Economic Rationality, Risk Presentation, and Retirement Portfolio Choice

38 Pages Posted: 19 Sep 2011

See all articles by Hazel Bateman

Hazel Bateman

UNSW Sydney, CEPAR

Christine Ebling

University of Technology, Sydney - Centre for the Study of Choice

Jordan J. Louviere

University of South Australia - Institute for Choice

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Susan Thorp

University of Sydney Business School; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

John Geweke

University of Technology Sydney - Economics Discipline Group

Date Written: December 8, 2010

Abstract

This research studies the propensity of individuals to violate implications of expected utility maximization in allocating retirement savings within a compulsory defined contribution retirement plan. The paper develops the implications and describes the construction and administration of a discrete choice experiment to almost 1200 members of Australia's mandatory retirement savings scheme. The experiment finds overall rates of violation of roughly 25%, and substantial variation in rates, depending on the presentation of investment risk and the characteristics of the participants. Presentations based on frequency of returns below or above a threshold generate more violations than do presentations based on the probability of returns below or above thresholds. Individuals with low numeracy skills, assessed as part of the experiment, are several times more likely to violate implications of the conventional expected utility model than those with high numeracy skills. Older individuals are substantially less likely to violate these restrictions, when risk is presented in terms of event frequency, than are younger individuals. The results pose significant questions for public policy, in particular compulsory defined contribution retirement schemes, where the future welfare of current workers depends on quantitative decision-making skills that a significant number of them do not possess.

Keywords: discrete choice, context and framing effects, retirement savings, investment risk, household finance, financial literacy

JEL Classification: G23, G28, D14

Suggested Citation

Bateman, Hazel and Ebling, Christine and Louviere, Jordan J. and Satchell, Stephen E. and Thorp, Susan and Geweke, John, Economic Rationality, Risk Presentation, and Retirement Portfolio Choice (December 8, 2010). UNSW Australian School of Business Research Paper No. 2011ACTL02. Available at SSRN: https://ssrn.com/abstract=1776525 or http://dx.doi.org/10.2139/ssrn.1776525

Hazel Bateman (Contact Author)

UNSW Sydney, CEPAR ( email )

High Street
Sydney, NSW 2052
Australia

Christine Ebling

University of Technology, Sydney - Centre for the Study of Choice ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Jordan J. Louviere

University of South Australia - Institute for Choice ( email )

Level 13
140 Arthur Street
North Sydney, New South Wales 2060
Australia

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

Susan Thorp

University of Sydney Business School ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 6354 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

John Geweke

University of Technology Sydney - Economics Discipline Group ( email )

645 Harris Street
Sydney, NSW 2007
Australia
0295149797 (Phone)

HOME PAGE: http://www.censoc.uts.edu.au/about/members/jgeweke_papers.html

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