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Economic Rationality, Risk Presentation, and Retirement Portfolio Choice

Hazel Bateman (), Christine Ebling, John Geweke, Louviere Jordan, Satchell Stephen and Susan Thorp

MPRA Paper from University Library of Munich, Germany

Abstract: This research studies the propensity of individuals to violate implications of expected utility maximization in allocating retirement savings within a compulsory de- �ned contribution retirement plan. The paper develops the implications and describes the construction and administration of a discrete choice experiment to almost 1200 members of Australias mandatory retirement savings scheme. The experiment �nds overall rates of violation of roughly 25%, and substantial variation in rates, depend- ing on the presentation of investment risk and the characteristics of the participants. Presentations based on frequency of returns below or above a threshold generate more violations than do presentations based on the probability of returns below or above thresholds. Individuals with low numeracy skills, assessed as part of the ex-periment, are several times more likely to violate implications of the conventional expected utility model than those with high numeracy skills. Older individuals are substantially less likely to violate these restrictions, when risk is presented in terms of event frequency, than are younger individuals. The results pose significant questions for public policy, in particular compulsory de�ned contribution retirement schemes, where the future welfare of participants in these schemes depends on quantitative decision-making skills that a signi�cant number of them do not possess.

Keywords: discrete choice; retirement savings; investment risk; household finance; financial literacy (search for similar items in EconPapers)
JEL-codes: D14 G23 G28 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-age, nep-cbe, nep-exp and nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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