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Framing and retirement age: The gap between willingness-toaccept and willingness-to-pay
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.
... 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. ...
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. ...
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. ...
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. ...
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]. ...
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 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). ...
This paper examines two behavioral factors that diminish people’s ability to value a lifetime income stream or annuity, drawing on a randomized experiment with about 4,000 adults in a U.S. nationally representative sample. We find that increasing the complexity of the annuity choice reduces respondents’ ability to value the annuity, measured by the difference between the sell and buy values they assign to the annuity. When we limit narrow choice bracketing by inducing people to think first about how quickly or slowly to spend down assets in retirement, their ability to value an annuity increases.
This paper studies the large concentration of retirement behavior around statutory retirement ages, a puzzling stylized fact. To investigate this fact, I estimate bunching responses to 644 pension benefit discontinuities, using administrative data on the universe of German retirees. Financial incentives alone cannot explain retirement patterns, but there is a large direct effect of statutory retirement ages. I argue that the framing of statutory ages as reference points for retirement provides a plausible explanation. Simulations based on a model with reference dependence highlight that shifting statutory ages via pension reforms is an effective policy to influence retirement behavior. (JEL D91, H55, J26, J32)
With the increase in life expectancy and demographic shocks, several public policies in the last decades aim to encourage individuals to postpone retirement. One of them, the pension bonus, gives an increased pension if individuals retire beyond their Full Retirement Age. Previous ex post analyses found that the responsiveness to this type of financial incentives, which encourage to postpone retirement, is heterogeneous among agents and that the global effect is rather limited. Deriving from previous research in Behavioural Economics, this article analyses the impact of time inconsistency in the decision to delay retirement to get the bonus. Using public national survey data, short-term and long-term impatience are measured with questions on retiring motivations. After controlling for the endogeneity of the bonus knowledge, econometric results show that time-inconsistent agents are less likely to retire with the bonus.
This paper documents consumers’ difficulty valuing life annuities. Using a purpose-built experiment in the American Life Panel, we show that the prices at which people are willing to buy annuities are substantially below the prices at which they are willing to sell them. We also find that buy values are negatively correlated with sell values and that the sell–buy valuation spread is negatively correlated with cognition. This spread is larger for those with less education, weaker numerical abilities, and lower levels of financial literacy. Our evidence contributes to the emerging literature on heterogeneity in financial decision-making abilities, particularly regarding retirement payouts.
In two studies, time preferences for financial gains and losses at delays of up to 50 years were elicited using three different methods: matching, fixed-sequence choice titration, and a dynamic "staircase" choice method. Matching is found to create fewer demand characteristics and to produce better fits with the hyperbolic model of discounting. The choice-based measures are shown to better predict real-world outcomes such as smoking and payment of credit card debt. No consistent advantages are found for the dynamic staircase method over fixed-sequence titration. © 2013. The authors license this article under the terms of the Creative Commons Attribution 3.0 License.
Americans are living healthier and longer lives, but the shifting age distribution is straining existing and projected social welfare protections for older adults (e.g., Social Security, Medicare). One solution is to delay retirement. Another is an alternative to "total leisure" retirement -- an "encore" stage of paid or unpaid engagement coming after career jobs but before infirmities associated with old age. We draw on gendered life-course themes together with data from the American Time Use Survey (2003-2009) to examine the real time American men and women ages 50-75 apportion to paid work and unpaid volunteer work on an average day, as well as factors predicting their time allocations. We find that while full-time employment declines after the 50s, many Americans allot time to more limited engagements - working part time, being self-employed, volunteering, helping out - through and even beyond their 60s. Caring for a child or infirm adult reduces the odds of paid work but not volunteering. While time working for pay declines with age (though more slowly for men than women), time volunteering does not. Older men and women in poor health, without a college degree, with a disability or SSI income are the least likely to be publicly engaged. This social patterning illustrates that while the ideal of an encore of paid or unpaid voluntary, flexible, and meaningful engagement is an emerging reality for some, it appears less attainable for others. This suggests the importance of organizational and public policy innovations offering all Americans a range of encore opportunities.
