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Rules of Thumb in Life‐cycle Saving Decisions

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  • Joachim K. Winter
  • Kathrin Schlafmann
  • Ralf Rodepeter

Abstract

We analyse life-cycle saving decisions when households use simple heuristics, or rules of thumb, rather than solve the underlying intertemporal optimization problem. We simulate life-cycle saving decisions using three simple rules and compute utility losses relative to the solution of the optimization problem. Our simulations suggest that utility losses induced by following simple decision rules are relatively low. Moreover, the two main saving motives re ected 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 backward induction.

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File URL: http://hdl.handle.net/10.1111/j.1468-0297.2012.02502.x
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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 122 (2012)
Issue (Month): 560 (05)
Pages: 479-501

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Handle: RePEc:ecj:econjl:v:122:y:2012:i:560:p:479-501

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Cited by:
  1. Fabio C. Bagliano & Carolina Fugazza & Giovanna Nicodano, 2012. "Optimal life-cycle portfolios for heterogeneous workers," Working papers 012, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
  2. Larin, Alexander & Novak, Anna & Khvostova, Irina, 2013. "Consumption dynamics in Russia: Estimates on microdata," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 32(4), pages 29-44.
  3. 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.
  4. Landon, Stuart & Smith, Constance, 2014. "Rule-Based Resource Revenue Stabilization Funds: A Welfare Comparison," Working Papers 2014-1, University of Alberta, Department of Economics.

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