Bank Guarantees and Defined Contribution Plan Exchange Frequency

At his excellent blog, Paul Kedrosky posted a piece on bank deposit guarantees across nations.  It included this graph:

Now I will give you an unusual analogy that reflects the story that this graph is telling us.  This is somewhat like what the Defined Contribution [DC] plan industry went through when it moved from annual valuation, annual redirection of monies, to quarterly, to monthly, to the eventual change your asset allocation once a day if you like.

With annually, a huge number of people would make moves. Quarterly, not so much, but it still increased the over all number of transactions. Monthly brought a decline in the total number of transactions. Daily? Few people transact because they can always do it.

So, when the guarantee is unlimited, few take advantage of it. When it is limited, people get far closer to the limit on average.

This is just another application of behavioral economics.  When something is free, people don’t value it as much, so they don’t use it.  When something is hard to do and valuable, they take every opportunity.  In between they act to some degree to preserve value at the appropriate dates or amounts.  After all they will have another chance soon.