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Economic Rationality, Risk Presentation, and Retirement Portfolio Choice

  • Hazel Bateman

    ()

    (Centre for Pensions and Superannuation and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

  • Christine Ebling

    ()

    (Centre for the Study of Choice, University of Technology Sydney)

  • John Geweke

    ()

    (Centre for the Study of Choice, University of Technology Sydney)

  • Jordan Louviere

    ()

    (Centre for the Study of Choice, University of Technology Sydney)

  • Stephen Satchell

    ()

    (Trinity College, University of Cambridge and University of Sydney)

  • Susan Thorp

    ()

    (Centre for the Study of Choice, University of Technology Sydney)

This research studies the propensity of individuals to violate implications of expected utility maximization in allocating retirement savings within a compulsory defined contribution retirement plan. The paper develops the implications and describes the construction and administration of a discrete choice experiment to almost 1200 members of Australia's mandatory retirement savings scheme. The experiment finds overall rates of violation of roughly 25%, and substantial variation in rates, depending on the presentation of investment risk and the characteristics of the participants. Presentations based on frequency of returns below or above a threshold generate more violations than do presentations based on the probability of returns below or above thresholds. Individuals with low numeracy skills, assessed as part of the experiment, are several times more likely to violate implications of the conventional expected utility model than those with high numeracy skills. Older individuals are substantially less likely to violate these restrictions, when risk is presented in terms of event frequency, than are younger individuals. The results pose significant questions for public policy, in particular compulsory defined contribution retirement schemes, where the future welfare of participants in these schemes depends on quantitative decision-making skills that a significant number of them do not possess.

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File URL: http://www.cepar.edu.au/media/62136/economic_rationality__risk_presentation__and_retirement_portfolio_choice.pdf
File Function: First version, 2011
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Paper provided by ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales in its series Working Papers with number 201121.

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Length: 38 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:asb:wpaper:201121
Contact details of provider: Postal: Ground Floor, East Wing, UNSW Kensington Campus, Sydney NSW 2052
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Web page: http://www.cepar.edu.au
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  1. Levon Barseghyan & Jeffrey Prince & Joshua C. Teitelbaum, 2011. "Are Risk Preferences Stable across Contexts? Evidence from Insurance Data," American Economic Review, American Economic Association, vol. 101(2), pages 591-631, April.
  2. Jeffrey R. Brown & Jeffrey R. Kling & Sendhil Mullainathan & Marian V. Wrobel, 2008. "Why Don't People Insure Late Life Consumption: A Framing Explanation of the Under-Annuitization Puzzle," NBER Working Papers 13748, National Bureau of Economic Research, Inc.
  3. Julie R. Agnew & Lisa R. Anderson & Jeffrey R. Gerlach & Lisa R. Szykman, 2008. "Who Chooses Annuities? An Experimental Investigation of the Role of Gender, Framing, and Defaults," American Economic Review, American Economic Association, vol. 98(2), pages 418-22, May.
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