www.people.cornell.edu/pages/edo1/.

As firms switch from defined-benefit plans to defined-contribution plans, employees bear more responsibility for making decisions about how much to save. The employees who fail to join the plan or who participate at a very low level appear to be saving at less than the predicted life cycle savings rates. Behavioral explanations for this behavior stress bounded rationality and self-control and suggest that at least some of the low-saving households are making a mistake and would welcome aid in making decisions about their saving. In this paper, we propose such a prescriptive savings program, called Save More Tomorrow � (hereafter, the SMarT program). The essence of the program is straightforward: people commit in advance to allocating a portion of their future salary increases toward retirement savings. We report evidence on the first three implementations of the SMarT program. Our key findings, from the first implementation, which has We are grateful to Brian Tarbox for implementing the Save More Tomorrow � plan and for sharing the data with us. We would also like to thank many people at the following

Though economists assume that intertemporal preferences are time-consistent, evidence suggests that a person 's relative preference for well-being at an earlier moment over a later moment increases as the earlier moment gets closer. We explore the behavioral and welfare implications of such time-inconsistent preferences in a simple model where a person must engage in an activity exactly once during some duration. We focus on two sets of distinctions. First, do choices involve salient costs # where the costs of an action are immediate but any rewards are delayed # or do they involve salient rewards # where the rewards of an action are immediate but any costs are delayed? Second, are people sophisticated #theyforesee future self-control problems # or are they naive # they do not anticipate these self-control problems? Naive people procrastinate activities with salient costs and preproperate #dotoo soon # activities with salient rewards. If costs are salient, sophistication mitigates procrastination, and can even lead sophisticated people to do the activity sooner than if they had no self-control problem . If rewards are salient, sophistication exacerbates preproperation. These behavioral results have corresponding welfare implications: With salient costs, mild self-control problems can severely damage a person only if she is naive, while with salient rewards mild self-control problems can severely damage a person only if she is sophisticated. We also consider a multiple-activity version of the model, and discuss how our results might apply to savings, addiction, and other behaviors. Keywords: Doing It, Hyperbolic Discounting, Preproperation, Procrastination, Time Inconsistency. JEL Classifications: A12, B49, C70, D11, D60, D74, D91, E21 Acknowledgments: We thank Steven Bl...

Mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities. Making use of research on this topic over the past decade, this paper summarizes the current state of our knowledge about how people engage in mental accounting activities. Three components of mental accounting receive the most attention. This first captures how outcomes are perceived and experienced, and how decisions are made and subsequently evaluated. The accounting system provides the inputs to be both ex ante and ex post cost-benefit analyses. A second component of mental accounting involves the assignment of activities to specific accounts. Both the sources and uses of funds are labeled in real as well as in mental accounting systems. Expenditures are grouped into categories (housing, food, etc.) and spending is sometimes constrained by implicit or explicit budgets. The third component of mental accounting concerns the frequency with which accounts are evaluated and 'choice bracketing'. Accounts can be balanced daily,

Construal level theory proposes that temporal distance changes people’s responses to future events by changing the way people mentally represent those events. The greater the temporal distance, the more likely are events to be represented in terms of a few abstract features that convey the perceived essence of the events (high-level construals) rather than in terms of more concrete and incidental details of the events (low-level construals). The informational and evaluative implications of high-level construals, compared with those of low-level construals, should therefore have more impact on responses to distant-future events than near-future events. This article explores the implications of construal level theory for temporal changes in evaluation, prediction, and choice. The authors suggest that construal level underlies a broad range of evaluative and behavioral consequences of psychological distance from events.

