Kris Safarova  00:52

Welcome to the strategy skills podcast. I’m your host, Kris Safarova, and this episode is sponsored by strategy training.com you can access the key insights and practical action steps from today’s discussion at firms consulting.com forward slash action. It is f, i, r, M, S, consulting.com forward slash action. And we also have a few other gifts for you. Number one is you can access episode one of how to build the consulting practice level one, and you can get it at firms consulting.com forward slash build. You can also get the overall approach used in well managed strategy studies at firms consulting.com forward slash overall approach. And you can get a McKinsey and BCG winning resume, which is a resume that led to offers from both of those firms, and you can get it at firms, consulting.com, forward slash resume PDF. And however senior you are, it’s always a good idea to update your resume and have it in a good shape. And today, we have with us John Campbell, who is a professor of economics at Harvard University, the co founder of an asset management company and an expert on personal finance, he recently co authored a book with Tarun Rama daraj, and I’m looking forward to discussing it today. John, welcome.

John Campbell  02:14

Thank you very much. Glad to be here, Kris.

Kris Safarova  02:17

Maybe we can start with how is the personal finance system fundamentally structured to favor financially sophisticated individuals over ordinary ones.

John Campbell  02:29

Thank you. So that’s a great question. That’s really the heart of our message. Our book is called fixed. Why personal finance is broken and how to make it work for everyone. And fixed is intended as a little bit of a pun, fixed in the sense of rigged, or, you know, a game that’s hard to play, and some people know how to play it better than others. But we also intend to refer to the idea that we think we can fix it like we can fix a broken machine. So, you know, in the first sense of fixed. How is the system fixed? And why we argue this is because financial calculations don’t come naturally to people. And you know, financial education is very limited and very basic, so ordinary people tend to make mistakes of various kinds when they enter the personal finance marketplace. One type of mistake is misunderstanding the costs and benefits of products, perhaps missing some hidden costs that may be very significant but just don’t influence people’s purchasing decisions. Another type of mistake is failing to shop around. You know, most people enjoy many types of shopping. We might, you know, we might each have our favorite way to shop, but almost nobody likes to shop for financial products, and so people tend to buy familiar brands, stay with familiar providers, and this gives financial institutions market power, as economists say, they’re able to mark up their prices. And then a third type of mistake people make is that they mismanage products once they’re bought. So, you know, an example of this might be taking a bank account with so called overdraft protection, which allows you to overdraft your account, but the bank is going to charge you $35 for every transaction, which is, you know, enormously expensive and can really add up, especially if you’re out and about Shopping and you inadvertently pay multiple late overdraft fees. And when this happens, it generates revenue for the financial industry, which can be partly passed on in the form of lower upfront prices. So for example, we all benefit from free checking accounts. Where do banks get the money to offer free checking accounts? It’s part. Partly from these overdraft charges. The problem, then, is that the less sophisticated people who make the mistake of overdrafting their account end up subsidizing the bank accounts of people like me. You know, I don’t overdraft my account, but I’m benefiting from other people who may have less sophistication. It’s what economists call a cross subsidy, in this case, from the poor to the rich. And my co author, Tarun and I feel that this is really outrageous, and we should be concerned about it,

Kris Safarova  05:37

John, and can you talk to us about a defining moment when you realize that you had to write a book on this topic.

John Campbell  05:45

Well, you know, I’ve been working in personal finance for over 20 years now, and I started out doing fairly sort of sophisticated academic work on, you know, optimal investment strategies, how to invest your retirement funds, how to manage your mortgage and so on. And I was essentially writing academic papers that have mounted to a form of advice within the within the academic arena. Then I realized I ought to study how people actually behave and what they actually do. And once I started looking at that, I became more and more aware of how pervasive mistakes are, the things that people are just leaving money on the table. You know, a lot of my work has concerned mortgages, and I studied mortgage refinancing, and I came to realize that many people are very slow to take advantage of a refinancing opportunity to lower their rate in the US, this actually creates a troubling racial inequality that even though Black and White borrowers at origination, when they take out their mortgages are offered very, very similar rates, conditional on other things like credit score and so forth. If you look a few years down the road at the rates people are actually paying on their outstanding mortgage in periods when rates have gone down, you find that black borrowers are paying maybe as much as half a percentage point more on average, than white borrowers, and that’s just because they haven’t refinanced. And so we think that these mistakes that people make and the complexity of the products that really induce mistakes contribute significantly to inequality in our society, and I came to feel that I needed to move beyond the academic arena and try to write a book for a general audience to make more people aware of these problems.

