Financial Competence and Expectations Formation: Evidence from Australia

Posted: 24 May 2011

See all articles by Hazel Bateman

Hazel Bateman

UNSW Sydney, CEPAR

Christine Eckert

University of Technology Sydney (UTS) - School of Marketing

John Geweke

University of Technology Sydney - Economics Discipline Group

Jordan J. Louviere

University of South Australia - Institute for Choice

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Susan Thorp

The University of Sydney Business School

Multiple version iconThere are 4 versions of this paper

Date Written: May 23, 2011

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 participants in these schemes depends on quantitative decision-making skills that a significant number of them do not possess.

Keywords: discrete choice, retirement savings, investment risk, household finance, financial literacy

JEL Classification: G23, G28, D14

Suggested Citation

Bateman, Hazel and Eckert, Christine and Geweke, John and Louviere, Jordan J. and Satchell, Stephen E. and Thorp, Susan, Financial Competence and Expectations Formation: Evidence from Australia (May 23, 2011). Available at SSRN: https://ssrn.com/abstract=1850359

Hazel Bateman

UNSW Sydney, CEPAR ( email )

High Street
Sydney, NSW 2052
Australia

Christine Eckert

University of Technology Sydney (UTS) - School of Marketing ( email )

P.O. Box 123
Broadway, NSW 2007
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

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 (Contact Author)

The University of Sydney Business School ( email )

Abercrombie Building
H70
The University Of Sydney, NSW 2006
Australia
0290366354 (Phone)

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