The degree to which the Social Security tax distorts labor supply decisions depends on the extent to which individuals recognize that future benefits are based on how much they worked. To measure the perceived linkage between labor supply and Social Security benefits, we administer a survey about the Social Security benefit rules to a representative sample of Americans aged 50-70. We find that the majority of respondents believe that their Social Security benefits increase with labor supply, i.e., that the Social Security benefit rules provide a positive work incentive. The magnitude of this perceived incentive varies across respondents, but people generally cite an incentive that is somewhat greater than the actual figure. We also surveyed people about their understanding of various provisions in the Social Security benefit rules. We find that some of these provisions (e.g., effects of delayed benefit claiming, and rules on widow benefits) are relatively well understood while others (rules on spousal benefits, provisions on which years of earnings are taken into account) are less well understood.
Willingness to accept (WTA) is usually substantially higher than willingness to pay (WTP). These constructs have been studied for roughly 30 years and with a wide variety of goods. This paper reviews those studies. We find that the less the good is like an “ordinary market good,” the higher is the ratio. The ratio is highest for non-market goods, next highest for ordinary private goods, and lowest for experiments involving forms of money. A generalization of this pattern holds even when we account for differences in survey design: ordinary goods have lower ratios than non-ordinary ones. We also find that ratios in real experiments are not significantly different from hypothetical experiments and that incentive-compatible elicitation yields higher ratios.
We use a US Social Security reform as a quasi-experiment to provide evidence on framing effects in retirement behavior. The reform increased the full retirement age (FRA) from 65 to 66 in two month increments per year of birth for cohorts born from 1938 to 1943. We find strong evidence that the spike in the benefit claiming hazard at 65 moved in lockstep along with the FRA. Results on self-reported retirement and exit from employment are less clear-cut, but go in the same direction. The responsiveness to the new FRA is stronger for people with higher cognitive skills. We interpret the findings as evidence of reference dependence with loss aversion. We develop a simple labor supply model with reference dependence that can explain the results. The model has potentially important implications for framing of future Social Security reforms. JEL: J26
Loss aversion can occur in riskless and risky choices. Yet, there is no evidence whether people who are loss averse in riskless choices are also loss averse in risky choices. We measure individual-level loss aversion in riskless choices in an endowment effect experiment by eliciting both WTA and WTP from each of our 360 subjects (randomly selected customers of a car manufacturer). All subjects also participate in a simple lottery choice task which arguably measures loss aversion in risky choices. We find substantial heterogeneity in both measures of loss aversion. Loss aversion in the riskless choice task and loss aversion in the risky choice task are highly significantly and strongly positively correlated. We find that in both choice tasks loss aversion increases in age, income, and wealth, and decreases in education.
Item nonresponse is a problem that frequently occurs in survey data. Although it can never be prevented totally, it can be reduced considerably. This not only provides researchers with more data to use in their analyses, but also with helpful auxiliary information for better imputation and adjustment. Understanding, prevention, and imputation are chained together in handling missing data successfully. To supply survey researchers with adequate tools we will review all three aspects. First, we present a typology of missing data patterns and their origins. Based on this typology and the potential sources of item nonresponse, we outline how missing data can be prevented as much as possible. Finally, we discuss how knowledge of the data collection process can improve the statistical treatment of the remaining missing data
This study analyzes the empirical relation between the decision when to retire and individuals time preferences. Theoretical models predict that hyperbolic discounting leads to dynamic inconsistent retirement timing. Conducting an online survey with more than 3,000 participants, we confirm this prediction. The analysis shows, that time inconsistent participants decrease their planned retirement age with increasing age. The temptation of early retirement seems to become stronger the closer retirement comes. We show that the negative effect of age is between 1.5 and 3 times stronger for participants who can be classified as hyperbolic discounters. In addition, we find that time inconsistent participants actually retire earlier. On average, the most time inconsistent participants retire about 2.2 years earlier. The time inconsistent behavior has severe consequences: Time inconsistent participants are ex post more likely to regret their retirement timing decision. Also, the unplanned early retirement leads to a constant decrease of retirement benefits of about 13%.
Individuals are increasingly put in charge of their financial security after retirement. Moreover, the supply of complex financial products has increased considerably over the years. However, we still have little or no information about whether individuals have the financial knowledge and skills to navigate this new financial environment. To better understand financial literacy and its relation to financial decision-making, we have devised two special modules for the DNB Household Survey. We have designed questions to measure numeracy and basic knowledge related to the working of inflation and interest rates, as well as questions to measure more advanced financial knowledge related to financial market instruments (stocks, bonds, and mutual funds). We evaluate the importance of financial literacy by studying its relation to the stock market: Are more financially knowledgeable individuals more likely to hold stocks? To assess the direction of causality, we make use of questions measuring financial knowledge before investing in the stock market. We find that, while the understanding of basic economic concepts related to inflation and interest rate compounding is far from perfect, it outperforms the limited knowledge of stocks and bonds, the concept of risk diversification, and the working of financial markets. We also find that the measurement of financial literacy is very sensitive to the wording of survey questions. This provides additional evidence for limited financial knowledge. Finally, we report evidence of an independent effect of financial literacy on stock market participation: Those who have low financial literacy are significantly less likely to invest in stocks.