Kris Safarova  07:52

John, so our listeners are primarily leaders within major organizations, so let’s talk about what are some of the likely mistakes they may be making. They’re a little bit more sophisticated or a lot more sophisticated, but many of them, of course, do not have your depth of experience and understanding of where there are dangers and what they should watch out for or take advantage of, right?

John Campbell  08:18

So you know, when we decided to write this book, we we didn’t want to compete with the personal finance advice guides, you know, from Dave Ramsey to personal finance for Dummies, whatever your favorite advice guide is, because, you know, it depends a lot on the details of a particular country system and the details of a particular person’s situation. Having said that, you know, we think there are some there. There are some important mistakes that even more sophisticated readers and listeners should should be aware of. So I’ll just throw out a few. You know there are mistakes around housing. So we know that there are advantages in the tax code to owner occupied housing, and this can make a case for buying your own home. However, it’s a huge mistake to buy a bigger house than you need, or even more so, to buy a place and then let it sit empty, as is actually very common in China, because when you do that, you’re effectively buying an asset and then throwing away the dividend on that asset. The dividend on real estate is rent, either the rent that you get if you have a tenant, or the implicit rent that you pay to yourself when you live in your own house. But you know, if you if you buy an asset and then throw away the dividend, you should not expect it to deliver a high return. So. You know, that’s one very common mistake. Another common mistake, I would say, is to is for people to take too little financial risk early in their life. So the theory of life cycle investing has come a long way over the years, and essentially what it says is that most people, when they’re young, have a very large hidden asset, which is their earning power, their future ability to earn a salary. And while we know this is risky, obviously life is risky, we don’t know what we’re going to be making for most people, that earning power is far safer than the stock market, and so it’s a relatively stable asset, safe asset, that people have. And what you ought to do is think, well, if you like, that’s the 90% of the iceberg that’s under the water. I may not see it, but it’s there, and it is stabilizing my standard of living, and with the smaller financial wealth that I control and where I have to decide where to invest it, as a young person, I can take a lot of risk, and then as you get older and you approach retirement, you should scale back that risk, because the safe earning power is diminishing as you as you get older. Now target date funds implement that wisdom, right? Target date funds typically invest more aggressively early on and less so later. But they don’t do it enough. Most target date funds are not aggressive enough early in life, and they they taper down the risk taking too too gradually. Also, target date funds don’t condition on how much wealth you’ve accumulated already. So one of the things we say in the book is that it would be possible to improve, to build, improve target date funds. But if you don’t have those available, what you what you should probably do is be really more aggressive early in life, and then invest more cautiously as you accumulate your retirement nest egg and end up with a more conservative investment strategy. So those are two pieces of advice. We have more in the book. I could go on for a long time, but maybe that would be enough to get started.

Kris Safarova  12:31

Of course, John and can you elaborate more on not buying a bigger house than you need? Because I think some of our business will have questions around that.

John Campbell  12:40

Well, the point would simply be that you should in your financial planning. You should, you should, you should imagine yourself paying rent to yourself now, if you’re an owner occupant. Now, it’s true, if you have a big house and you’re living in it, you’re receiving that rent, but you also are paying a lot of rent. You’re living expensively. So that is usually not a good financial strategy. It would be, it would be better to right size your house and then invest in other real estate vehicles or the stock market, or, you know, other investments, rather than buying an investment where, effectively, it forces you to spend more than you might have really wanted to.

