How Real People Make Long-Term Decisions: The Case of Retirement Preparation
CentER Discussion Paper Series No. 2009-73
30 Pages Posted: 17 Sep 2009
Date Written: September 9, 2009
A canonical but untested assumption in economics is that choices are determined only by preferences and budget constraints, but not by how people approach decision making. In particular, it is believed that people behave “as if they optimized”, even if they do not engage in any formal planning. We test this empirically in the domain of retirement saving using a specifically designed survey. We find that people who rely on a rule of thumb indeed behave like literal planners/optimizers. However, people without any systematic approach save substantially less. We discuss the implications of this finding.
Keywords: decision process, planning, rule of thumb, retirement saving, household finance
JEL Classification: D03, D91, H55
Suggested Citation: Suggested Citation