Dynamic Consistency and Regret

Frank Caliendo and T. Scott Findley

Journal of Economic Behavior & Organization, 2020, vol. 173, issue C, 342-364

Abstract: Individuals often report that they regret not having saved more for retirement. This fact raises concerns about the financial security of retirees and about the adequacy of traditional economic models in making predictions that are consistent with regret about having saved too little for retirement. We provide an overview of four discounted utility models and examine their implications for the optimal level of retirement savings. All of these models exhibit dynamically consistent decision making, and some also feature backward discounting in order to generate regret about past saving decisions. In our preferred parameterization with both forward and backward discounting, a 66 year old at retirement will consider the optimal level of retirement savings to be almost twice as large as what was actually saved, even though actual saving decisions are dynamically consistent across the entire life-cycle. Compared to a model setting with fixed retirement, adding choice over retirement timing compounds the regret that individuals experience about past saving decisions.

Keywords: Saving for Retirement; Regret; Retirement Timing; Dynamic Consistency; Forward and Backward Discounting; Welfare (search for similar items in EconPapers)
JEL-codes: C61 D15 D91 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:173:y:2020:i:c:p:342-364

DOI: 10.1016/j.jebo.2019.09.014

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