Working Paper: NBER ID: w21482
Authors: Gopi Shah Goda; Matthew R. Levy; Colleen Flaherty Manchester; Aaron Sojourner; Joshua Tasoff
Abstract: There is considerable variation in retirement savings within income, age, and educational categories. Using a broad sample of the U.S. population, we elicit time preference parameters from a quasi-hyperbolic discounting model, and perceptions of exponential growth. We find that present bias (PB), the tendency to value utility in the present over the future in a dynamically inconsistent way, and exponential-growth bias (EGB), the tendency to neglect compounding, are prevalent and distinct latent variables. PB, EGB, and the long-run discount factor are all highly significant in predicting retirement savings, even while controlling for measures of IQ and general financial literacy as well as a rich set of demographic controls. We find that lack of self-awareness of these biases has an additional independent negative impact on retirement savings. We assess potential threats to a causal interpretation of our results with a hypothetical choice experiment and several robustness exercises. Finally, we explore potential mechanisms for our findings. If the relationship we estimate is causal, our estimates suggest that eliminating PB and EGB would be associated with an increase in retirement savings of 12%, or as high as 70% using estimates that account for classical measurement error.
Keywords: Retirement Savings; Time Preferences; Exponential Growth Bias; Behavioral Economics
JEL Codes: H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Present Bias (PB) (D91) | Retirement Savings (D14) |
| EGB (D50) | Retirement Savings (D14) |
| Eliminating PB and EGB (F69) | Increase in Retirement Savings (D14) |
| Self-awareness regarding biases (D91) | Retirement Savings (D14) |
| Sophistication regarding biases (D91) | Mitigation of adverse effects of PB (H84) |