When the Government Went Experimental

40 Pages Posted: 3 Mar 2013

See all articles by Ido Kallir

Ido Kallir

Ono Academic College

Aharon R. Ofer

Northwestern University - Kellogg School of Management; Tel Aviv University - The Leon Recanati Graduate School of Business Administration

Date Written: March 2, 2010

Abstract

When households make financial decisions, one may expect them to be both informative and rational – just as any other financial agent. In this paper, we question whether this hypothesis is error-free and correct by using a unique large-scale event study. Our results do not support the axioms of financial theory. However, our results are harmonious with the experimental literature, which, to be sure, suggests that agents use information inefficiently; they ignore it or misuse to the effect of bringing about suboptimal or even bad financial results. We use a unique event – an entirely new valuation mechanism that was "enforced" on the pension system and on the households – in order to study the behavior of individual investors. We find that under actual conditions – more similar to "real life" than any deliberated and designed experiment can give rise to – and while information and time are abundant, investors do not behave as if they are informed and rational. They behave in this uninformed and irrational way, nonetheless the availability of the information and the clear-cut possibility of utility-maximizing decision-making. Only when agents are provided with direct information and when the detailed consequence is analyzed for them, the households make a rational decision. We suggest that the gap between experimental conditions and actual situations may be the reason for the indecisive results appearing at the current experimental literature.

Keywords: Pension Funds, Flow of Funds, Household Decision, Personal Finance, Household Behavior, Family Economics

JEL Classification: D1, D78, D83, G14, G23, G28

Suggested Citation

Kallir, Ido and Ofer, Aharon R., When the Government Went Experimental (March 2, 2010). Available at SSRN: https://ssrn.com/abstract=2227501 or http://dx.doi.org/10.2139/ssrn.2227501

Ido Kallir (Contact Author)

Ono Academic College ( email )

Tzahal Street 104
Kiryat Ono, 55000
Israel

Aharon R. Ofer

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-3562 (Phone)
847-491-5719 (Fax)

Tel Aviv University - The Leon Recanati Graduate School of Business Administration

P.O. Box 39010
Ramat Aviv Tel Aviv 69972, 69978
Israel

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