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How Real People Make Long-Term Decisions : The Case of Retirement Preparation

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  • Binswanger, J.

    (Tilburg University, Center For Economic Research)

  • Carman, K.G.

    (Tilburg University, Center For Economic Research)

Abstract

Large variations in retirement wealth are common, with some households accumulating hundreds of thousands of dollars and others accumulating next to nothing. We examine to what extent formal planning or simple rules of thumb contribute to these differences in wealth accumulation. In particular, we investigate whether those who follow simple rules of thumb or those who come up with more complete plans accumulate more wealth than those who take an unsystematic approach. We test this empirically using a specifically designed survey about retirement preparation. We find that people who rely on a rule of thumb behave like literal planners. However, people without any systematic approach save substantially less. Our results, taken together with evidence from psychology, suggest that financial planning advice based on simple rules of thumb may be helpful for those who currently take no systematic approach.
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  • Binswanger, J. & Carman, K.G., 2009. "How Real People Make Long-Term Decisions : The Case of Retirement Preparation," Discussion Paper 2009-73, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:e775449d-4563-42eb-8fbe-799ae5b53d2a
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    Cited by:

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    2. Bannier, Christina E. & Schwarz, Milena, 2017. "Skilled but unaware of it: Occurrence and potential long-term effects of females' financial underconfidence," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168188, Verein für Socialpolitik / German Economic Association.
    3. Kay Blaufus & Michael Milde, 2021. "Tax Misperceptions and the Effect of Informational Tax Nudges on Retirement Savings," Management Science, INFORMS, vol. 67(8), pages 5011-5031, August.
    4. Mohammed Abdullah Ammer & Theyazn H. H. Aldhyani, 2022. "An Investigation into the Determinants of Investment Awareness: Evidence from the Young Saudi Generation," Sustainability, MDPI, vol. 14(20), pages 1-25, October.
    5. Binswanger, J. & Carman, K.G., 2010. "The Miracle of Compound Interest : Does our Intuition Fail?," Other publications TiSEM c6f1bbec-bee0-467b-956c-1, Tilburg University, School of Economics and Management.
    6. Alassane Diaw, 2017. "Retirement Preparedness in Saudi Arabia," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 78-86.
    7. Zhang, C. Yiwei & Sussman, Abigail B. & Wang-Ly, Nathan & Lyu, Jennifer K., 2022. "How consumers budget," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 69-88.
    8. Brüggen, Elisabeth C. & Hogreve, Jens & Holmlund, Maria & Kabadayi, Sertan & Löfgren, Martin, 2017. "Financial well-being: A conceptualization and research agenda," Journal of Business Research, Elsevier, vol. 79(C), pages 228-237.
    9. Nolan, Anne & Whelan, Adele & McGuinness, Seamus & Maître, Bertrand, 2019. "Gender, pensions and income in retirement," Research Series, Economic and Social Research Institute (ESRI), number RS87.
    10. Isler, Ozan & Rojas, Andres & Dulleck, Uwe, 2022. "Easy to shove, difficult to show: Effect of educative and default nudges on financial self-management," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    11. Adeabah, David & Asongu, Simplice & Andoh, Charles, 2021. "Remittances, ICT and pension income coverage: The international evidence," Technological Forecasting and Social Change, Elsevier, vol. 173(C).
    12. Ye, Zihan & Zou, Xiaopeng & Post, Thomas & Mo, Weiqiao & Yang, Qianqian, 2022. "Too old to plan? Age identity and financial planning among the older population of China," China Economic Review, Elsevier, vol. 73(C).
    13. Robert Clark & Robert Hammond & Emma Hanson & Melinda Morrill, 2014. "Older public sector workers’ retirement planning, participation, and preparedness," Discussion Papers 14-008, Stanford Institute for Economic Policy Research.
    14. Robert L. Clark & Robert G. Hammond & Christelle Khalaf, 2019. "Planning for Retirement? The Importance of Time Preferences," Journal of Labor Research, Springer, vol. 40(2), pages 127-150, June.
    15. Abu Elnasr E. Sobaih & Ibrahim A. Elshaer, 2023. "Risk-Taking, Financial Knowledge, and Risky Investment Intention: Expanding Theory of Planned Behavior Using a Moderating-Mediating Model," Mathematics, MDPI, vol. 11(2), pages 1-17, January.
    16. María J. Prados & Arie Kapteyn, 2019. "Subjective Expectations, Social Security Benefits, and the Optimal Path to Retirement," Working Papers wp405, University of Michigan, Michigan Retirement Research Center.
    17. Osvaldo García-Mata & Mariana Zerón-Félix, 2022. "A review of the theoretical foundations of financial well-being," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 69(2), pages 145-176, June.
    18. Binswanger, J. & Carman, K.G., 2011. "The Role of Desicion Making Processes in the Correlation between Wealth and Health," Other publications TiSEM deb8d0eb-7290-4a34-931b-d, Tilburg University, School of Economics and Management.
    19. George Apostolakis & Gert Dijk, 2018. "Retirement concerns and planning of cooperative members: a study in the Dutch healthcare sector," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 53(4), pages 209-224, October.
    20. Fu, Jonathan, 2020. "Ability or opportunity to act: What shapes financial well-being?," World Development, Elsevier, vol. 128(C).
    21. Piotr Bialowolski & Dorota Weziak-Bialowolska & Eileen McNeely, 2021. "The Role of Financial Fragility and Financial Control for Well-Being," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 155(3), pages 1137-1157, June.
    22. Bucher-Koenen, Tabea & Knebel, Caroline & Weber, Martin, 2023. "Do individuals accept fluctuations in pension income?," ZEW Discussion Papers 23-019, ZEW - Leibniz Centre for European Economic Research.
    23. Ibrahim A. Elshaer & Abu Elnasr E. Sobaih, 2023. "Antecedents of Risky Financial Investment Intention among Higher Education Students: A Mediating Moderating Model Using Structural Equation Modeling," Mathematics, MDPI, vol. 11(2), pages 1-18, January.
    24. Bachmann, Kremena & Lot, Andre & Xu, Xiaogeng & Hens, Thorsten, 2023. "Experimental Research on Retirement Decision-Making: Evidence from Replications," Journal of Banking & Finance, Elsevier, vol. 152(C).
    25. Carman, Katherine Grace & Zamarro, Gema, 2016. "Does Financial Literacy Contribute To Food Security?," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 4(1), pages 1-19, January.

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    More about this item

    Keywords

    Decision process; planning; rule of thumb; retirement saving; household finance;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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