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From the Editor 

Financial planning for the family or individual is far more difficult than 
financial planning for the corporation, in large part because the former lacks 
anything resembling a viable optimization criterion. Those of us interested in 
individual financial management cannot seek simply to maximize shareholder 
wealth. This is partly because the “shareholders” of a family are simultaneously its 
time-constrained consumers and producers, partly because there is no legal or 
viable market for a family’s wealth, and partly because inter-family agency 
problems make it difficult to identify the ultimate shareholder. 

Economists suggest that we broaden the optimization criterion to that of utility 
maximization. While theoretically elegant, this solution lacks practicality. Ignoring 
the agency problem of how family members trade off their individual utilities in 
favor of maximizing the family’s utility, we are still faced with complex problems 
including the allocation of wealth to present consumption or future consumption 
through compatible investment vehicles. 

In our opening article, “Personal Financial Planning and the Allocation of 
Disposable Wealth,” by Amy and Robert Puelz, the authors state that “In the 
personal financial planning literature, however, there is no decision model that fully 
integrates an individual’s subjective valuation of all objectives and constraints 
relevant to this time dependent wealth allocation problem. ” Since conflicting goals 
cannot be simultaneously achieved, the authors propose the “satisficing” of 
multiple goals, a solution first proposed by Herbert Simon in 1955. They achieve 
this through two decision-making techniques, goal programming and the analytical 
hierarchy process. 

The second article addresses a more practical and immediate problem. Small 
investors are susceptible to “get rich quick” investment schemes based upon 
alleged anomalies in otherwise reasonably efficient investment markets. One such 
anomaly suggests that it only pays to be in the market in January. In their article 
entitled “Should the Small Investor be Out of the Market Outside of January?,” 
Steven Mann and Donald Solberg conclude that evidence supporting the January 
anomaly is not strong and that the investor should be wary of the claim. 

In recent years, the proportion of consumers leasing cars has increased 
dramatically, extending the lease versus buy decision from the corporation to the 

V 



vi FINANCIAL SERVICES REVIEW, l(2) 1991 

household. Some have attributed this new development to TRA86 which phased out 
the tax deductibility of consumer automobile loans not secured by home equity. In 
their article entitled “Effective Credit Costs in Retail Financial Markets: Leasing 
vs. Borrowing,” D. Anthony Plath and Bennie H. Nunnally use empirical analysis 
to come up with two very significant results. First, neither form of financing is 
superior. In about half the cases, leasing is less expensive and in the other half, 
borrowing proves cheaper. Second, the cost of financing is substantially understated 
by both lenders and leasers, particularly the latter who are not bound by the uniform 
reporting standards of the Truth-in-Lending Act. 

The fourth article, “Comparing Mortgages with Different Payment 
Frequencies,” by Arefaine Yohannes is a behavioral study of consumers designed to 
find out who uses the biweekly payment mortgage. The use of this option tends to 
reduce the term of a 30 year mortgage by about a third. Not surprisingly, he finds 
through logistic regression that frequency of payday is a very important determinant 
with those who are paid weekly or biweekly the more likely to utilize this innovation. 
He also finds that utilization varies as well with level of education, the better educated 
more willing to avail themselves of savings offered by the biweekly plan. 

An interesting new approach to estate planning is taken by Ronald Crabb in his 
article “Probabilistic Estate Planning. ” This article challenges the traditional 
approach to estate planning which uses life expectancy to calculate likely estate value 
and insurance needs. Since few people die at the time of their actuarially-predicted 
demise, there is a range of estate values and strategies implied. Using Markowitz’s 
mean variance portfolio approach, estate planning comes down to a risk-return 
tradeoff which is determined by the risk preferences of the decision maker. 

Our review article, “International Investing for the Individual,” by Jeff 
Madura and Tom O’Brien, examines the rapidly expanding world of inter- 
national investing and asks how individual investors may best participate. Three key 
issues are examined: the benefits of international diversification, the key problem 
of currency exposure, and the effective means of achieving international 
diversification. 

This issue of Financial Services Review concludes with abstracts of articles on 
individual financial management, edited by Phyllis Myers. 

I am pleased to report that the flow of high quality submissions keeps 
increasing. In order to attract the best possible articles relating to individual 
financial management, we have established a sixty day review turnaround as our 
goal for articles received between September and the beginning of April. 
Turnaround slows during the summer months as reviewers become somewhat more 

scarce. 
We are seeking review articles for our forthcoming issues. Readers who are 

interested in reading or writing about a particular topic should contact me. 

-Lewis Mandell