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Dynamic Consistency and Regret

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  • Caliendo, Frank N.
  • Findley, T. Scott

Abstract

Individuals often report that they regret not having saved more for retirement. This fact raises concerns about the financial security of retirees and about the adequacy of traditional economic models in making predictions that are consistent with regret about having saved too little for retirement. We provide an overview of four discounted utility models and examine their implications for the optimal level of retirement savings. All of these models exhibit dynamically consistent decision making, and some also feature backward discounting in order to generate regret about past saving decisions. In our preferred parameterization with both forward and backward discounting, a 66 year old at retirement will consider the optimal level of retirement savings to be almost twice as large as what was actually saved, even though actual saving decisions are dynamically consistent across the entire life-cycle. Compared to a model setting with fixed retirement, adding choice over retirement timing compounds the regret that individuals experience about past saving decisions.

Suggested Citation

  • Caliendo, Frank N. & Findley, T. Scott, 2020. "Dynamic Consistency and Regret," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 342-364.
  • Handle: RePEc:eee:jeborg:v:173:y:2020:i:c:p:342-364
    DOI: 10.1016/j.jebo.2019.09.014
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    Cited by:

    1. Johan Gustafsson, 2021. "Age-Targeted Income Taxation, Labor Supply, and Retirement," CESifo Working Paper Series 8988, CESifo.
    2. Gustafsson, Johan, 2021. "Age-Targeted Income Taxation, Labor Supply, and Retirement," Umeå Economic Studies 985, Umeå University, Department of Economics, revised 01 Mar 2021.

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    More about this item

    Keywords

    Saving for Retirement; Regret; Retirement Timing; Dynamic Consistency; Forward and Backward Discounting; Welfare;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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