Comments welcome The research reported herein was pursuant to a grant from the US Social Security

Abstract: This paper has two goals. First, we discuss several emerging approaches to applied welfare analysis under non-standard (“behavioral”) assumptions concerning consumer choice. This provides a foundation for Behavioral Public Economics. Second, we illustrate applications of these approaches by surveying behavioral studies of policy problems involving saving, addiction, and public goods. We argue that the literature on behavioral public economics, though in its infancy, has already fundamentally changed our understanding of public policy in each of these domains.

literacy questions. Yuni Yan and Hiroaki Matsuura provided excellent research assistance.

We analyze a national sample of Americans with respect to their debt literacy, financial experiences, and their judgments about the extent of their indebtedness. Debt literacy is measured by questions testing knowledge of fundamental concepts related to debt and by selfassessed financial knowledge. Financial experiences are the participants ’ reported experiences with traditional borrowing, alternative borrowing, and investing activities. Overindebtedness is a self-reported measure. Overall, we find that debt literacy is low, especially among women, the elderly, minorities and those with low income and wealth. Even after controlling for demographics, we find a strong relationship between debt literacy and both financial experiences and debt loads. Specifically, individuals with lower levels of debt literacy tend to transact in high-cost manners (incurring fees and using high-cost borrowing). In applying our results to credit cards, we estimate that less knowledgeable individuals pay 46 percent more fees than do the more knowledgeable individuals. The less knowledgeable also report that their debt loads are

Increasingly, individuals are in charge of their own financial security and are confronted with ever more complex financial instruments. However, there is evidence that many individuals are not well-equipped to make sound saving decisions; that they do not possess adequate financial literacy. This paper demonstrates widespread financial illiteracy among the U.S. population, particularly among specific demographic groups. Those with low education, women, African-Americans, and Hispanics display particularly low levels of literacy. Financial literacy impacts financial decision-making. Failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior can all be linked to ignorance of basic financial concepts. While financial education programs can result in improved saving behavior and financial decision-making, much can be done to improve these programs ’ effectiveness. 1

including © notice, is given to the source. WHAT DETERMINES 401(K) PARTICIPATION AND CONTRIBUTIONS? This paper uses the 1998 Survey of Consumer Finances to identify the factors that determine whether an eligible employee elects to participate in a 401(k) plan and the magnitude of the employee’s contribution. The conclusion is that the most important factor affecting employees ’ participation and contribution decisions is their planning horizon. Those with planning periods of less than two years are much less likely to provide for retirement than those who have a more long-term perspective. These results are consistent with other studies suggesting that employee education can have a major impact on retirement saving. On the plan side, the most important determinants are the availability of an employer match and the ability of employees to gain access to their funds before retirement through withdrawal or borrowing. In short, good information

The American pension environment is undergoing a dramatic shift from defined benefit, in which the amount of retirement benefits are determined largely by years of service, to defined contribution, in which retirement wealth depends on how much workers save and how they allocate their pension wealth. A wide range of financial products are now available for retirement saving, and workers are called upon to make investment decisions. Thus it is more important than ever for households to have a high degree of financial savvy. However, as this brief will demonstrate, there is widespread financial illiteracy. Many households are unfamiliar with even the most basic economic concepts needed to make sensible saving and investment decisions. This has serious implications for saving, retirement planning, retirement,

This paper tests two explanations for apparent undersaving in lifecycle models: Bounded rationality; and a preference for immediacy. Each was addressed in a separate experimental study. In first study, subjects saved too little initially—providing evidence for bounded rationality—but learned to save optimally within four repeated lifecycles. In the second study, thirsty subjects that consume beverage sips immediately rather than with a delay show greater relative overspending, consistent with quasi-hyperbolic discounting models. The parameter estimates of overspending obtained from the second study—but not the first—are in range of several empirical studies of savings (with an estimated �=0.6-0.7).

Using data from the Surveys of Consumers, we explore patterns of financial behaviors (cash flow management, saving, and investing) and the characteristics and learning preferences of households exhibiting these patterns. We find a wide range in diversity of financial behaviors among U.S. households. The only variables that consistently influenced having a high score for cash flow, saving, and investing behaviors were financial knowledge and financial learning experiences – those who knew more and those who learned from family, friends, and personal experiences had higher scores. The implication is that increases in knowledge and experience can lead to improvements in financial behaviors. We argue that one way to increase knowledge is to gain additional education, although we acknowledge that education is only one mechanism for influencing behavior. We conclude that a “one size fits all ” and a “one delivery technique fits all ” approach to financial education will be less effective than more targeted, tailored approaches. 1.

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.