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Framing and retirement age: The gap between willingness-toaccept and willingness-to-pay

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Abstract

In a large online experiment, we relate the retirement timing decision to the disparity between the willingness-to-accept (WTA) and the willingness-to-pay (WTP). In the WTP treatment, participants indicate the maximum amount of monthly benefits they are willing to give up to retire early. In the WTA treatment, the minimum increase of monthly payments to delay retirement is elicited. Our results reveal that the framing of the decision problem strongly influences participants' reservation price for early retirement. The WTA for early retirement is more than twice as high as the corresponding WTP. Using actual values from the German social security system as market prices, we demonstrate that the presentation in a WTA frame can induce early retirement. In this frame, the implicit probability of retiring early increases by 30 percentage points.We further show that the disparity between WTA and WTP is correlated with loss aversion. Repeating the analysis with data from a representative household survey (German SAVE panel), we find similar results.

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... By measuring individuals' time preferences and analyzing their effect on retirement timing, we contribute to a growing literature in behavioral economics on retirement savings and planning (Benartzi and Thaler, 2007). Framing and its impact on retirement timing is perhaps the phenomenon studied most extensively, with the common finding that the retirement decision is strongly affected by how information is presented (Fetherstonhaugh and Ross, 1999;Brown, Kapteyn and Mitchell, 2013;Shu, Payne and Sagara, 2014;Merkle, Schreiber and Weber, 2017). Non-standard time preferences, alongside affective forecasting and planning fallacy, fall into a category of issues in predicting future behavior and happiness (for an overview, see Knoll, 2011). ...
... Participants answer questions about retirement planning, time preferences, risk preferences, financial literacy, and demographics. Some participants are assigned to different branches of the experiment, which are analyzed in two papers that use data from the same survey (Schreiber and Weber, 2016;Merkle, Schreiber and Weber, 2017). Therefore the initial sample for this study consists of 256 retired participants and 2,173 non-retired participants. ...
... There is evidence that self-reported preferences are good predictors of choices (Nosić and Weber, 2010;van Rooij, Lusardi and Alessie, 2011;Merkle, Schreiber and Weber, 2017). ...
... On the slightly different side, the framing effect was studied by C. Merkle, P. Schreiber and M. Weber [122]. These authors linked the decision on the time of retirement to the discrepancy between the presentation in the form of willingness-to-accept (the minimum increase in monthly benefits inducing people to delay retirement) and in the form of willingness-to-pay (the maximum and the amount of monthly benefits, which people are willing to give up to take early retirement). ...
... Therefore, it was considered that the problem of decision-making regarding retirement affects the extension of the planned retirement age. This conclusion is therefore in line with the prevailing view in the literature [109,110,113,122]. Analyzing the obtained results, however, it is necessary to point out that the impact of individual framing variants was differentiated. ...
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The aim of the study is to fill the research gap in relation to one of the behavioral factors that have a potential impact on retirement decisions—the framing effect. A research question addressed in the study is whether the way in which the decision-making problem is formulated (the framing effect) influences decisions on the planned retirement age. To answer this question, an original research questionnaire was developed. It included a description of a hypothetical pension system and experimental vignette questions. The research was conducted on the basis of answers given by 1079 randomly selected respondents who were participants of the pension system in Poland before retirement. In the analysis of the results, non-parametric tests and multiple logistic regression were used to compare response distributions. As a result of the conducted research, it was proven that the framing effect significantly affects the extension of the planned retirement age. At the same time, it was found that loss framing affects pension decisions to a greater extent than gain framing. It has also been noted that women are more susceptible than men to the framing of pension decisions. An application conclusion resulting from the conducted research is indicated as the possibility of the intentional use of the framing effect by decision-makers in order to increase the effective retirement age.
