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Predicting Retirement Savings Using Survey Measures of Exponential-Growth Bias and Present Bias

Author

Listed:
  • Shah Goda, Gopi

    () (Stanford University)

  • Levy, Matthew

    () (London School of Economics)

  • Flaherty Manchester, Colleen

    () (University of Minnesota)

  • Sojourner, Aaron J.

    () (University of Minnesota)

  • Tasoff, Joshua

    () (Claremont Graduate University)

Abstract

In a nationally-representative sample, we predict retirement savings using survey-based elicitations of exponential-growth bias (EGB) and present bias (PB). We find that EGB, the tendency to neglect compounding, and PB, the tendency to value the present over the future, are highly significant and economically meaningful predictors of retirement savings. These relationships hold controlling for cognitive ability, financial literacy, and a rich set of demographic controls. We address measurement error as a potential confound and explore mechanisms through which these biases may operate. Back of the envelope calculations suggest that eliminating EGB and PB would increase retirement savings by approximately 12 percent.

Suggested Citation

  • Shah Goda, Gopi & Levy, Matthew & Flaherty Manchester, Colleen & Sojourner, Aaron J. & Tasoff, Joshua, 2018. "Predicting Retirement Savings Using Survey Measures of Exponential-Growth Bias and Present Bias," IZA Discussion Papers 11762, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp11762
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    More about this item

    Keywords

    household finance; retirement savings; exponential-growth bias; quasi-hyperbolic discounting; present bias; financial literacy; survey-based elicitations;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving

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