Precautionary Saving in the Laboratory

This paper analyzes data generated from economics experiments in which individuals make a series of "life cycle" saving decisions in the face of random income realizations. We directly measure the extent to which subjects' decisions align with predictions based on the standard theoretical framework of intertemporal optimization with rational expectations. We investigate results from two experimental treatments representing problems of different complexity. Additionally, we discern how much learning contributes to rational decision-making in the context of this economic problem and, by introducing a novel experimental design, we focus on the ability of subjects to learn from one another through explicit verbal communication. Indeed, we find significant movements toward intertemporal optimization in subject decision-making after communication with previous players. However, communication between three "generations" of experience is insufficient to yield intertemporally optimal saving decisions among the latest experimental cohort.