Kris Safarova  13:34

Thank you. So now we spoke about the side where people making mistakes. Let’s talk about the distinct and powerful financial advantages that high income sophisticated earners exploit within the current system so that they can accelerate their wealth accumulation,

John Campbell  13:52

there’s evidence from academic research in a number of countries that richer people tend to earn higher returns than poorer people, and that’s actually a contributor to wealth inequality. Of course, there are many reasons why wealth is unequal. Income is unequal, there are inheritances, there are other random things, like lotteries. There’s lots of reasons for inequality, but a systematic factor is that richer people tend to earn higher average returns, and the difference can be pretty substantial. For example, there’s one study of Sweden, which is a relatively well educated and relatively equal country, but it turns out that the richest people in Sweden are earning on their total wealth, including all their borrowing, all their assets, they’re earning about 8% more, eight percentage points more than the safe interest rate, whereas the poorest people are just earning the safe interest rate, which is, you know, very low. So it makes a huge difference. And it is, it really tends to. Widen the gap between the rich and the poor. Now why does this happen? There are many, many reasons that we go into in the book, but one important reason is that poorer people often don’t participate in risky markets. They save their money, they keep their money under the mattress, or they may end up lending their money to family and friends. Poorer people often participate in sort of social insurance networks among you know, family friends, the community where people are borrowing and lending to each other at very low rates of return, there’s a lot of default, and it’s a deterrent to saving, because if you know that anything you accumulate is going to be tapped by your needy relatives, you know why save so richer people earn higher returns, that in turn encourages them to save more. And then, you know, there are, there are, there are beyond that. You know, the mistakes that that people make will lower their returns. So, for example, if you, if you buy a house that’s too big that you can’t really afford, and then you get in financial difficulty and you lose the house in foreclosure, that foreclosure process itself is going to destroy a lot of the value of the house, and you may end up losing everything you put in. So those kinds of events are very destructive, of

Kris Safarova  16:39

course, let alone the just experience you will go through, and how it will impact your ability to trust yourself, your decisions, and just level of stress it puts on you. Another question I have for you is many people do not invest. I think you mentioned it already today, but can we talk a little about why you think so many people avoid investing.

John Campbell  17:03

You know, I think, I think there’s a number of reasons. I mean, one is they just don’t know enough. There’s not enough financial education to make clear the benefits of investing. Another is that we know that many people lack even a few $100 of savings to use as an emergency fund, and it should be a priority to have an emergency fund in a safe and liquid form so that you stay out of high cost debt. But you know, another factor is that if you, if you think about the system of retirement accounts that we have in this country. On the one hand, it’s, it’s, you know, a rich variety of possibilities. There are IRAs, there are 401 Ks, there are 403 B’s, there are 429 plans. There ARE ABLE accounts of many, many tax favored accounts of various types. You can they can be traditional, or they can be Roth, which have different tax treatment. But I would argue that in many that that we have two problems. One is that this profusion of accounts leads to confusion. You know, there’s just so many choices. People throw up their hands. And the other thing is that the access to these accounts is unequal. So you know, if you work for a big employer that has a nice 401 k plan, they’ll set you up. They may auto enroll you. They may give you a good asset allocation as a default. They’ll certainly make it easy, even if you don’t auto enroll and 401 ks have high contribution limits, so if you want to, you can really contribute quite a lot tax free and start building your retirement nest egg. On the other hand, if you are bouncing from job to job, or if you’re self employed, or if you work for a small business that doesn’t offer a 401, k, then you’re very disadvantaged. You can open an IRA, of course, but you’re much more on your own when you do that, it’s it’s confusing and off putting, and also, the contribution limits are lower. So you know, the result is that some people have a wide and easy path to start retirement saving, and for other people, it’s much, much more difficult, definitely.

Kris Safarova  19:31

So for our listeners, where do you think they’re leaving money on the table, just to build on everything we already covered today, but anything else you want to share on where do you think they are living? Money on the table right now? And just to give you a little bit of better view kind of understanding, let’s say someone who is a partner at the major consulting firm or their senior leader within Microsoft, they don’t have your type of background. They don’t understand all the details about how they should be taking advantage of what is available to build their wealth. They’re working really hard. They usually work almost around the clock, and there’s very little time. So I just want to give people some advice today that they can implement. If you have anything you could share,