Return-chasing investors almost exclusively consider top-performing funds for their investment decisions. When drawing conclusions
about the managerial skill of these top performers, they tend to neglect fund volatility and the cross-sectional information
contained in the number of funds and the distribution of skill. In multiple surveys of sophisticated retail investors, we
show that they do not fully understand the role of chance in experimental samples of fund populations. Respondents evaluate
each fund in isolation and do not sufficiently account for fund volatility. They confuse risk taking with manager skill and
are thus likely to over-allocate capital to lucky past winners.
Claiming Social Security retirement benefits before the full retirement age (FRA) results in permanently lower benefits. Therefore, delaying claiming is often considered the best decision economically. We examine a number of novel changes aimed at encouraging individuals to delay claiming in the months and years before reaching their FRA, such as changing the early retirement reductions, paying lump sums, rewarding work with bonuses, instituting a lottery, and reforming the earnings test. We use Modeling Income in the Near Term, Version 6 data to determine the socioeconomic characteristics of individuals who claim at various ages and analyze one of the incentives to encourage delayed claiming: changing the early retirement reductions. We model the incentive first with no assumed behavioral response, and then we assume a 1-year delay in benefit claiming. We find that the delay in claiming would result in larger increases to both monthly and lifetime benefits than would the incentive alone.
In this article, the authors propose some psychological principles to describe the boundaries of loss aversion. A key idea is that exchange goods that are given up "as intended" do not exhibit loss aversion. For example, the authors propose that money given up in purchases is not generally subject to loss aversion. The results of several experiments provide preliminary support for the hypotheses. The authors find that, consistent with prospect theory, loss aversion provides a complete account of risk aversion for risks with equal probability to win or lose. The authors propose boundaries for this result and suggest further tests of the model.
The recent financial crisis caused a shock to private wealth. Households with low financial literacy are less likely to own risky assets directly. Therefore, fewer of them report financial losses. More importantly, financially illiterate households are more prone to sell assets that have lost in value. Thereby losses become permanent, and these households do not participate in markets' resurgence. This flight from risky assets is persistent - the financial crisis may prove to be a traumatic experience that shapes investment behavior and gives rise to serious distributional consequences, as households with lower financial literacy face lower returns in the long run. © © The Authors 2013. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For Permissions, please email: [email protected]
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Eight alternative methods of eliciting preferences between money and a consumption good are identified: two of these are standard
willingness-to-accept and willingness-to-pay measures. These methods differ with respect to the reference point used and the
dimension in which responses are expressed. The loss aversion hypothesis of Tversky and Kahneman's theory of reference-dependent
preferences predicts systematic differences between the preferences elicited by these methods. These predictions are tested
by eliciting individuals' preferences for two private consumption goods; the experimental design is incentive-compatible and
controls for income and substitution effects. The theory's predictions are broadly confirmed.
Social Security benefits may be commenced at any time between ages 62 and 70. As individuals who claim later can, on average, expect to receive benefits for a shorter period, an actuarial adjustment is made to the monthly benefit to reflect the age at which benefits are claimed. We investigate the actuarial fairness of that adjustment in light of recent improvements in mortality and historically low interest rates. We show that delaying is actuarially advantageous for a large number of people, even for individuals with mortality rates that are twice the average. At real interest rates closer to their historical average, singles with mortality that is substantially greater than average do not benefit from delay, although primary earners with high mortality can still improve the present value of the household's benefits through delay. We also investigate the extent to which the actuarial advantage of delay has grown since the early 1960s, when the choice of when to claim first became available, and we decompose this growth into three effects: (1) the effect of changes in Social Security's rules, (2) the effect of changes in the real interest rate, and (3) the effect of changes in life expectancy. Finally, we quantify the extent to which the gains from delay can be expected to increase in the future as a result of mortality improvements.
