The sophistication of financial decisions varies with age: middle-aged adults borrow at lower interest rates and pay fewer fees compared to both younger and older adults. We document this patternintenfinancial markets. The measured effects cannot be explained by observed risk characteristics. The sophistication of financial choices peaks around age 53 in our cross-sectional data. Our results are consistent with the hypothesis that financial sophistication rises and then falls with age, although the patterns that we observe represent a mix of age effects and cohort

In this paper, we summarize and add to the evidence on the large and systematic differences in portfolio composition across individuals with varying characteristics, and evaluate some of the theories that have been proposed in terms of their ability to account for these differences. Variation in background risk exposure--from sources such as labor and entrepreneurial income or real estate holdings, and from factors such as transactions costs, borrowing constraints, restricted pension investments and life cycle considerations – can explain some but not all aspects of the observed cross-sectional variation in portfolio holdings in a traditional utility maximizing framework. In particular, fixed costs and life cycle considerations appear necessary to explain the lack of stock market participation by young and less affluent households. Remaining challenges for quantitative theories include the apparent lack of diversification in some unconstrained individual portfolios, and non-participation in the stock market by some households with significant financial wealth.

doi 10.1287/mksc.1060.0254

Behavioural approaches have become mainstream in economics, supported by the research of cognitive scientists and psychologists, yet their findings have attracted little attention from geographers. This article argues for a renewed behavioural economic geography that builds on research in behavioural economics but also addresses one of its main shortcomings: a lack of engagement with the social context of decision-making. I outline a research agenda that bridges the gap between the disciplines in the area of pension decision-making, using the example of choice in UK occupational plans to argue for a mixed methodological approach to meet the challenge of taking context seriously.

When faced with a choice of selecting one of several available products (or possibly buying nothing), according to standard theoretical perspectives, people will choose the option with the highest cost–benefit difference. However, we propose that decisions about free (zero price) products differ, in that people do not simply subtract costs from benefits and perceive the benefits associated with free products as higher. We test this proposal by contrasting demand for two products across conditions that maintain the price difference between the goods, but vary the prices such that the cheaper good in the set is priced at either a low positive or zero price. In contrast with a standard cost–benefit perspective, in the zero price condition, dramatically more participants choose the cheaper option, whereas dramatically fewer participants choose the more expensive option. Thus, people appear to act as if zero pricing of a good not only decreases its cost but also adds to its benefits. After documenting this basic effect, we propose and test several psychological antecedents of the effect, including social norms, mapping difficulty, and affect. Affect emerges as the most likely account for the effect.

and Vanguard. The authors also acknowledge Vanguard’s efforts in the provision of recordkeeping data under restricted access conditions. They benefited from the suggestions of Brigitte Madrian, Alexander Muermann, and Stephen Shore. Opinions, errors, and conclusions are solely those of the authors and do not represent the views of the SSA, any agency of the Federal Government, Vanguard, the MRRC, or any other institution with which the authors may be affiliated. ©2008 Mitchell, Mottola, Utkus and Yamaguchi. All rights reserved. Menu Effects and Retirement Saving: The Impact of Life Cycle Funds on 401(k) Plan Portfolios The introduction of Life Cycle funds into 401(k) pension plan menus offers a rich environment in which to assess how changing investment menus shapes workers ’ pension investment decisions. We show that when employers introduce life cycle funds which provide professional rebalancing for already-existing investment options this fundamentally alters employees’ investment patterns. Using a unique new dataset on corporate defined contribution plans, we show that behavioral explanations do motivate worker investment patterns; those most swayed by changing the menu include low-wage workers and those thought to be least financially literate. Yet we also find that some new hires exert what appears to be rational choice in their

In many markets consumer biases do not affect prices, since competition forces firms to price their products close to marginal cost; competition protects the consumer. We show that noisy consumer product evaluations undermine the force of competition, enabling firms to charge high mark-ups in equilibrium, even in highly competitive environments. We analyze markets in which rational firms sell goods to consumers who evaluate products with noise. Using results from extreme value theory, we show that competition generally has a remarkably weak impact on markups. For normally distributed evaluation noise, we show that markups are proportional to the inverse of √ ln n, wherenis the number of competitors. In this setting, a highly competitive industry with n =1, 000, 000 firms will retain 1/3 of the markup of a highly concentrated industry with only n =10competitors. When we make noise an endogenous variable, we find that firms choose excess noise by making their products inefficiently confusing. Moreover, competition exacerbates this effect: a higher degree of competition causes firms to choose even more excess complexity. Firms with lower intrinsic quality and higher production costs choose the most excess complexity. Educating consumers to reduce their evaluation noise would generate

Abstract not found

of the Social Security system. According to his plan, a portion of the payroll tax would be designated for individual savings accounts. At the same time as this issue was being debated in the United States, Sweden was in the process of launching a system that is very similar to President Bush’s proposal. Although Bush’s plan did not get much attention in the early years of his administration, the proposal may resurface either in the United States or in other countries. If so, important lessons can be learned from the Swedish experience. In particular, the Swedish plan adopted an interesting mix of design choices that can now be evaluated based on three years of post-implementation experience. Although there is a large literature in economics on the design of social-security systems, most of that literature is concerned with macroeconomic considerations such as funding. In contrast, there has been much less attention devoted to the details of how plans might be designed, in part because these details do not seem important from a standard economic perspective. In this paper, we reverse this usual pattern and focus our attention on the design aspects of the Swedish plan. We find that, although most of the design choices are those that might be approved by most economists, in some cases these choices produced undesirable consequences.

In recent years there has been a significant shift in retirement income provision in the UK from the situation where employers offer defined benefit pensions, to one where defined contribution schemes are more common. This follows similar trends in the US. In a DC scheme the individual employee bears the risk the pension contributions – and the investment returns they earn – are sufficient to fund their retirement. The growing literature of ‘behavioural economics ’ raises important questions about the ability of most employees to make the strategic investment decisions required by DC schemes. This paper uses data from a survey of the members of a mid-sized UK DC pension scheme to explore the attitudes and knowledge of individual employees faced with saving and investment choices in their pension plan. The results are broadly consistent with previous US findings in that many employees show limited knowledge and interest in their pension arrangements. The key difference is that the UK scheme members do not appear to have the enthusiasm for own-company stock often found in the US. The UK scheme members also display a high level of conviction that owning property is a better means of providing for retirement than investing in financial assets.