How do anticipated short-term costs affect the likelihood of engaging in an activity that has long-term benefits. Five studies investigated the factors that determine (a) how anticipated short-term costs elicit self-control efforts and (b) how self-control efforts eventually diminish the influence of short-term costs on behavior. The studies manipulated short-term costs (e.g., painful medical procedures) and assessed a variety of self-control strategies (e.g., self-imposed penalties for failure to undergo a test). The results show that short-term costs elicit self-control strategies for self rather than others, before rather than after behavior, when long-term benefits are important rather than unimportant and when the costs are moderate rather than extremely small or large. The results also show that the self-control efforts help people act according to their long-term interests. People sometimes know what they prefer but feel uncertain that this is what they will actually do. This uncertainty often reflects feasibility constraints such as lack of opportunity, freedom of choice, or prerequisite skills. In some cases, however, people may know that what they prefer is entirely feasible but may nevertheless suspect that when faced with the actual choice they will be tempted to do something else. A considerable amount of basic and applied research on self-control has investigated how immediate temptations prevent people from acting according to their preferences and has suggested techniques that may help people resist the

This paper explains why seemingly irrational overconfident behavior can persist. Information aggregation is poor in groups in which most individuals herd. By ignoring the herd, the actions of overconfident individuals (“entrepreneurs”) convey their private information. However, entrepreneurs make mistakes and thus die more frequently. The socially optimal proportion of entrepreneurs trades off the positive information externality against high attrition rates of entrepreneurs, and depends on the size of the group, on the degree of overconfidence, and on the accuracy of individuals ’ private information. The stationary distribution trades off the fitness of the group against the fitness of overconfident individuals. Starting any company is really hard to do, so you can’t be so smart that it occurs to you that it can’t be done.

Five studies tested the predictions of temporal construal theory and time-discounting theories regarding evaluation of near future and distant future options (outcomes, activities, products). The options had abstract or goal-relevant features (called high-level construal features) as well as more concrete or goal-irrelevant features (called low-level construal features). The studies varied the valence (positive vs. negative) and the type of valence (affective vs. cognitive) of the low-level and high-level construal features. The results show that the weight of high-level construal features, compared to the weight of low-construal features, is greater in determining distant future preferences than near future preferences. The implications of the results for extant theories of time-dependent changes in preference are discussed.

Investing for retirement is one of the most important tasks of a person's life, and yet many people do a very poor job. This paper argues that a plausibly important source of poor performance is procrastination. We present a simple model and calibration exercises showing how a person who naively procrastinates due to a time-inconsistent taste for immediate gratification may put off investigating, or implementing, superior investment strategies. Even when the person knows that the benefits of finding a superior investment enormously outweigh the short-term effort costs, she may significantly procrastinate because she repeatedly plans to put in the effort soon. We conclude by discussing some policies that might be used to influence the savings behavior of procrastinators, with an emphasis on policies aimed at default options and short-term incentives that do not significantly alter long-term incentives. Acknowledgments: We thank Peter Diamond and other participants in the Russe...

This paper undertakes a review of the existing academic work in this area. It attempts both to evaluate the evidence, and to identify the important open questions. Although it does not include a full evaluation of any particular saving incentive proposal, it does identify relevant implications. The central conclusions of this review are as follows. First, the traditional life cycle hypothesis has had an excessive influence on the design and conceptualization of empirical investigations concerning the relation between taxation and saving. While other behavioral hypotheses are mentioned in the literature with increasing frequency, this usually occurs in the course of explaining an anomalous result, rather than at the stage of designing an empirical strategy, or even at the stage of evaluating results that do not appear to be anomalous from a lifecycle perspective. In part, this is no doubt attributable to the absence of sufficiently welldeveloped organizing principles for a compelling behavioral alternative. But even in the absence of an intellectually satisfying alternative, it is important to be aware of the potential for reaching misleading conclusions by imposing potentially false structure on the data. Second, there is little reason to believe that households increase their saving significantly in response to a generic increase in the after-tax rate of return. Since the evidence is quite poor, there is still considerable uncertainty on this point. However, it is difficult to identify any robust empirical pattern that is suggestive of a high elasticity. , Third, the literature on the relation between Individual Retirement Accounts (IRAs) and personal saving is inconclusive. Studies that point to a large effect on personal saving contain identifiable biases that ove...