John Campbell  20:18

you know, I think, I think for people in the position you describe, you know, for your audience, I think my advice would be, you know, pretty conventional and unsurprising. It would be, you know, take the most advantage of of the retirement account that your employer offers. Certainly any kind of employer match. You want to maximize that right away. You, since you’re in a relatively high income bracket, Social Security is not going to be that helpful to you, because Social Security is progressive. So it’s, it’s, it’s excellent for poorer people, but you know, as you as you get into the upper income brackets, it doesn’t do what you need for retirement. So you should be saving aggressively, and you should be you should be maximizing your use of tax favored accounts to do it. I would say that, you know many managing your mortgage is also a very important thing for you know, people in the in the middle class and upper middle class. An interesting point is that you know, if you’re building a financial portfolio, it the cheapest way to lever that portfolio and be involved in risky markets, actually, in many cases, is to use an adjustable rate mortgage, because adjustable mortgage rates are normally lower than fixed mortgage rates, and you can use this as a cheap way to take leverage. I’ve done some research that shows that it’s a very common pattern across countries that Adjustable Rate Mortgages are used by young, poorer people starting out, who are stretching to buy their first house, but they’re also used by wealthy people with financial portfolios big houses, and essentially, the adjustable mortgage is being used as a cheap form of leverage, and you know, very much better than a margin loan, something like that. A margin loan can be called, but a mortgage can’t. All you have to do is keep paying the interest, even if your house price goes down, there’s nothing they can do, so long as you keep paying the interest. So, you know, home equity is a valuable is a valuable source of credit. Now I don’t know if you if your audience also includes, you know, older people who are more in the retirement phase of life, but for those people, I would say there’s, there’s a many people hang on to their financial assets too long and are too reluctant to spend them down and too reluctant to tap Home Equity. I think the right way to manage retirement is a mix of annuities and reverse mortgage borrowing to essentially insure yourself against extreme long life, and also, you know, get at the cash that you have so that you can enjoy it. Brilliant.

Kris Safarova  23:36

Thank you so much. I really appreciate your advice on this, so let’s talk about your book a little more. Of course, it is such an important piece of work, and they want to make sure that we give it enough time during our discussion today. So given the system is designed so that people who are sophisticated can take full advantage of it, and people who are not sophisticated in terms of understanding how to take advantage of it, they lose out. What do you think would be a neutral or fair design?

John Campbell  24:07

So, you know, Tarun and I have a proposal to reform the financial system, and I do want to make it clear that you know, our goal, in part, is to restore the popularity of finance. We think that the market economy is very important for prosperity, and we think the financial system is very important for the market economy. And the unpopularity of finance that has arisen, really in the last 15 years since the global financial crisis that unpopular, and that unpopularity is partly driven by all these problems I’ve been talking about. People have a sense that the system is unfair. They don’t understand it. They’re being ripped off, and that’s made finance unpopular, and that’s really bad, we think. And so we’re trying to save the. The financial industry from itself, basically. And our proposal is that we need a very straightforward, design, focused form of financial regulation. Financial regulation has sort of gone wrong. We think by being too vague and too retroactive. You know, regulators come in and they say to some big bank, you know, you did bad things, we’re going to fine you. And a regulatory environment like that makes financial institutions very risk averse and they don’t want to innovate. The result, then is innovation goes on elsewhere, like in the crypto world, and you know, we get a very chaotic situation. So what we want to do instead is essentially tell the financial institutions that are active in each part of the of consumer finance. We want to say you can offer any products you want, but you must offer what we call a starter kit product, which is a simple, well designed financial product that is safe and easy to use and where the fee structure is transparent. And by doing this, we’ll make shopping for these products much easier. Idea, our vision is that it should be as easy as shopping for an over the counter painkiller. So you go into the pharmacy, you have a headache, you go to the shelf, and there’s, you know, there’s Advil, the brand name, and there’s ibuprofen, the pharmacy brand, and maybe another generic brand. It’s standardized. You know that the size of pill is the same. You always take two. The pricing is very clear, how much you’re going to pay per pill, and you can just choose, maybe you like the brand name, maybe you want to save money, but it’s very easy to shop, and we think that these starter kit financial products can be made that easy to shop. So as one example, you know, take simple bank accounts. We think that the existing system in which you know checking is free and you’re paying for it implicitly by giving up interest. That’s very confusing to people. Lots of people think checking is free, no problem. I’ll just have a checking account and put my money there. Sophisticated people know that on a savings account you can get four and a half percent interest right now, and you should minimize your use of a checking account that’s paying only 0% Well, we think that checking accounts should starter kit. Checking accounts should be set up to pay money market interest with fees, but the like an upfront fee per transaction fee, but the fee is calculated relative to the market interest rate, and by doing so, we think it will be much easier for people to shop for these accounts. We also think the accounts should not have overdraft charges, so the same the problem I brought up earlier. There are countries where simple bank accounts like this must be offered by banks. For example, in Germany, there’s a very basic account called a basis conto basic account, and every bank must offer this. And you know, it’s easy to acquire and easy to shop for. So we think in each type of product, there should be a standardized account that must be offered and is easy to shop for. And then in some in some cases, we think some products are so important that people should be required to buy one to choose one. An example might be a basic retirement account that you open when you first start working. So in your first job, you have your 401 K, equivalent updated version of a 401 k. And everyone gets one of these, and then you can carry them with you from job to job, very standardized terms, standard fees, easy to shop for, and off we go. So, you know, we have many, many examples. The end of the book is, goes through all these examples, but that’s the basic approach, and we think that we’re not trying to displace the private financial industry. We’re not advocating that the government offer financial services itself, but we are saying that there’s a role for financial regulation to simplify product design,

