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What Will My Account Really Be Worth? An Experiment on Exponential Growth Bias and Retirement Saving

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  • Gopi Shah Goda
  • Colleen Flaherty Manchester
  • Aaron Sojourner

Abstract

Recent findings on limited financial literacy and exponential growth bias suggest saving decisions may not be optimal because such decisions require an accurate understanding of how current contributions can translate into income in retirement. This study uses a large-scale field experiment to measure how a low-cost, direct-mail intervention designed to inform subjects about this relationship affects their saving behavior. Using administrative data prior to and following the intervention, the authors measure its effect on participation and the level of contributions in retirement saving accounts. Those sent income projections along with enrollment information were more likely to change contribution levels and increase annual contributions relative to the control group. Among those who made a change in contribution, the increase in annual contributions was approximately $1,150. Results from a follow-up survey corroborate these findings and show heterogeneous effects of the intervention by rational and behavioral factors known to affect saving. Finally, they find evidence of behavioral influences on decision-making in that the assumptions used to generate the projections influence the saving response.

Suggested Citation

  • Gopi Shah Goda & Colleen Flaherty Manchester & Aaron Sojourner, 2012. "What Will My Account Really Be Worth? An Experiment on Exponential Growth Bias and Retirement Saving," Working Papers WR-873-2, RAND Corporation.
  • Handle: RePEc:ran:wpaper:wr-873-2
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    References listed on IDEAS

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    More about this item

    Keywords

    saving rate; defined contribution plans; financial literacy;
    All these keywords.

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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