We elicited the prospect theory components (utility, probability weighting, and loss aversion) when consequences are expressed as the time dedicated to a specific task or activity. A similar elicitation was performed for monetary consequences to allow an across-attribute (time/money) comparison of the elicited components (at the individual level). We obtained less concave utility and smaller loss aversion for time than for money. Moreover, while the probability weighting was predominantly inverse S-shaped for both attributes, it was less sensitive to probabilities and more elevated for time than for money. This finding implies more optimism for gains and more pessimism for losses.
This paper was accepted by Peter Wakker, decision analysis.
This study reports a new meta-analysis of papers that elicit willingness-to-pay (WTP) and willingness-to-accept compensation (WTA) measures of value for the same good. We investigate the effects of type of good and several survey-design features on the WTP/WTA disparity, measured as the logarithm of the ratio of mean WTA to mean WTP. Confirming Horowitz and McConnell's (2002) pioneering meta-analysis, we find the disparity is smaller for ordinary private goods than for public and non-market goods, that it is not solely an artifact of using hypothetical transactions or other weak experimental or survey methods, and that it is smaller for studies using student subjects. In addition, we find that the disparity is smaller when subjects have experience valuing the good in real markets or through repeated experimental trials. In contrast to Horowitz and McConnell, we find the disparity is significantly smaller in studies using incentive-compatible elicitation mechanisms. The disparity is smaller in more recent studies, an effect that is attributable only in part to changes in study characteristics.
This article provides evidence that Social Security benefit claiming decisions are strongly affected by framing and are thus inconsistent with expected utility theory. Using a randomized experiment that controls for both observable and unobservable differences across individuals, we find that the use of a “breakeven analysis” encourages early claiming. Respondents are more likely to delay when later claiming is framed as a gain, and the claiming age is anchored at older ages. Additionally, the financially less literate, individuals with credit card debt, and those with lower earnings are more influenced by framing than others.
We provide evidence that individuals optimize imperfectly when making annuity decisions, and this result is not driven by loss aversion. Life annuities are more attractive when presented in a consumption frame than in an investment frame. Highlighting the purchase price in the consumption frame does not alter this result. The level of habitual spending has little interaction with preferences for annuities in the consumption frame. In an investment frame, consumers prefer annuities with principal guarantees; this result is similar for guarantee amounts below, at, and above the purchase price. We discuss implications for the retirement services industry and its regulators.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Cumulative prospect theory (CPT) is widely considered to be the most successful descriptive theory for decision making under risk and uncertainty. Sophisticated methods have been developed to reliably elicit CPT parameters on an individual basis. The aim of this paper is to analyze whether such methods are suited to be applied in real world situations, particularly in the context of investment counseling for retail investors. Specifically, we examine whether CPT parameters elicited via standardized computer tools are successful in predicting an individual’s preference for different structured financial products. Surprisingly, we find only low predictive power of the elicited CPT parameters on the WTP. Using a second set of experiments, we examine possible explanations for the low prediction quality. Overall, we have to conclude that it is too much of a leap to draw conclusions about the attractiveness of complex financial products from CPT parameters elicited via simple lotteries.
Many surveys of the U.S. household population are experiencing higher refusal rates. Nonresponse can, but need not, induce
nonresponse bias in survey estimates. Recent empirical findings illustrate cases when the linkage between nonresponse rates
and nonresponse biases is absent. Despite this, professional standards continue to urge high response rates. Statistical expressions
of nonresponse bias can be translated into causal models to guide hypotheses about when nonresponse causes bias. Alternative
designs to measure nonresponse bias exist, providing different but incomplete information about the nature of the bias. A
synthesis of research studies estimating nonresponse bias shows the bias often present. A logical question at this moment
in history is what advantage probability sample surveys have if they suffer from high nonresponse rates. Since postsurvey
adjustment for nonresponse requires auxiliary variables, the answer depends on the nature of the design and the quality of
the auxiliary variables.
Using a sample of several thousand faculty members and multiple measures of health, wealth, and productivity, this study examines the predictors of actual acceptance of 3 successive early retirement incentive offers. Consistent with previous research, the results here suggest that poorer health, lower salary, and higher pension benefits were significantly related to early retirement decisions. In addition, the results suggest that faculty members who planned on working part time after retirement and who expected there would be no future incentive programs were more likely to accept early retirement offers, while those with higher productivity and with spouses still in the workforce were less likely to do so. Implications for future research on early retirement and for the design of early retirement programs are discussed as well.
