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The Psychology of Saving More

Financial planners often suggest clients figure out how much they'll need to retire and save toward that huge number. Utpal "Paul" Dholakia, associate professor of management at Houston's Rice University, thinks people would do better to think about how much they'll save next month. A paper he co-wrote with Leona Tam of Old Dominion University found that those who planned savings for the next month did far better than those who tried to plan further out. In one experiment, people said they'd save an average $287 next month but saved $440. When asked to plan ahead four months, they said they'd save an average $946, but put aside just $123. Amy Feldman spoke with Dholakia.

Did the results surprise you? We were shocked. How can someone tell you they will save $1,000 and then only save $100? It's a gross misprediction of behavior.

So we're better off trying to save for next month than next year? That's it. Don't plan in advance because it makes you overoptimistic. You think: "I might get a windfall or a raise." And not only do people who give a savings estimate for four months from now estimate too high but they become more risk-seeking.

Is this just an American problem? We're working with colleagues in China and Korea to see if this translates. In Korea, the young are Westernized, so we think [their behavior] will look like that of Americans.

Ra, Ra, Stock-Boom-Ba

Equity analysts get accused of being cheerleaders. They may also deserve grief for being wowed by management-speak. A University of Oldenburg in Germany study examined analyst recommendations from 1991 to 2002, a period when the term "core competency," the notion that companies should downsize and focus on what they do best, was in ascendancy. The study showed that analysts overestimated earnings of companies that jumped on the bandwagon, perhaps giving the notion too much credence. But analysts have their uses. A University of California at Irvine study found that while analysts are slow to downgrade stocks, CEOs are more likely to be purged when they do.

CD Rates A-Poppin'

Troubled financial institutions, confronted with tight capital markets and at least $871 billion of debt set to mature by 2009, are hiking yields on certificates of deposit. "As hokey as these retail promotions may sound, banks can raise billions in a short time to pay off maturing liabilities," says JPMorgan Chase (JPM) analyst Alex Roever. Some of the best rates, often available in only selected states, are for CDs maturing within a year. Is it safe to stash your money with these companies? As long as you put away $100,000 or less, it's covered by FDIC insurance. Still, buying a CD from the folks that control failed bank IndyMac might stir a few butterflies.

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