[MUSIC] All right. So now let's talk about inertia. And what do I mean by inertia? It's always good to show a picture if you can. A picture's worth a thousand words. So if you ever heard the phrase, let a sleeping dog lie. So I thought, why not get my dog Max. In the neighborhood, I'm known as the guy with the dog, walking my beloved Siberian Husky, Max. He gets compliments 80% of the time we walk. I'm yet to get a compliment. But anyway, it's good to be in his company. He's not sleeping here, but it looks like he doesn't want to go any place soon. So I'd call this Inertia. Now, inertia can be good or bad. For example, if we're about ready to have a meal, and if Max is comfortable being here on this bed. By the way, which is my son's, Luke, and he's rarely getting in Luke's room. So he took this opportunity to jump on Luke's bed. If Max is going to stay here while we are eating, this could actually be good inertia, right? He won't be bugging us to give him food while we are trying to have a peaceful meal. On the other hand, if this is five minutes before Luke is going to go to bed, this is bad inertia because it's going to be very awkward to try to get Max down from the bed and then get Luke into the bed. So, point is inertia can be good or bad. Same thing is true when it comes to investments and located inertia in financial decisions can be good or bad, right? Depends on what your initial decision if you're sticking with it, well that's good, right? But if your initial decision was bad and you're sticking with it, that's not so good. Okay, so this really highlights the importance of participants making a sound portfolio allocation at the start. I'm about to show you a study that just documented the inertia that people have in their financial decisions. So if your first decision is good, it's okay to have this inertia. It also explains the powers of defaults, which I'll talk about later in the module, in influencing behavior. So default policy is what choice are you put in to if you don't make a choice? And if that default is good then it's good for you to say there, but if it's bad, it's not so good. Like if you ever signed up for some service, like you're getting a magazine, or you're checking your credit score, and you clicked this box, it says like, hey, charge many a month. I can cancel when I want. Why do companies set up that way? because people forget to cancel and then they get charged month after month, after month. So that's a case where inertia is working against you, but it's working for the magazine company. Or the company that wants to sell you, you know, kind of telling you want your credit score is. Let's think of kind of a financial example here, and how about this is a module about retirement plan investing, so let's look at this Ameriks and Zeldes study. They examine decisions of TIAA-CREF participants in their retirement plan over a nine-year window And look, were there any changes? Did these people make any changes in their investment decisions? And there are two decisions participants could make. One is just simply, what's the asset mix? What fraction in stocks, what fraction in bonds? We call that asset allocation. The second decision is what's your contribution allocation. So forget your existing assets. For new money you contribute to the plan, what's going to be the mix of bonds or stock. So two separate decisions. What did people do, what are the results of the study? 47% made zero changes to their contribution allocation over a 9-year period. 68% made zero or one change, so the initial allocation, 100% stocks, 50% stocks, 80% bonds. People generally stick with that, or very rarely revisit it. 73%, three-quarters made zero change to the asset allocation over the nine-year horizon. And 86% made zero or one change. So even stronger evidence that people are sticking with this initial allocation. So this research really highlights how important inertia is in financial decisions, and it also highlights how important default policy is. If you have the default, and people are in something defaulted into something good, they'll probably stay in that good thing. But if you have the default that people are to default into something bad, like the bad thing can be not saving. Or saving but saving in an inappropriate asset allocation, that's bad because of this inertia that people clearly exhibit in their financial decision making. [SOUND]