SLOAN SCHOOL OF MANAGEMENT Preliminary syllabus 15.S08 CONSUMER FINANCE AND FINANCIAL PRODUCTS

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1 SLOAN SCHOOL OF MANAGEMENT Preliminary syllabus 15.S08 CONSUMER FINANCE AND FINANCIAL PRODUCTS SPRING 2016 (H1) M, W 10:00-11:30, E51-??? Professor Jonathan Parker Office: E JAParker@MIT.edu Phone: Teaching assistant: Jing (Helen) Li HelenLi@mit.edu Administrative assistant: Safia Albaiti Office: E SAlbaiti@mit.edu Phone: Consumer finance studies the financial decisions of households, which in the U.S. hold $76 trillion in assets and $13 trillion in liabilities (in 2012). In contrast, corporate finance studies the financial decisions of corporations, which hold less than half this amount of debt and less than two-thirds this amount of assets. Household financial products were at the center of the recent financial crisis, consumer financial innovation is booming globally, most investment banks have now merged with household-serving traditional banks, and the institutions and regulation of personal finance are rapidly evolving as the Consumer Protection Financial Bureau rethinks regulation of consumer financial markets and various regulators reform origination and trading mechanisms for assets backed by mortgages, student loans, and credit cards. This course provides an introduction to consumer finance organized around four main themes. First, the course covers how people make financial decisions, including both rational and behavioral models, and both experimental and observed real-world behavior. Second, given this behavior, how have existing financial products been designed to serve the needs of consumers? The course discusses past examples of product innovation as well as possible future opportunities. Third, we consider the implications for designing and pricing financial products derived from claims on household payments, such as debt backed by mortgages, credit cards, or student loans. Finally, the course touches on the rapidly-evolving institutions and the regulatory structure affecting the financial industry serving households. Given that this is a half-course, the course will be a quick tour. 4B5BC Requirements and Grading Course requirements include regular attendance and participation in class which requires having read the assigned articles prior to coming to class and discussing them (30%), group-based (30%) and individual (40%) written projects and case analyses. Cases are listed in the course readings. 15.??? Page 1 of 5

2 Website The course website is on Stellar and all teaching materials will be posted on this site. TA office hours, class announcements, as well as problem sets will be posted here. Solutions to problem sets will be posted no later than one week after the due date; they will not be distributed in paper form in class. Materials o Class Notes and Recitation Notes. Notes will be available on the course website. o Research articles and cases are contained in the casepack o Additional reading and will be distributed or linked to the course webpage. Recitations and Office Hours The course instructor and TA will also hold regular office hours. The times and locations will be announced on the course website. Sloan Values You are responsible for upholding Sloan s code of conduct, which mandates zero tolerance for cheating and plagiarism. For more details on Sloan s academic policies, please read the document Classroom Values in Practice which is available on the course website. 15.S68 Page 2 of 5

3 Course Outline Class Topic and readings 1. Introduction and overview of consumer finance The Uberization of Money, Wall Street Journal, Nov 6, 2015 Tufano, Ryan, and Schneider, An Introduction to Consumer Credit HBS note Campbell, John Y. (2006). Household Finance. Journal of Finance 61(4): Campbell, John Y., Howell E. Jackson, Brigitte C. Madrian and Peter Tufano (2011), Consumer Financial Protection. Journal of Economic Perspectives 25(1): World Bank, Mind Society and Behavior, World Development Report 2015, Chapter 6, Household Finance 2. Overview of traditional economic model of household financial behavior o Underlying assumptions: diminishing marginal utility, knowledge, optimization o Central implications: consumption smoothing, CCAPM o Revealed preference and the philosophy of consumer sovereignty Textbook summary of traditional economic model: Abel, Bernanke, Croushore 4.1 and 4.A Ang, Andrew, Asset Management, Chapter 2 3. Behavioral biases and financial decisions o Underlying evidence: experiments, biology, psychology, evolution o Central assumption: mistakes o Regulation vs. competition for rents o Profiting from mistakes vs. selling correcting products Betterment assignment due Chapter 4 or 5 in An Introduction to Behavioral Economics Small changes, real impact: Applying behavioral economics in asset-building programs A brief from the BETA Project, December 2013 Cohen, J., 2005, The Vulcanization of the Human Brain: A Neural Perspective on Interactions Between Cognition and Emotion, Journal of Economic Perspectives 19, Thaler, Richard, Mental Accounting Matters" Journal of Behavioral Decision Making, 12: (1999) Tversky, A. and D. Kahneman, 1981, The Framing of Decisions and the Psychology of Choice, Science 211, S68 Page 3 of 5