Kris Safarova  29:56

and there are so many people who delay starting. They fall 1k and so on, sometimes delaying until they are 40 years old. And your proposal makes a lot of sense. You also argue that technology can be a tremendous force for good, but also can magnify existing problems. What would you like to say about that?

John Campbell  30:20

Yes, so, you know, we’re in an era of incredibly exciting technological change, right? And this has been going on for a while. And you know the next phase, phase, you know the use of the blockchain, AI, you know, the world, the world is changing very fast now, from an economic point of view, what’s happening is that technology is driving down fixed costs of providing products on a small scale to relatively poor people. So things that used to be luxuries and affordable only by the rich, you know, now can be offered to people of much more modest means, that’s a huge plus. Another huge plus is that it’s possible to customize products. Think of, think of Robo advising, you know, design, tailoring investment strategies to the risk aversion that people express by filling in questionnaires or in the future, by having a speaking with a chatbot about your your risk preferences. So there’s, you know, and another use of technology is to make it easier to shop, so I can get lots of mortgage quotes, you know, on an app on my phone. That’s, that’s extremely helpful. So there’s a lot it can do, but technology can also be misused, and it can be used to amplify biases and encourage the wrong kind of behavior, rather than leading people down a better path. So for example, if you if you gamify stock trading, day trading of stocks, and you make it very fun, and you know, your smartphone makes a nice sound, or confetti comes down every time you, you know, sell a stock at a profit or something like that. You know you’re being you’re going to be led into wasting a lot of money on the transactions costs of the trading which, of course, are hidden, and behind the scenes, there’s no explicit commission. That’s so it’s, it looks to you as if it’s free, but you’re going to always be paying the bid, ask spread every time you buy and sell, and that’s that’s going to pick your pocket. Another example, another favorite example of mine is an academic paper studied the the Alipay app in China, which is one of the main ways in which Chinese consumers learn about mutual funds. And the design of the app, by default, shows the top performing mutual fund over the last year at the top of the screen, and then it goes down in order of return over the last year. Now we all know that we like to look at the top of our list of search results, and so if you put the top performing mutual fund at the top of the smartphone screen, people will buy the mutual fund that’s gone up the most, which is performance chasing. It’s not going to produce good results in the future. If anything, you’re likely to get a reversal, and certainly you’re going to lead people into very risky mutual funds, because the riskiest funds are the most likely to be at the top of a ranked list. So technology is powerful, but we need to use it carefully, and we think, we think regulation is needed to get the good uses and and control the bad,

Kris Safarova  33:52

of course. And speaking about AI to take an opportunity to get your thoughts on it, stepping a little bit outside of your book, but it’s still all connected. How do you think our listeners should think about AI? There’s a lot of anxiety surrounding it, a lot of sense that you’re falling behind. You’re not on top of what’s happening. A lot of anxiety about it replacing you. You losing your job, even at senior levels. What are your thoughts on it?