... Such judgements are, however, difficult to make without knowing the underlying utility functions. 4 Previous studies showing that behavioural factors, such as default and framing, influence the demand for annuities are either based on incentivized labouratory settings (Agnew et al., 2008) or hypothetical choice experiments (Brown et al., 2008(Brown et al., , 2013Beshears et al., 2014;Bockweg et al., 2017;Merkle et al., 2017;Brown et al., 2019). Such approaches can be useful in eliciting respondents' valuation of different payout scenarios and in analyzing specific mechanisms that might be at play. ...
... While standard economic models predict that risk-averse consumers facing uncertainty about their life expectancies should choose annuities since annuities eliminate longevity risk (Davidoff et al., 2005;Yaari, 1965), empirical studies usually find that relatively few individuals choose annuities. Our findings support existing evidence for framing effects in annuity demand (Agnew et al., 2008;Brown et al., 2008Brown et al., , 2013Beshears et al., 2014;Bockweg et al., 2017;Merkle et al., 2017;Brown et al., 2019). Apart from adopting a novel, quasi-experimental approach to address this issue, we are also the first to examine how the salience of different payout options affects annuitization decisions. ...
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We study the effects of two exogenous modifications in the Swedish pension system application form nudging individuals towards a fixed-term payout. Meanwhile, the set of available options and the default option—life annuity—were unchanged during the period under study. We examine the effects on individuals’ payout decisions and the spillover effects on labour supply and other pensions using a difference-in-difference framework and detailed administrative data on actual payout decisions and a wide range of individual-level outcomes. Each modification increased the demand for the nudged payout by around 30 percentage points. The first modification also induced individuals to work less.
... The average age in our sample is 52.1 years (median 54). While this is higher compared to similar surveys of our kind (e.g., Merkle et al., 2017;or Müller and Weber, 2014), it is well suited to study hypothetical retirement choices. Men are overrepresented in our study (85%), which reflects the fact that the majority of FAZ readers are male. ...
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We field a large online survey to study preferences and hypothetical product choices for phased withdrawal accounts and compare their demand to the demand of annuities. We find that most individuals prefer phased withdrawal accounts with dynamic withdrawal rates and equity-based asset allocation. Additionally, when offered the opportunity to exchange the phased withdrawal account with an annuity, most individuals decline to annuitize. Our results suggest that policymakers should consider offering combined solutions of phased withdrawals and annuities. Retirees who are averse to full annuitization could preserve some of their accumulated wealth while also acquiring protection against longevity risk.
... Ülkümen and Cheema (2011) demonstrate the relationship between high versus low construal level framing and savings. Merkle et al. (2017) find that framing (willingness to pay vs. willingness to accept) influences participants' reservation price for early retirement. ...
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People spend very little time planning for retirement, which could have negative effects on their financial well-being. To address this troubling lack of engagement, the authors posit that the use of goal framing, a marketing practice that involves making strategic adjustments to wording of marketing communications, in technology-facilitated communication (e.g., email) is effective for stimulating consumers’ behavioral engagement with pension information that is relevant for their long-term financial well-being. Field, online, and laboratory studies consistently show that a prevention-oriented assurance frame in technology-facilitated communication is twice as effective as a promotion-oriented investment frame for increasing participants’ engagement behavior. The findings have important implications for marketers and policy makers who seek to increase consumers’ retirement engagement behavior and financial well-being.
... A recent and growing literature documents behavioral elements in retirement decisions (Behaghel and Blau, 2012; Goda et al., 2015;Brown et al., 2016;Cribb et al., 2016;Merkle et al., 2017;Seibold, 2019). This evidence raises the question how the welfare evaluation changes in presence of behavioral biases. ...
... The behaviors of individuals, such as loss aversion, that affect the WTP can increase the gap. For substitute goods, the WTA to WTP ratio is smaller, while for health or safety and public or non-market goods, it remains the highest [15]. However, the gap can be turned on and off and can be a source of problematic interpretation [16]. ...
