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33
Heuristics and Biases in Retirement Savings Behavior
- JOURNAL OF ECONOMIC PERSPECTIVES—VOLUME 21, NUMBER 3—SUMMER 2007—PAGES 81–104
, 2007
"... All around the world, in both the public and private sectors, retirement plans are shifting away from “defined benefit” plans toward “defined contribution” plans. Poterba, Venti, and Wise (2006), for example, followed the cohort of Americans who were 45 years old in 1984 and report a decrease in def ..."
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Cited by 69 (2 self)
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All around the world, in both the public and private sectors, retirement plans are shifting away from “defined benefit” plans toward “defined contribution” plans. Poterba, Venti, and Wise (2006), for example, followed the cohort of Americans who were 45 years old in 1984 and report a decrease in defined benefit plan coverage from about 40 percent to 20 percent and a corresponding increase in defined contribution plan coverage from about 5 percent to more than 30 percent. Defined contribution plans have many attractive features for participants, such as portability and flexibility, but these attractions come with an increased responsibility to choose wisely. The plans also provide economists with an attractive domain in which to study saving behavior. The standard economic theories of saving (like the life-cycle or permanent income models) contain three embedded rationality assumptions, one explicit and two implicit. The explicit assumption is that savers accumulate and then decumulate assets to maximize some lifetime utility function (possibly including bequests). The first implicit assumption is that households have the cognitive ability to solve
Choice proliferation, simplicity seeking, and asset allocation
- Journal of Public Economics
, 2010
"... ABSTRACT Does the design of an individual's 401(k) plan affect his or her investment behavior? Records of more than 500,000 employees from 638 institutions reveal that the presence of more funds, even more equity funds, in an individual's 401(k) plan induces a greater allocation to money ..."
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Cited by 31 (1 self)
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ABSTRACT Does the design of an individual's 401(k) plan affect his or her investment behavior? Records of more than 500,000 employees from 638 institutions reveal that the presence of more funds, even more equity funds, in an individual's 401(k) plan induces a greater allocation to money market and bond funds at the expense of equity funds. Two randomized experiments replicate the result: larger choice sets induce a stronger preference for simpler options. We offer a rationalization of the results based on the possibility that employees might make inferences about the offered funds based on the design of the plan. ♣ This paper was previously circulated under the title "Choice Overload and Simplicity Seeking." 2
(Over)insuring Modest Risks
, 2009
"... Despite the large literature on anomalies in risky choice, very little research has explored the relevance of these insights in real insurance markets. This paper uses new data on consumers ’ choices of deductibles for home insurance to provide evidence that a surprising level of risk aversion over ..."
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Cited by 25 (1 self)
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Despite the large literature on anomalies in risky choice, very little research has explored the relevance of these insights in real insurance markets. This paper uses new data on consumers ’ choices of deductibles for home insurance to provide evidence that a surprising level of risk aversion over modest stakes is a reality in the market. Most customers purchase low deductibles despite costs signi…cantly above the expected value. Fitting these choices to a standard model of risk aversion yields implausibly large measures of risk parameters. Potential explanations and the implications of these results for understanding the market for insurance are discussed.
Last-place aversion: Evidence and redistributive implications
"... We present evidence from laboratory experiments showing that individuals are “last-place averse.” Participants choose gambles with the potential to move them out of last place that they reject when randomly placed in other parts of the distribution. In money-transfer games, those randomly placed in ..."
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Cited by 19 (2 self)
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We present evidence from laboratory experiments showing that individuals are “last-place averse.” Participants choose gambles with the potential to move them out of last place that they reject when randomly placed in other parts of the distribution. In money-transfer games, those randomly placed in second-to-last place are the least likely to costlessly give money to the player one rank below. Last-place aversion suggests that low-income individuals might oppose redistribution because it could differentially help the group just beneath them. Using survey data, we show that individuals making just above the minimum wage are the most likely to oppose its increase.
When More Alternatives Lead to Less Choice
, 2006
"... One crucial decision firms or government agencies must make is the selection of the alternatives, e.g., the characteristics and/or the number of products, to offer to consumers or citizens. The selection of the set of alternatives to offer should not only take into account the potential preferences ..."
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Cited by 12 (0 self)
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One crucial decision firms or government agencies must make is the selection of the alternatives, e.g., the characteristics and/or the number of products, to offer to consumers or citizens. The selection of the set of alternatives to offer should not only take into account the potential preferences of the consumers and firms, but also the evaluation costs of the economic agents. This may lead to offering more alternatives not always being better for the firms than offering fewer alternatives. This paper shows that search/evaluation costs may lead consumers not to search and not to choose if too many or too few alternatives are offered. If too many alternatives are offered the consumer may have to engage in many searches/evaluations to find a satisfactory fit, which may be too costly and may dissuade the consumer from making a choice altogether. If too few alternatives are offered, a consumer may doubt that a satisfactory alternative is present, and therefore, also decide not to engage in search, and not to choose. These two forces may result in the existence of an interior optimal number of alternatives that should be offered in order to maximize the probability that a choice actually occurs. The number of alternatives offered may also signal the importance of fit in the market if there is asymmetric information about the importance of fit. 1 1.
1 The Discriminating Consumer: Product Proliferation and Willingness to Pay for Quality
"... Trautmann for helpful comments. They also acknowledge the Centre for Marketing at London Business School for financial support. Correspondence: Marco Bertini. 2 The authors propose that a crowded product space motivates consumers to better discriminate between choice options of different quality. Sp ..."