John Campbell  34:20

Well, look, things are changing so fast that, you know, the answer I might give now could easily be completely out of date. You know, in a year or even less, maybe, having said that, I do think the the the the technology that’s based on large language models is still in some sense confined to repackaging conventional wisdom, and it lacks a model of the world that is very. Important for practical decision making. So actually, in the first assignment, I teach a personal finance course at Harvard, and in the first assignment of the course, I tell the students to go onto the Harvard AI. There’s an AI sandbox that they’re encouraged to use and ask chat, GPT and Google, Gemini, I have them do two different models. Ask the following question, you need to borrow $24,000 to buy a car. You can get a one year loan with a 10% interest rate, or a 10 year loan with a 1% interest rate, which is better now with the current generation of chatbots, if you ask that question, you will get some very impressive calculations. It will, it will calculate the total interest that will be paid in each case, it will, you know, show you quite a bit of calculation, but it won’t give you a useful answer, because what it does is it says, well, you’re going to pay more interest if you take the the 10 year loan at a 1% interest rate than the one year loan, then so I’m sorry, it basically encourages you to take the the short term loan at a very high interest rate, unless you’re in financial distress and you can’t and you Need more and you need more time to pay. Now, why is that the wrong answer? Well, look, a 10% interest rate is a rip off. There’s much cheaper ways to borrow, and a 1% loan, especially for 10 years, that’s an incredible deal. You can you should borrow all you can at that rate and put the money in a savings account and earn the spread right. And if you want to repay sooner than 10 years, you have the right to do that. So basically, it’s it’s like comparing a 10% rate and a 1% rate. Of course, you want to borrow cheaply, but the AI doesn’t tell you that now, maybe in a year it will. These things are improving very fast, but right now, I think the lesson is, or the lesson I try to teach the students is, you need to know enough about personal finance to ask the right question and do the prompt engineering to get a really useful answer. Because if you guide the AI a little bit, you can get a good answer and a useful calculation. It’s just that if you ask the naive question, it’s going to lead you astray. Definitely.

Kris Safarova  37:52

So for our listeners now, what would be your advice on how they can stay on top of what’s happening, enough not to fall behind, but the concerns on how to stay on top of what’s happening, especially if you don’t have that background, you don’t have technology background, and you kind of, you have to integrate it into the world. Don’t have the background.

John Campbell  38:11

I actually think that AI has reduced the premium for a technical background, you know, prompt engineering, which is learning how to use AI, is less technical than coding was, and at the same time, AI makes it much easier to learn coding when you need to do it. You know, my daughter was learning Python with with an AI coach, and she learned it very quickly as a result, and found it much easier. But then beyond that, you know, if you need to do something technical, AI has created the possibility of so called vibe coding, where you essentially explain what you want the program to do in English, and the AI will convert that into code. So, you know, things are changing very fast, but I think the non technical people should not be afraid that this is a moment where advanced technical skills are needed to keep up. I don’t think that’s necessarily true.

Kris Safarova  39:16

Makes sense. So coming back to your book, we spoke about certain recommendations that you guys proposed, what do you feel is the right boundary between financial so to say, paternalism and individual freedom?

John Campbell  39:31

That’s a great question. So you know, we are we are paternalistic in the sense that we actually believe that many decisions less sophisticated people make are not in their interests, and that if they understood the system better, they wouldn’t make those decisions. The Wall Street Journal had a branding campaign with the slogan, trust your decisions. And we think that. Is aspirational, not realistic. Given the complexity of financial products and the level of financial literacy that exists, we also don’t think that financial education, by itself, is going to fix that problem. I’m all for financial education. I’m very involved in it myself. I’m teaching personal finance at Harvard. I’m on the board of the Council for Economic Education, which promotes financial education in secondary schools throughout the US. So I’m all for financial education, but I think it’s not going to be enough by itself. The pace of innovation is just too fast. The level of complexity is too high, and particularly in high schools. You know, high school students are not making many of these decisions yet, and so the knowledge is very theoretical and abstract. I like to ask people, you know, how effective would drivers ed be in high school if you never got to drive, and you only got to sit in the classroom learning about how to drive. I mean, I’m not sure people would learn much. So given all of that, the limitations of financial education, we think that some intervention is necessary, but it should be kept to a minimum, and that’s why, you know, with the idea of the starter kit is that this is to help people start out. We don’t want to prevent people from then doing more sophisticated things once they’ve started out. We want the basic products to be on offer, to be widely used in some cases where it’s particularly important, we want people to be required to buy products just the way, you have to buy auto insurance. When you buy a car, you know, to register the car, you have to have auto insurance. So we think that some of that is necessary. But then we’d like to see a competitive private sector financial industry, doing its thing, innovating, delivering new products, competing. We’re trying to reform the financial system in order to save it. Would be the way I’d put it,

Kris Safarova  42:19

of course. And let’s assume your proposal is accepted and the changes are implemented. How should governments measure success in a reformed financial system?

