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Retirement savings and decision errors: lessons from behavioral economics

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  • Philip Armour
  • Mary C. Daly

Abstract

Long gone are the days when most American workers could rely on their employers to manage their retirement savings. Today, most people handle their retirement portfolios themselves, gaining the right and responsibility to determine their own best strategies. Research on retirement planning suggests, however, that many fall short of consensus targets for optimal savings and investment. While part of the shortfall is explained by information gaps and income constraints, research in behavioral economics suggests that \\"decision errors,\\" arising out of human tendencies such as procrastination, also play a role. ; This Economic Letter reviews some key insights of this research and discusses how they apply to retirement savings and financial decisionmaking more broadly. It then discusses how policymakers and employers are enhancing the design of 401(k) savings plans and other retirement vehicles to circumvent what appear to be our less-than-optimal human instincts.

Suggested Citation

  • Philip Armour & Mary C. Daly, 2008. "Retirement savings and decision errors: lessons from behavioral economics," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun6.
    • Handle: RePEc:fip:fedfel:y:2008:i:jun6:n:2008-16
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    References listed on IDEAS

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    1. Beshears, John & Choi, James J. & Laibson, David & Madrian, Brigitte C., 2013. "Simplification and saving," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 130-145.
    2. Mitchell, Olivia S. & Utkus, Stephen P. (ed.), 2004. "Pension Design and Structure: New Lessons from Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780199273393.
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    Cited by:

    1. Basak Kalkanci & Kay-Yut Chen & Feryal Erhun, 2011. "Contract Complexity and Performance Under Asymmetric Demand Information: An Experimental Evaluation," Management Science, INFORMS, vol. 57(4), pages 689-704, April.

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