In this article, the authors propose some psychological principles to describe the boundaries of loss aversion. A key idea is that exchange goods that are given up "as intended" do not exhibit loss aversion. For example, the authors propose that money given up in purchases is not generally subject to loss aversion. The results of several experiments provide preliminary support for the hypotheses. The authors find that, consistent with prospect theory, loss aversion provides a complete account of risk aversion for risks with equal probability to win or lose. The authors propose boundaries for this result and suggest further tests of the model.
We test the abilities of the Stiftung Warentest fund rating system to predict future fund performance among German registered funds for six equity categories: Germany, Euro-Zone, Europe, North-America, Pacific, and World. Stiftung Warentest is a consumer protection agency and a major provider of fund ratings in Germany. Our empirical analysis documents predictive abilities of the rating system. The reason is that measures of past performance are positively related to future performance in several of these markets, even after controlling for momentum. Measures of fund activity are also helpful to predict performance, and in particular to identify likely future losers.
The degree to which the Social Security tax distorts labor supply depends on the extent to which individuals perceive the link between current earnings and future Social Security benefits. Some Social Security reform plans have been motivated by an assumption that workers fail to perceive this link and that increasing the salience of the link could result in significant efficiency gains. To measure the perceived linkage between labor supply and Social Security benefits, we administered a survey to a representative sample of Americans aged 50-70.We find that the majority of respondents believe that their Social Security benefits increase with labor supply. Indeed, respondents generally report a link between labor supply and future benefits that is somewhat greater than the actual incentive. We also surveyed people about their understanding of various other provisions in the Social Security benefit rules. We find that some of these provisions (e.g., effects of delayed benefit claiming and rules on widow benefits) are relatively well understood while others (e.g., rules on spousal benefits, provisions on which years of earnings are taken into account) are less well understood. In addition, our survey incorporated a framing experiment, which shows that how the incentives for delayed claiming are presented has an impact on hypothetical claiming decisions. In particular, the traditional "break-even" framing used by the Social Security Administration leads to earlier claiming than other presentations do. © 2012 by the National Bureau of Economic Research. All rights reserved.
Individuals are increasingly put in charge of their financial security after retirement. Moreover, the supply of complex financial products has increased considerably over the years. However, we
still have little or no information about whether individuals have the financial knowledge and skills to navigate this new financial environment. To better understand financial literacy and its relation to financial decision-making, we have devised two special modules for the DNB Household Survey. We have designed questions to measure numeracy and basic knowledge related to the working of inflation and interest rates, as well as questions to measure more advanced financial knowledge related to financial market instruments (stocks, bonds, and mutual funds). We evaluate the importance of financial literacy by studying its relation to the stock market: Are more financially knowledgeable individuals more likely to hold stocks? To assess the direction of causality, we make use of questions measuring financial knowledge before investing in the stock market. We find that, while the understanding of basic economic concepts related to inflation and interest rate compounding is far from perfect, it outperforms the limited knowledge of stocks and bonds, the concept of risk diversification, and the working of financial markets. We also find that the measurement of financial literacy is very sensitive to the wording of survey questions. This provides additional evidence for limited financial knowledge. Finally, we report evidence of an independent effect of financial literacy on stock market participation: Those who have low financial literacy are significantly less likely to invest in stocks.
The pervasive finding that individuals value losses more than gains, suggests that actual gains from trade and numbers of market exchanges may well be much smaller than would be the case if people's buying and selling prices were equivalent, as normally assumed. The results of two sets of costless market simulations, using actual gain and loss valuations, show that the actual gains from exchange and trade volumes are less than half of those expected with conventional assumptions, and that completion of all Pareto-efficient exchanges fail by wide margins to shift entitlements to those willing to pay the most for them. These findings suggest the valuation disparity has significant welfare implications and may be a major cause of market stickiness.
To learn why WTA regularly exceeds WTP in economic experiments involving inexpensive market goods with ample substitutes, the verbal protocol technique was used in a real cash experiment employing a random price auction. Results suggest that the primary reason for the disparity was subjects’ reluctance to suffer a net loss from any transaction, whether purchase or sale, and tendency to consider sale much below assumed market price as a loss. This interpretation indicates a kind of loss aversion, but not the kind envisioned in the endowment effect, which maintains that selling creates a loss and buying creates a gain.
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.
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.
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.
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.
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.
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).
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.
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.
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.