Dynamic Consistency and Regret

49 Pages Posted: 25 Apr 2014 Last revised: 6 Sep 2019

See all articles by Frank Caliendo

Frank Caliendo

Utah State University

T. Scott Findley

Utah State University

Date Written: September 6, 2019

Abstract

Individuals often report that they regret not having saved more for retirement. This fact raises concerns about the financial security of retirees and about the adequacy of traditional economic models in making predictions that are consistent with regret about having saved too little for retirement. We provide an overview of four discounted utility models and examine their implications for the optimal level of retirement savings. All of these models exhibit dynamically consistent decision making, and some also feature backward discounting in order to generate regret about past saving decisions. In our preferred parameterization with both forward and backward discounting, a 66 year old at retirement will consider the optimal level of retirement savings to be almost twice as large as what was actually saved, even though actual saving decisions are dynamically consistent across the entire life-cycle. Compared to a model setting with fixed retirement, adding choice over retirement timing compounds the regret that individuals experience about past saving decisions.

Keywords: Saving for Retirement, Regret, Biased Retirement Timing, Dynamic Consistency, Forward and Backward Discounting, Welfare.

JEL Classification: C61, D15, D91

Suggested Citation

Caliendo, Frank and Findley, T. Scott, Dynamic Consistency and Regret (September 6, 2019). Available at SSRN: https://ssrn.com/abstract=2428465 or http://dx.doi.org/10.2139/ssrn.2428465

Frank Caliendo

Utah State University ( email )

Logan, UT 84322
United States

T. Scott Findley (Contact Author)

Utah State University ( email )

Department of Economics and Finance
3565 Old Main Hill
Logan, UT 84322-3565
United States
+001-435-797-2371 (Phone)

HOME PAGE: http://tscottfindley.com

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