Using Behavioral Prompts to Improve Saving and Investment Decisions

June 2020

Behavioral prompts that encourage reflection on goals and future needs can have significant effects on asset allocation decisions and expected returns.

Summary

Previous research suggests that differences in overconfidence, financial literacy, risk preferences, and present bias all affect saving and investment behavior. This study examines whether behavioral prompts can lessen the effects of these characteristics in young people who were asked to make investment and asset allocation decisions. The prompts considered include setting goals in advance of such decisions, setting goals and receiving investment advice, and thinking about future financial needs.

This study was presented at the June 25, 2020, TIAA Institute Fellows Symposium. To view additional research that was presented, go to the 2020 Fellows Symposium Overview.

Key Insights

Individual risk tolerance and discount rates each have a persistent and significant impact on saving and investment decisions.

Financial literacy is an important driver of investment decisions.

Higher levels of financial literacy and risk tolerance, as well as lower discount rates, increase the rate of saving and expected returns.

Behavioral prompts increase expected returns for women and people with lower levels of financial literacy.

Methodology

In an incentivized laboratory experiment, the authors study participants’ investment and asset allocation decisions over a 26-week time horizon and test the efficacy of alternative behavioral prompts to motivate saving decisions.