How Real People Make Long-Term Decisions: The Case of Retirement Preparation
34 Pages Posted: 16 Jun 2010
Date Written: April 22, 2010
Large variations in retirement wealth are common, with some households accumulating hundreds of thousands of dollars and others accumulating next to nothing. We examine to what extent formal planning or simple rules of thumb contribute to these differences in wealth accumulation. In particular, we address the common assumption that people behave “as if they optimized,” even if they do not engage in any formal planning. We test this empirically using a specifically designed survey about retirement preparation. 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. Because rules of thumb are easier to communicate and found to be as effective as a formal plan, financial planning advice based on simple rules of thumb may be helpful for those who currently take no systematic approach.
Keywords: Decision Process, Planning, Rule of Thumb, Retirement Saving, Household Finance
JEL Classification: D03, D91, H55
Suggested Citation: Suggested Citation