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Background: The clients’ willingness to accept (WTA) and willingness to pay (WTP) for a given good or service can help elicit the monetary value of that good or service. This study aims to assess the WTA and WTP of mothers attending primary health centers for vaccines to their children during 2019 in Kermanshah city, western Iran. Methods: We conducted a cross-sectional study on a total of 667 mothers attending primary health centers for vaccines to their children aged two to 18 months. A multistage sampling technique was employed to involve the mothers in the study, and data were collected using a self-administrated open-ended questionnaire. The multivariate linear regression model was used to identify the factors associated with the mothers’ WTP and WTA for vaccines to their children. Results: The study indicated that 94.2% and 93.1% of the mothers respectively had WTA and WTP values greater than zero, with their corresponding mean values of US6.8andUS 6.8 and US 4.4. The mothers in the higher monthly household income category, mothers born in the urban areas, and being a female child showed statistically significant positive associations with the mothers' WTA for the vaccines. While there was a statistically significant positive relationship between monthly household income and the mothers’ WTP; a statistically significant negative relationship exists between the mothers’ age and their WTP for the vaccine to their children. Conclusions: The findings indicated the mothers’ WTA to WTP ratio of greater than one for the vaccines to their children. The most important factor associated with the mothers’ WTA and WTP was the monthly household income. Thus, improving the socio-economic standards of women in the study area might contribute to reinforcing their immunization services seeking behavior to their children.
... A different strand of literature explores whether behavioral factors help explain low observed levels of annuitization. Several hypothetical choice experiments suggest that behavioral factors influence the demand for annuities, including studies showing that framing of the annuity choice affects the demand for annuities (Brown et al., 2008(Brown et al., , 2013Beshears et al., 2014;Brown, Kapteyn, & Mitchell, 2016;Merkle, Schreiber, & Weber, 2017;and Bockweg et al., 2018). Similar findings emerge in incentivized laboratory settings (Agnew et al., 2008;Gazzale & Walker, 2011). ...
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The paper springs from a position that economic theory is an abstract investigation of the concepts and considerations involved in real life economic decision making rather than a tool for predicting or describing real behavior. It is argued that when experimental economics is motivated by theory, it should not look to verify the predictions of theory but instead should focus on verifying that the considerations contained in the economic model are sound and in common use. It is argued that when theory is motivated by experiments, the theorist should not be hasty in adopting new functional forms but should try to identify the basic psychological themes which are revealed exposed by the experiment. Finally, some critical comments on the methodology of experimental economics are presented.
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We compare wealth holdings across two cohorts of the Health and Retirement Study: the early Baby Boomers in 2004, and individuals in the same age group in 1992. Levels and patterns of total net worth have changed relatively little over time, though Boomers rely more on housing equity than their predecessors. Most important, planners in both cohorts arrive close to retirement with much higher wealth levels and display higher financial literacy than non-planners. Instrumental variables estimates show that planning behavior can explain the differences in savings and why some people arrive close to retirement with very little or no wealth.
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The economic theory of the consumer is a combination of positive and normative theories. Since it is based on a rational maximizing model it describes how consumers should choose, but it is alleged to also describe how they do choose. This paper argues that in certain well-defined situations many consumers act in a manner that is inconsistent with economic theory. In these situations economic theory will make systematic errors in predicting behavior. Kanneman and Tversey's prospect theory is proposed as the basis for an alternative descriptive theory. Topics discussed are: undeweighting of opportunity costs, failure to ignore sunk costs, scarch behavior choosing not to choose and regret, and precommitment and self-control.
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Our study analyzes the determinants of investors' risk taking behavior. We find that investors' risk taking behavior is affected by their subjective risk attitude and by the risk and return of an investment alternative. Our results also suggest that consistent with previous findings in the literature objective or historical return and volatility of a stock are not as good predictors of risk taking behavior as subjective risk and return measures. Moreover, we illustrate that overconfidence or more precisely miscalibration has an impact on risk behavior as predicted by theoretical models. However, our results regarding the effect of various determinants on risk taking behavior heavily depends on the domain the respective determinant is elicited. We interpret this as an indication for an extended domain specificity. In particular with the Markets of Financial Instruments Directive (MiFID) coming into effect we believe practitioners could improve on their investment advising process by incorporating some of the determinants we argue to influence investment behavior.
