Who Saves More, the Naive or the Sophisticated Agent?

56 Pages Posted: 31 Mar 2017 Last revised: 16 Oct 2019

See all articles by Max Groneck

Max Groneck

Stockholm School of Economics, Department of Economics

Alexander Ludwig

Leibniz Institute for Financial Research SAFE; University of Cologne - Faculty of Management, Economics and Social Sciences

Alexander Zimper

University of Pretoria; Kiel Institute for the World Economy

Date Written: September 2019

Abstract

We construct and solve a dynamically inconsistent Choquet expected utility life-cycle model for naive and sophisticated agents, respectively. Pollak (1968) shows that the realized saving behavior of naive and sophisticated agents be- comes identical for a logarithmic period-utility function. As a generalization of Pollak's analysis, we compare the saving behavior of both types of agents for the family of isoelastic utility functions. We show that a sophisticated agent saves more in every period than her naive counterpart if and only if her period- utility function is more concave than the logarithmic function. This relationship holds for arbitrary survival beliefs and time-discount factors. Quantitatively, the difference in saving behavior across the two types can be large.

Keywords: Survival beliefs; Ambiguity; Choquet expected utility; Dynamic inconsistency

JEL Classification: D91, D83, E21

Suggested Citation

Groneck, Max and Ludwig, Alexander and Zimper, Alexander, Who Saves More, the Naive or the Sophisticated Agent? (September 2019). SAFE Working Paper No. 169. Available at SSRN: https://ssrn.com/abstract=2943885 or http://dx.doi.org/10.2139/ssrn.2943885

Max Groneck

Stockholm School of Economics, Department of Economics ( email )

Germany

HOME PAGE: http://https://www.hhs.se/en/Research/Departments/DE/

Alexander Ludwig (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

University of Cologne - Faculty of Management, Economics and Social Sciences ( email )

Albertus-Magnus-Platz
Cologne, D-50923
Germany

HOME PAGE: http://www.wiso.uni-koeln.de/cmr/alexludwig

Alexander Zimper

University of Pretoria ( email )

South Africa

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

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