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

Multiple version iconThere are 2 versions of this paper

Date Written: September 9, 2009

Abstract

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

Binswanger, Johannes and Carman, Katherine Grace, How Real People Make Long-Term Decisions: The Case of Retirement Preparation (September 9, 2009). CentER Discussion Paper Series No. 2009-73. Available at SSRN: https://ssrn.com/abstract=1474262 or http://dx.doi.org/10.2139/ssrn.1474262

Johannes Binswanger (Contact Author)

University of St. Gallen ( email )

Dufourstrasse 50
St.Gallen, CH-9000
Switzerland

Katherine Grace Carman

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

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