If you think of academic research as initiating a circle of influence, you’ll understand the impact of Amy Finkelstein, Ph.D., on the retirement industry. The John & Jennie S. MacDonald professor of economics at the Massachusetts Institute of Technology is an expert on the nexus of insurance markets and consumer behavior.
A winner of the John Bates Clark Medal from the American Economic Association, Finkelstein is a high-echelon researcher who produces rigorous scholarly studies that retirement experts rely on for rich revelations and deep insights. Ultimately, her analyses are passed on to financial advisors for practical client application. Last, but certainly not least, the economist’s work has helped shape U.S. government policy.
At its summer conference, the Retirement Industry Income Association — in partnership with Research on Wealth magazine — will honor the prolific Finkelstein with its 2017 Achievement in Applied Retirement Research award. Past recipients include economists Shlomo Benartzi, Zvi Bodie, Laurence Kotlikoff, Brigitte Madrian, Moshe Ayre Milevsky and James Poterba.
The focus of Finkelstein’s insurance research chiefly concerns how individuals’ private information impacts their behavior when buying annuities, long-term care and health insurance, and how it affects insurance companies and insurance markets — all of which influence government policy.
“Amy was chosen for the character quality of her academic work and also, very clearly, for the substance of her work,” said Francois Gadenne, the chair, executive director and co-founder of RIIA. “Everything about retirement from both the viewpoints of gerontology and funding cannot be addressed without proper thought about the areas that she has researched.”
A jury of prior RIIA award recipients chose Finkelstein as this year’s honoree from a field of about 20 economists.
“The award goes to a researcher who exemplifies the virtues that RIIA seeks: independence, real research and respect for previous academic researchers whose thinking is anchored in an authentic genealogy of concept,” Gadenne explained.
In an interview, Finkelstein expressed her hope that her analyses of the evidence she finds help influence thinking and individuals’ retirement decisions. “It’s a great honor to be selected,” she said. “It’s always very exciting whenever one’s work has some impact outside just the small set of colleagues that also work on these topics and that it can potentially reach a broader audience. I’m tremendously flattered,” explained Finkelstein, who has received more than 35 honors and awards.
What sparked her interest in the insurance markets was finding “problems, such as private information, that — absent government policy — might [cause] the markets to not operate well,” she said. “That opened the possibility of asking: Was there scope for improving government policy as a result? This has been a question that’s animated a lot of my interest for many years.”
Finkelstein’s most important contributions center on the development of evidence-based tools for looking at where market failures — or inefficiencies — exist in health, annuities and long-term care insurance due to private information, similarly known as adverse selection, anti-selection or asymmetric information.
“We’re interested in seeing whether these [inefficiencies] exist because we then want to think about the implications for government policy,” she explained.
Finkelstein’s M.O. is interesting: She’s gained access to large data sets of administrative records, such as insurance-plan choices, claims and other information, which she examines to foster understanding of economics, insurance and health care markets. The MIT professor has answered questions, for instance, on why people buy or do not buy such insurance and the influence that consumer behavior has on annuity pricing.
“Amy is a superstar in economics, and her work in annuities and long-term care insurance is important to retirees. She’s helping the retirement industry,” said Moshe Ayre Milevsky, finance professor at York University’s Schulich School of Business. “If I were a financial advisor who sold long-term care insurance, I’d really want to understand what Amy’s insights have been about that. If there’s ever a Nobel Prize in economics in the insurance category, chances are very good that Amy would win it.”
Part of what’s fun for Finkelstein in conducting studies and experiments is the element of potential surprise, she says. Such was the case with the Oregon Health Study of 2008-2010, a high-profile experiment in which, via lottery, uninsured low-income adults were given Medicaid, while a control group was not.
The experiment sought to learn how having this government insurance changed people’s behavior. One finding was that the group with Medicaid used the emergency room — a costly form of health care — more often than the others did.
This refuted the assumption that the Medicaid group would seek help at free private care clinics or doctors’ offices. Hence, the study had implications for the Affordable Care Act, which aimed to reduce costs by giving more Americans access to health care.
In annuities, Finkelstein has helped improve the understanding of adverse selection among purchasers; that is, they know something about themselves that the insurance company does not — and such knowledge motivates them to buy.
“This means that people end up paying more, because the people who are voluntarily buying annuities are signaling to the companies that they’re in a bigger risk pool,” Milevsky noted. “They probably have a longer life expectancy than others. This has been an axiom in actuarial pricing for many years, but Amy has measured it. That’s very important because it helps us to understand the magnitude of this.”
Indeed, private information, or adverse selection, drives up annuity prices for others, so that “even people who would like to buy annuities at prices that would be fair to them given their mortality risk cannot do so or don’t want to” Finkelstein pointed out.