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Cognitive Ability, Expectations, and Beliefs about the Future: Psychological Influences on Retirement Decisions

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  • Andrew M. Parker

    (RAND)

  • Leandro S. Carvalho

    (RAND)

  • Susann Rohwedder

    (RAND)

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    Abstract

    Recent advances in behavioral decision research, behavioral economics, and life-span development psychology provide leverage for expanding our understanding of the decision to retire earlier versus later. This report examines how cognitive abilities, perceptions about the future, and other psychological characteristics affect retirement decisions. We use existing and new data collected through the RAND-USC American Life Panel, including detailed assessments of fluid and crystallized intelligence, financial literacy, expectations for the future, future time perspective, and maximizing versus satisficing decision styles. We find those with high levels of cognitive ability are more likely to retire later, as are those with greater longevity expectations. We also find those with lower cognitive ability have less coherent expectations of retirement—suggesting a need for planning assistance. We also find expectation of lower Social Security benefits is associated with plans to retire later—contrary to our hypothesis that such expectation might spur early retirement in an effort to lock in benefits. Finally, we find that tendencies maximize (versus satisfice) had mixed effects on retirement decision making, with different aspects of maximizing tendencies showing different relationships with retirement decision making. Future work should expand these data in a targeted direction. Recent research notes that decision-making competence can be improved with training, and to the extent this trainability extends to older adults, decision skills may be a useful target for intervention. Stronger longitudinal design and analysis can also help demonstrate possible endogenities between retirement and psychological variables.

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    File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp298.pdf
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    Bibliographic Info

    Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp298.

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    Length: 97 pages
    Date of creation: Sep 2013
    Date of revision:
    Handle: RePEc:mrr:papers:wp298

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    References

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    1. Gergana Y. Nenkov & Maureen Morrin & Andrew Ward & Barry Schwartz & John Hulland, 2008. "A short form of the Maximization Scale: Factor structure, reliability and validity studies," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 3, pages 371-388, June.
    2. Eric French, 2000. "The effects of health, wealth, and wages on labor supply and retirement behavior," Working Paper Series WP-00-2, Federal Reserve Bank of Chicago.
    3. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Financial literacy and retirement planning: New evidence from the Rand American Life Panel," CFS Working Paper Series 2007/33, Center for Financial Studies (CFS).
    4. Andrew M. Parker & W�ndi Bruine de Bruin & Baruch Fischhoff, 2007. "Maximizers versus satisficers: Decision-making styles, competence, and outcomes," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 2, pages 342-350, December.
    5. Disney, Richard & Emmerson, Carl & Wakefield, Matthew, 2006. "Ill health and retirement in Britain: A panel data-based analysis," Journal of Health Economics, Elsevier, vol. 25(4), pages 621-649, July.
    6. Lee Lillard & Robert J. Willis, 2001. "Cognition and Wealth: The Importance of Probabilistic Thinking," Working Papers wp007, University of Michigan, Michigan Retirement Research Center.
    7. Charles F. Manski, 2004. "Measuring Expectations," Econometrica, Econometric Society, vol. 72(5), pages 1329-1376, 09.
    8. Michael D. Hurd, 2009. "Subjective Probabilities in Household Surveys," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 543-564, 05.
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