4 4. Financial coaching and behavioral economics Guest lecture: Piyush Tantia, co-executive Director, ideas 42 Financial Health Check assignment due Schoar, Antoinette and Piyush Tantia, The Financial Health Check: A Behavioral Approach to Financial Coaching New American Foundation, March 2014 Chapter 6, Thaler, Richard H. and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness, Yale University Press, Retirement saving and annuitization o Undersaving, the aging society and the public-private interactions o The importance of defaults and the irrelevance of education Retirement Security: Most Households Approaching Retirement Have Low Savings, GAO : Published: May 12, John Beshears, James J. Choi, David Laibson and Brigitte C. Madrian (2008). The Importance of Default Options for Retirement Savings Outcomes: Evidence from the United States In Stephen J. Kay and Tapen Sinha, editors, Lessons from Pension Reform in the Americas, New York: Oxford University Press, pp Poterba, James, Retirement Security in an Aging Population, American Economic Review, 104(5), 2014, Startup consumer finance: Longbridge Financial and reverse mortgages Guest Lecture: Christopher Mayer, CEO Longbridge Financial Reverse mortgage assignment due Professor Puts Ideas in Practice as Reverse-Mortgage CEO, Bloomberg, January 18, 2014 Reverse Mortgages, FTC, Jeffrey Brown (2007). Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning, NBER Working Paper 7. Securitization of household debt products 2-28 Mortgage case due Securitization, chapters TBA 8. Peer to peer lending Lending club case due 15.S68 Page 4 of 5

5 9. Securities backed by consumer debts Guest lecture: Joseph Naggar, Partner, GoldenTree Asset Management o Tour of securitized products and ABS (credit cards, autos, student loans, personal loans, esoteric), CMBS, RMBS, and CLOs o The size of the market, the participants, and importance o How the market works: creation, distribution, liquidity o What happened during the crisis and what the future holds CLO modelling exercise due Structured Loan Investments, Citi Research, Credit division, September 2015, pages only 2008 Securitization Annual, Research Barclay s Capital, January 2008, pages 3-5 only Structured Products Cross-Sector Weekly, Wells Fargo Securities, latest date 2015 (to be distributed) Proposed FRTB ruling endangers ABS, CMBS and non-agency RMBS markets, Securitized Products Weekly, JPMorgan, Nov 2, 2015 IX-Final Offering Circular (Printed ), GoldenTree Asset Management, Pages 1 22 Morgan Stanley, Global Securitized Products Autumn Outlook, Fall 2015 CLO Management Platform, GoldenTree Asset Management, Sept Risk-based pricing in consumer credit: credit cards and regulation Guest lecture: Scott Nelson, MIT and Consumer Financial Protection Bureau Consumer credit assignment due Orszag, Jonathan and Susan Manning 2007, An Economic Assessment of Regulating Credit Card Fees and Interest Rates, sections I and II, p. 1-28) Frank, Joshua 2012, Predatory Credit Card Lending, p. 1-14) 11. Consumer insurance markets BASIC case due Challenged by Upstarts, Lenders Try New Strategy: Cooperation, New York Times, Randall Smith, January 7, 2015 (readings post class 10) 15.S68 Page 5 of 5