Mysteries of money: fool people to choose well
NEW DELHI: Why don't people do what they should do for their own good? It's a difficult question, or maybe it's silly or it can be both. However, when it comes to creating a change in behavior, there seems to be a widespread belief that urging people to do the right thing is enough. We see this in many areas; In fact, almost all the so-called public service advertising is an example.
Take the case of the latest in personal finance: term insurance. Anyone who has income and dependents must have term insurance and, nevertheless, there is great resistance among people, against buying something that returns nothing. The generally acceptable answer is that someone should educate people about insurance, because those who don't buy insurance Do it for ignorance and if ignorance is solved, then the problem can be solved.
The attempt to change the psychology of savers may need a trick. Here’s a trick that, long ago, would get people to buy insurance . In the late nineteenth century, when insurance companies were first trying to get people to buy their products, there used to be a form of annuity called a ‘tontine’. In a tontine, a group of 20 to 50 people of similar age would buy from an insurance company what would effectively be a single, joint annuity. They would each get their share of the income that was generated by the annuity amount. When any member died, his share would go back into a common pool.
Therefore, the total income stream of the annuity remained constant. It was divided equally among all surviving members. With the passage of time, and the members died one by one, those who were still alive earned increasing income. When the last member died, the insurance company obtained full possession of the deposited amount. Indeed, buying a membership of a tontine was a commitment to its own longevity, the longer he lived, the more financially comfortable he was.
Would you buy a tontine? I would definitely consider one. At some point, tontinas were banned, apparently due to some scams. Or maybe the members started killing each other. In any case, it is possible for a tontine-type system to encourage more retirees to buy annuities.
Of course, insurance is so tightly regulated that it is effectively limited to the same (ineffective) business model, so it is unlikely that one will see some kind of modern tontine.
Here is another example of an unusual trick that could be useful for the government to make customers force sellers not to do uncounted business. Since 1951, Taiwan has had a national lottery system whose tickets are invoices issued for retail purchases in stores across the country. The country follows a Uniform Invoice System with a common numbering system and on the 25th of each odd month, the winners of the lottery are announced.
The prizes are quite high, from a single first prize of TWD 10 million (around ₹ 2.3 crore) to numerous TWD 200 prizes (₹ 460). There is a kind of gradation system that establishes a connection between the size of the purchase and the level of the prize.
At the retail level in India, tax honesty would probably get a big boost from something like this. Buyers would insist on proper billing because the bills would also be tickets to a lucrative lottery. Of course, in practice, none of these will happen. However, the fact is that weirder things can change behavior, for better or worse.
In personal finance, there are so many things that are wrong with the choices people make that innovative thinking may be necessary.
(The author is the founder and CEO of Value Research)