Behavioral Finance

April 2008

Increasing the number of options available to an individual is generally seen as beneficial. However, sufficiently large choice sets can also cause individuals to focus on all the things that can go wrong, lose the ability to distinguish between options, and otherwise negatively impact the choosing process. Research has found a negative effect of the number of offered funds on 401(k) participation rates. Further analysis has revealed that as the number of funds rises, participants become more likely to avoid stocks in favor of money market and bond funds.

March 2008

According to standard economic models, a risk-averse consumer who faces uncertainty about length-of-life should place a high value on life annuities that provide guaranteed income for life. Yet numerous studies show that few consumers voluntarily annuitize their retirement savings. As a whole, however, the literature has failed to find a sufficiently general explanation of consumer aversion to annuities. This paper suggests that a psychologically richer model of consumer behavior can explain under-annuitization.

May 2006

n recent years, a number of academic researchers have conducted analyses of retirement plan designs to better understand features that promote greater participation and contribution rates. Renowned experts in behavioral finance have linked low participation and savings rates in defined contribution (DC) plans to such human behaviors as procrastination and inertia, which has been described as “the divergence between desire and effective action.” With regards to saving for retirement, many workers simply don’t get around to enrolling in their employer’s retirement plan.

March 2002

Economists have developed models to explain the impact of pensions and Social Security on various outcomes, such as retirement, worker turnover, and saving. However, some recent research has raised questions about these conventional models. This issue of Research Dialogue summarizes findings from our ongoing research on pensions and Social Security.