Personal-Finance System Is Rigged Against Ordinary People, Two Economists Say
A new book argues that complex and costly products benefit the wealthy at the expense of other consumers.
Illustration: Christian Blaza for Bloomberg Markets
A reverse Robin Hood dynamic is playing out in the world of personal finance, with the mistakes of the poor lowering costs for the rich. Economists John Y. Campbell and Tarun Ramadorai aim to call attention to the issue with their new book, Fixed: Why Personal Finance Is Broken and How to Make It Work for Everyone. The authors say common mistakes made by lower-income, less financially savvy consumers result in cross-subsidies enjoyed primarily by the wealthier users of financial products.
The list of costly errors in the personal finance game is long: racking up interest and late fees on credit cards, not refinancing a mortgage or letting a life insurance policy lapse early, just to start. Such missteps create revenue for the companies selling the products. Some of that is likely passed on to consumers in the form of lower prices, but only people who know how to manage the products really benefit. It’s a setup that works in favor of people who grew up learning about money or already have enough of it to access the best products and advice and avoid taking out predatory loans in emergencies. “It sits very uncomfortably when you realize that you’re not just a participant but are actually in some ways complicit in this bizarre system that has created essentially this robbing-the-poor-to-pay-the-rich thing,” says Ramadorai, a professor at Imperial College London.