The Wall Street Journal has a free service in which weekly recaps of interesting stories are emailed on Friday [You can sign up here - look for the Weekly Review]. This week there are three topics in the microeconomics blast:

1) The lack of stop signs in Belgium and game theoretical implications
2) The supply and demand of/for flat-screen televisions
3) Forced enrollment in 401(k) plans.

I posted the first two (as I regularly do) over at Heavy Lifting although I do not post "my answers" to the questions. I will post the 401(k) summary below the fold.

However, the third recap did have an excellent question, one that might make for some interesting lunch/class conversations:

One example of irrational behavior is insuring against small risks and ignoring big ones. Why is it irrational to purchase extended warranties for appliances while not purchasing life insurance?

SUMMARY: "Congress has voted, and now it's official: Investors are irrational. Thanks to this year's pension law and yesterday's proposed rule from the Labor Department, it's becoming easier for companies to automatically enroll employees in their 401(k) plans and thereafter increase the amount these employees save each year." In this week's Getting Going column, Jonathan Clements reports that proposed rule is a triumph for behavioral-finance economists, who have championed the idea of automatic enrollment. "All this is a tad controversial. In building their models, economists have traditionally assumed that people behave rationally, and many view behavioral finance as little more than a series of clever anecdotes." However, as the column points out, people often make irrational investment decisions. One insight of behavioral-finance economists: How choices are framed can greatly affect investment decisions. By employers framing retirement account decisions as opt-out choices rather than opt-in choices, employees are more likely to make
rational investment decisions.

The column mentions the "Save More Tomorrow" program, devised by Shlomo Benartzi, UCLA, and Richard Thaler, University of Chicago. The column also points out three nice examples of irrational financial decisions.

QUESTIONS:

1.) What is a 401(k) plan? (Check Wikipedia http://en.wikipedia.org/wiki/401k
and wsj.com retirement worksheets http://online.wsj.com/page/2_0418.html?mod=rt_pftools) Consider a person who would choice to invest 10% of his salary in a 401k plan under an opt-out plan, but invest zero under an opt-in plan. Is this person irrational?

2.) What is the "Save More Tomorrow" program? See http://www.anderson.ucla.edu/faculty/shlomo.benartzi/savemore.htm.

3.) One example of irrational behavior is insuring against small risks and ignoring big ones. Why is it irrational to purchase extended warranties for appliances while not purchasing life insurance?

4.) If an investor has more information about the performance of stocks and mutual funds, is he necessarily a better investor?

Reviewed By: James Dearden, Lehigh University