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Reinforcement Learning and Savings Behavior

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  • Laibson, David I.
  • Choi, James J.
  • Madrian, Brigitte
  • Metrick, Andrew

Abstract

We show that individual investors over-extrapolate from their personal experience when making savings decisions. Investors who experience particularly rewarding outcomes from saving in their 401(k)—a high average and/or low variance return—increase their 401(k) savings rate more than investors who have less rewarding experiences with saving. This finding is not driven by aggregate time-series shocks, income effects, rational learning about investing skill, investor fixed effects, or time-varying investor-level heterogeneity that is correlated with portfolio allocations to stock, bond, and cash asset classes. We discuss implications for the equity premium puzzle and interventions aimed at improving household financial outcomes.

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File URL: http://dash.harvard.edu/bitstream/handle/1/4686777/Laibson_ReinforcementLearning.pdf
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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 4686777.

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Date of creation: 2009
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Publication status: Published in Journal of Finance -New York-
Handle: RePEc:hrv:faseco:4686777

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  1. George M. Constantinides, 1984. "Optimal Stock Trading with Personal Taxes: Implications for Prices and the Abnormal January Returns," NBER Working Papers 1176, National Bureau of Economic Research, Inc.
  2. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "For Better or For Worse: Default Effects and 401(k) Savings Behavior," NBER Working Papers 8651, National Bureau of Economic Research, Inc.
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