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Cited by 4 (0 self)
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Trautmann for helpful comments. They also acknowledge the Centre for Marketing at London Business School for financial support. Correspondence: Marco Bertini. 2 The authors propose that a crowded product space motivates consumers to better discriminate between choice options of different quality. Specifically, this article reports evidence from three controlled experiments and one natural experiment that people are prepared to pay more for high-quality products and less for low-quality products when they are considered in the context of a dense, as opposed to a sparse, set of alternatives. To explain this effect, the authors argue that consumers uncertain about the importance of quality learn from observing market outcomes. Product proliferation reveals that other consumers care to discriminate among similar alternatives, and this inference in turn raises the importance of quality in decisionmaking. 3 Consumers can be called discriminating when they value the differences between alternatives in a market, especially when inspecting these differences is costly. As firms seek to distinguish themselves from competitors through the superiority of their offerings, they need the custom of discriminating consumers who look beyond price to welcome improvements in
Stochastic Choice and Revealed Perturbed Utility
, 2014
"... Perturbed utility functions—the sum of expected utility and a non-linear perturbation function—provide a simple and tractable way to model various sorts of stochastic choice. We show that these representations correspond to a form of ambiguity-averse preferences for an agent who is uncertain about h ..."
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Cited by 3 (0 self)
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Perturbed utility functions—the sum of expected utility and a non-linear perturbation function—provide a simple and tractable way to model various sorts of stochastic choice. We show that these representations correspond to a form of ambiguity-averse preferences for an agent who is uncertain about her true utility. We then provide easily understood conditions that characterize forms of this representation by generalizing the acyclicity condition used in revealed preference theory. We show how to relax Luce’s IIA condition to model cases where the agent finds it harder to discriminate between items in larger menus, and how to extend the perturbation-function approach to model choice overload and nested decisions. We also show how to use perturbed utility to model menu-dependent choice behavior such as the attraction effect and the compromise effect.
Size, entropy, and density: What is the difference that makes the difference between small and large realworld assortments
- Psychology & Marketing
, 2009
"... ABSTRACT Consumer research has shown the downsides of offering consumers too much choice and is now starting to explore moderators of the effect of assortment size on consumer decisions. Building on previous studies, this research examines two side effects of tyranny of choice in the marketplace: h ..."
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Cited by 2 (1 self)
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ABSTRACT Consumer research has shown the downsides of offering consumers too much choice and is now starting to explore moderators of the effect of assortment size on consumer decisions. Building on previous studies, this research examines two side effects of tyranny of choice in the marketplace: high assortment entropy and high density of attribute values. We analyze two supermarkets-one offering small, the other large assortments-to examine how size, entropy, and density relate in the marketplace. We find that larger supermarket assortments come with higher density and higher entropy. Simulations of various choice strategies in these marketplace assortments reveal that making selections from large high-density and high-entropy
“But Can’t we Get the Same Thing with a Standard Model?”
, 2010
"... This paper discusses a common criticism of economic models that depart from the standard rational-choice paradigm- namely, that the phenomena addressed by such models can be “rationalized ” by some standard model. I criticize this criterion for evaluating bounded-rationality models. Using a market m ..."
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Cited by 2 (0 self)
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This paper discusses a common criticism of economic models that depart from the standard rational-choice paradigm- namely, that the phenomena addressed by such models can be “rationalized ” by some standard model. I criticize this criterion for evaluating bounded-rationality models. Using a market model with boundedly rational consumers due to Spiegler (2006a) as a test case, I show that even when it initially appears that a bounded-rationality model can be rationalized by a standard model, the rationalizing models tend to come with unwarranted “extra baggage”. I conclude that we should impose a greater burden of proof on rationalizations that are offered in refutation of such models.
A range-normalization model of context-dependent choice: A new model and evidence
- PLoS Computational Biology
, 2012
"... Most utility theories of choice assume that the introduction of an irrelevant option (called the decoy) to a choice set does not change the preference between existing options. On the contrary, a wealth of behavioral data demonstrates the dependence of preference on the decoy and on the context in w ..."
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Cited by 2 (0 self)
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Most utility theories of choice assume that the introduction of an irrelevant option (called the decoy) to a choice set does not change the preference between existing options. On the contrary, a wealth of behavioral data demonstrates the dependence of preference on the decoy and on the context in which the options are presented. Nevertheless, neural mechanisms underlying context-dependent preference are poorly understood. In order to shed light on these mechanisms, we design and perform a novel experiment to measure within-subject decoy effects. We find within-subject decoy effects similar to what have been shown previously with between-subject designs. More importantly, we find that not only are the decoy effects correlated, pointing to similar underlying mechanisms, but also these effects increase with the distance of the decoy from the original options. To explain these observations, we construct a plausible neuronal model that can account for decoy effects based on the trial-by-trial adjustment of neural representations to the set of available options. This adjustment mechanism, which we call range normalization, occurs when the nervous system is required to represent different stimuli distinguishably, while being limited to using bounded neural activity. The proposed model captures our experimental observations and makes new predictions about the influence of the choice set size on the decoy effects, which are in contrast to previous models of context-dependent choice preference. Critically, unlike previous psychological models, the computational resource required by our range-normalization model does not increase exponentially as the set size