John Campbell  42:32

One very obvious way is to look at the incidence of mistakes. So for example, let’s take another example, life insurance policies, they are very expensive in the early years and very good and valuable in the later years. So buying a life insurance policy and letting it lapse, that’s a big mistake. That’s costly. So you can measure the incidence of lapsing, and the more of that you see, the worse the performance is, the less of that you see, well, then you’ve made progress. So measuring the incidence of mistakes is certainly 111, thing you know in the retirement universe, you know how many people are broadly diversified and and you know, taking investment risk in their retirement accounts. How many people have retirement accounts, that kind of thing. These are the sorts of things to measure. What one can also do is measure price dispersion. So currently, you know, if you look at index funds, they’re all basically the same product, and the cheapest ones are incredibly cheap, right? If you know the big companies that are well known for diversified funds, passive investing, you know the Blackrock Vanguard fidelity, these passive funds are very cheap. But there are also index funds that are offered and that have significant assets under management that have fees that might be 50 basis points or going up to 1% for an index fund, and we should measure that, and the progress is seeing those kinds of fees come down so that Nobody is paying an exorbitant fee on a standard product.

Kris Safarova  44:23

And you mentioned you’re teaching a course on personal finance at Harvard. What are some of the key things that surprised you or continue to surprise you about working with students? Maybe some things where they were struggling the most anything that stood out?

John Campbell  44:39

Yes, one of the things about the course is that it particularly attracts first generation college students. About 20% of my students are first generation students. Harvard’s admitting more such students, and I’m very glad of that. But they are particularly drawn to this course, and they are some of the best students because they’re interested in everything they want to bring their knowledge. Knowledge back to their families, their communities, and they may have relatives who are depending on their advice. And so they will ask great questions. Will, you know, engage deeply with all material, and they’re very interested in topics like managing your credit score, you know, getting out of debt,

John Campbell  45:24

handling, living in retirement and so forth. So I was surprised by that. I hadn’t expected that

John Campbell  45:33

in terms of what students find difficult, you know, I guess I’ve been studying risk and in return and investing for so long that it’s become second nature to me, and I always have to remind myself every year how unintuitive it is for people who haven’t been exposed to it. So just sort of going over basic probability and statistics and understanding how that works. I always have to relearn every year, how slowly I have to do it.

Kris Safarova  46:06

And another question I have for you, if you take someone, let’s say they’re an executive at the tech company, they are a partner at the management consulting firm, and sometimes we have a conversation, and you can joke around, okay, if you could do anything in your life, what else would you enjoy doing? And some of them would say that, you know what academia sounds fun. I would enjoy being a professor at Harvard. What is it like to be a professor at Harvard? What is your personal experience?

John Campbell  46:35

Well, you know, I’ve certainly enjoyed it enormously. I really enjoy teaching. I will say that there’s a lot of any job has its annoyances, and you know, the administration of a course and handling, you know, special pleading in situations and student needs, and, you know, dealing with the university bureaucracy and so forth, that can become frustrating, but any job has that. But teaching is great fun. Research, also figuring things out is is wonderful, a wonderful experience, that too has its annoyances because it’s very slow academia, and particularly economics, academia has become very slow. You write a paper, you send it off. Months go by, you get picky comments, you spend another year responding, you send it back. You know, I’ve got a paper coming out that I’m very proud of, but I was working on it for over 10 years. You know, you have to be pretty patient to do that. For me, I really enjoyed combining academia with some private sector work and, most importantly, helping to found an asset management company that was just a fascinating parallel thing. And I was very lucky that the university allowed me to spend a day a week doing something on the side, outside the university. So you know that that flexibility is is marvelous. What I also want to say, though, is that part of what makes academia both thrilling to be part of, and also productive in the sense of generating new knowledge that benefits the world is that you bring bright people together from around the world, and you put them in the same place. Doesn’t have to be Harvard. There’s many, many good universities in this country, but you bring people together, and I do think that the current assault on higher education that’s going on in the US is very, very dangerous and risks, you know, damaging that very, very seriously. I think to maintain America’s lead in the world, we need to have a dynamic economy that, you know, exploits and benefits from the skills of people from around the world. So I would say nobody should take America’s higher education system for granted. It’s fragile and it can be damaged, so there are real risks today.

