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Heuristics and Biases in Retirement Savings Behavior

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  • Shlomo Benartzi
  • Richard Thaler

Abstract

Standard economic theories of saving implicitly assume that households have the cognitive ability to solve the relevant optimization problem and the willpower to execute the optimal plan. Both of the implicit assumptions are suspect. Even among economists, few spend much time calculating a personal optimal savings rate. Instead, most people cope by adopting simple heuristics, or rules of thumb. In this paper, we investigate both the heuristics and the biases that emerge in the area of retirement savings. We examine the decisions employees make about whether to join a savings plan, how much to contribute, and how to invest. Saving for retirement is a difficult problem, and most employees have little training upon which to draw in making the relevant decisions. Perhaps as a result, investors are relatively passive. They are slow to join advantageous plans; they make infrequent changes; and they adopt naive diversification strategies. In short, they need all the help they can get. We discuss the possible role of interventions aiming to improve retirement decision making. Fortunately, many effective ways to help participants are also the least costly interventions: namely, small changes in plan design, sensible default options, and opportunities to increase savings rates and rebalance portfolios automatically.

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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 21 (2007)
Issue (Month): 3 (Summer)
Pages: 81-104

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Handle: RePEc:aea:jecper:v:21:y:2007:i:3:p:81-104

Note: DOI: 10.1257/jep.21.3.81
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  17. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance," NBER Working Papers 8655, National Bureau of Economic Research, Inc.
  18. Shlomo Benartzi & Richard H. Thaler, 1999. "Risk Aversion or Myopia? Choices in Repeated Gambles and Retirement Investments," Management Science, INFORMS, INFORMS, vol. 45(3), pages 364-381, March.
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