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The majority of research on the retirement decision has focused on the health and wealth aspects of retirement. Such research concludes that people in better health and those enjoying a higher socioeconomic status tend to work longer than their less healthy and less wealthy counterparts. While financial and health concerns are a major part of the retirement decision, there are other issues that may affect the decision to retire that are unrelated to an individual's financial and health status. Judgment and decision-making and behavioral-economics research suggests that there may be a number of behavioral factors influencing the retirement decision. The author reviews and highlights such factors and offers a unique perspective on potential determinants of retirement behavior, including anchoring and framing effects, affective forecasting, hyperbolic discounting, and the planning fallacy. The author then describes findings from previous research and draws novel connections between existing decision-making research and the retirement decision.
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This paper compares two prominent empirical measures of individual risk attitudes - the Holt and Laury (2002) lottery-choice task and the multi-item questionnaire advocated by Dohmen, Falk, Huffman, Schupp, Sunde and Wagner (forthcoming) - with respect to (a) their correlation with actual risk-taking behaviour in the lab - here the amount sent in a trust game, and (b) their within-subject stability over time (one year). As it turns out, only the questionnaire measure is correlated with actual risk-taking behaviour (both studies) and with the Big Five personality measure (gathered prior to study 1); and the measures themselves are uncorrelated (both studies). Most importantly, however, both individual risk-taking behaviour and the questionnaire measure exhibit a significant high test-retest stability (r = 0:70 and r = 0:79, resp.), while virtually no such stability is present in the lottery-choice task. Thus, the results suggest that the questionnaire measure is more reliable in eliciting individual risk attitudes than the lottery-choice task. Moreover, with respect to trust, the data further support the conjecture that trusting behaviour indeed has a component which itself is a stable individual characteristic (Glaeser, Laibson, Scheinkman and Soutter, 2000).
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The future of Social Security is troubled, both in the United States and in most other developed countries with aging populations. As improvements in health care and changes in life styles enable retirees to live longer than ever before, the stress on national budgets will increase substantially. In Social Security Programs and Retirement around the World, Jonathan Gruber, David A. Wise, and experts in many countries examine the consequences of reforming retirement benefits in a dozen nations. Drawing on the work of an international group of noted economists, the editors argue that social security programs provide strong incentives for workers to leave the labor force by retiring and taking the benefits to which they are entitled. By penalizing work, social security systems magnify the increased financial burden caused by aging populations, thus contributing to the insolvency of the system. This book is a model of comparative analysis that evaluates the effects of illustrative policies for countries facing the impending rapid growth of social security benefits. Its insights will help inform one of the most pressing debates.
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This paper uses the first six waves of the Health and Retirement Study to investigate the impact of pensions on expected retirement age, on the probability of being retired in each wave given employment in the previous wave, and on the probability of retiring earlier than planned. Pension coverage per se and the type of pension are important in each case. Pension wealth reduces the expected retirement age by 0.6 year, and the incentives in defined benefit plans lower the expected age by another 1.1 years. Pension wealth increases the probability of retiring in a given wave, and pension accruals reduce the probability. Other characteristics of defined benefit plans, as measured by the pension dummy, further raise the probability of being retired. Finally, with regard to the probability of retiring earlier than planned, a change in defined contribution wealth increases the probability, but pension coverage per se reduces it. That is, those with pensions tend to be more accurate planners than those without.
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Aside from possible income effects, measures of the maximum amounts people will pay to avoid a loss and the minimum compensation necessary for them to accept it are generally assumed to be equivalent. Unexpectedly wide variations between these sums, however, have been noted in survey responses to hypothetical options. This paper reports the results of a series of experiments that confronted people with actual money payments and cash compensations. The results indicate that the compensation measure of value seems to exceed significantly the willingness to pay measure, which would appear to call into some question various rules of entitlement, damage assessments, and interpretations of indifference curves.