Economic Rationality, Risk Presentation, and Retirement Portfolio Choice.

Bateman, Hazel and Ebling, Christine and Geweke, John and Jordan, Louviere and Stephen, Satchell and Susan, Thorp (2011): Economic Rationality, Risk Presentation, and Retirement Portfolio Choice.

Abstract

This research studies the propensity of individuals to violate implications of expected utility maximization in allocating retirement savings within a compulsory de- �ned contribution retirement plan. The paper develops the implications and describes the construction and administration of a discrete choice experiment to almost 1200 members of Australias mandatory retirement savings scheme. The experiment �nds overall rates of violation of roughly 25%, and substantial variation in rates, depend- ing 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 ex-periment, 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 de�ned contribution retirement schemes, where the future welfare of participants in these schemes depends on quantitative decision-making skills that a signi�cant number of them do not possess.

• Item Type: MPRA Paper
• Language: English
• Keywords: discrete choice; retirement savings; investment risk; household finance; financial literacy
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance

References

The authors acknowledge �nancial support under ARC DP1093842, generous assistance with the development and implementation of the internet survey from PurePro�le and the sta¤ of the Centre for the Study of Choice, University of Technology Sydney; and excellent research assistance from Frances Terlich and Edward Wei. Part of this work was completed while Bateman visited the School of Finance and Economics at the University of Technology Sydney. Some previous versions of this paper bore the title �Investment Risk Presentation and Individual Preference Consistency.� yCentre for Pensions and Superannuation, University of New South Wales, [e-mail] zCentre for the Study of Choice, University of Technology Sydney, [e-mail] xCentre for the Study of Choice, University of Technology Sydney, [e-mail]. {Centre for the Study of Choice, University of Technology Sydney, [e-mail] kTrinity College, University of Cambridge, University of Sydney, [e-mail] Centre for the Study of Choice, University of Technology Sydney, [e-mail] 1