Rules of Thumb in Life‐cycle Saving Decisions
AbstractWe analyse life-cycle saving decisions when households use simple heuristics, or rules of thumb, rather than solve the underlying intertemporal optimisation problem. We simulate life-cycle saving decisions using three simple rules and compute utility losses relative to the solution of the optimisation problem. Our simulations suggest that utility losses induced by following simple decision rules are relatively low. Moreover, the two main saving motives reflected by the canonical life-cycle model - long-run consumption smoothing and short-run insurance against income shocks - can be addressed quite well by saving rules that do not require computationally demanding tasks, such as backwards induction.
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Bibliographic InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 122 (2012)
Issue (Month): 560 (05)
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Other versions of this item:
- Winter, Joachim K. & Schlafmann, Kathrin & Rodepeter, Ralf, 2011. "Rules of Thumb in Life-Cycle Saving Decisions," Discussion Papers in Economics 12334, University of Munich, Department of Economics.
- Winter, Joachim & Schlafmann, Kathrin & Rodepeter, Ralf, 2012. "Rules of Thumb in Life-cycle Saving Decisions," Munich Reprints in Economics 19721, University of Munich, Department of Economics.
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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- Bettina Lamla, 2013. "Family background and the decision to provide for old age: a siblings approach," Empirica, Springer, vol. 40(3), pages 483-504, August.
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- Fabio C. Bagliano & Carolina Fugazza & Giovanna Nicodano, 2012.
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- Fabio C. Bagliano & Carolina Fugazza & Giovanna Nicodano, 2012. "Optimal life-cycle portfolios for heterogeneous workers," Carlo Alberto Notebooks 266, Collegio Carlo Alberto, revised 2013.
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