal Life-Cycle Investing with Flexible Labor Supply: A Welfare Analysis of Life-Cycle Funds' — https://www.jstor.org/stable/29730037

'Consumption and Portfolio Choice over the Life Cycle' — https://academic.oup.com/rfs/article-abstract/18/2/491/1599892?redirectedFrom=fulltext

' Portfolio Choice Over the Life Cycle: A Survey' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3744669

'Longevity risk, retirement savings, and financial innovation' — https://www.sciencedirect.com/science/article/abs/pii/S0304405X11002339

'Stock Market Participation and Portfolio Shares Over the Life Cycle' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3808350

'Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence' — https://www.jstor.org/stable/3694770

'Do Robots Increase Wealth Dispersion?' — https://academic.oup.com/rfs/advance-article-abstract/doi/10.1093/rfs/hhad050/7192998?redirectedFrom=PDF

'Evidence on Expectations of Household Finances' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3229980

'Household Finance' — https://www.aeaweb.org/articles?id=10.1257/jel.20201461