Kris Safarova  49:27

Thank you, John, I want to wrap up with one or two of my favorite questions. The first one is, over your career and life so far, can go as far as when you were a child, what were two? Three aha moments, realizations that you feel comfortable sharing, that really change the way you look at life or the way you look at business,

John Campbell  49:49

those that’s a great question. I think the changes in the way I look at life and business have evolved. Somewhat more gradually than that. It’s not that I, you know, I’m walking along and suddenly I have a revelation, but I have come to a realization over time about some important things. So I’ll give you one from business and one from life, if I may. So in terms of business, something I’ve become very aware of is that business success depends on teamwork and having the right partners who have complementary skills and whom you can trust. I started my asset management venture with amazing partners who were extremely talented and who I could completely trust, and I didn’t try to do everything. I knew that I as an academic, had certain skills to offer, but I didn’t fool myself that I could run a business or be the boss or, you know, I needed to have a role in partnership with others, various contemporaries of mine, you know, got involved in business ventures around the same time, and a mistake that some of them made was to try to run the whole show and be the big boss. And I think it’s wise to understand your limitations and the need you have to be part of a team, but that team needs to have really good values and be people you can trust. So that’s one thing I’ve learned in terms of life. You know, I live in academia. Academia has a status hierarchy that’s that’s very much based on sort of IQ, and, you know, being able to demonstrate your intellect in various ways. And I learned through my family that actually, that’s not really what life is about, in the end, my wife and I, our oldest child, was born with a intellectual disability. He has Down syndrome. He has taught me so much in my life, and one thing he’s taught me is Life is about much more than showing off your intellect, that in fact, there are many other things that are much more important, and that that happiness comes from, you know, experiencing life, making the most of your opportunities, and, you know, showing love and appreciation For the world you’re in, and so that’s really grounded me, having having my son Graham with with Down syndrome in my life has really given me a much better life, I think, than I otherwise would have done by teaching me to keep away from that academic status competition

Kris Safarova  53:02

your family is very lucky to have you, and your students are very lucky to have you, and Harvard is very lucky to have you. Thank you so much for being here.

John Campbell  53:10

It’s It’s been my pleasure. I really enjoyed the conversation Kris.

Kris Safarova  53:14

Where can our listeners learn more about you by your book? Anything you want to share?

John Campbell  53:19

Well, I do hope people will, you know, buy the book. It’s coming out on October 21 but you know, it’s you can find it on Amazon and elsewhere, and it covers a lot of what we’ve been talking about today. But beyond that, you know, like all academics, I have a website which describes everything I do, and academic papers I’ve been writing, and so on and so forth. So if anybody’s interested in that, you’re certainly very welcome to take a look.

Kris Safarova  53:52

Thank you again, John, our guest today again has been John Campbell, professor of economics at Harvard University, and the co founder of an asset management company and co author of a new book called Fix, you can access the key insights and practical action steps, very important practical action steps from today’s session at terms consulting.com forward slash action something new we are doing to help you fully benefit, because otherwise it’s hard to retain the key things people may be driving, people may be running. And so this way you can get your key insights and action steps. And we also have a few gifts for you, access to the first episode of how to build a consulting practice level one at firms consulting.com, forward slash, build the overall approach used in well managed strategy studies at firms consulting.com forward slash overall approach. And a McKinsey and BCG winning resume, which is a resume that led to offers from both of those firms, and you can get it at firms consulting.com forward slash resume PDF. And lastly, a. Copy of one of the books we co wrote with some of our listeners some of our clients. It’s called Nine leaders in action. It went to number one bestseller on Amazon, and you can get [email protected] forward slash gift. Thank you so much for tuning in, John, thank you again, so much, and I’m looking forward to connect with you guys all next time.