The Role of Exponential-Growth Bias and Present Bias in Retirement Saving Decisions

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Date and Time: 
Thursday, May 28, 2015
12:00 pm – 1:00 pm
Speaker: 
Joshua Tasoff
Claremont Graduate University
Abstract: 

We investigate two biases that are predicted to cause people to have suboptimal retirement savings: exponential-growth bias, the tendency to neglect compounding interest, and present bias, the tendency for people to underweight future consumption in a dynamically inconsistent manner. Using an online representative sample of the US, we elicit individuals’ level of exponential-growth bias and time-preference parameters as well as numerous other background measures and find the joint distribution of these biases in the population. We find that both biases are prevalent and are strongly negatively correlated with levels of retirement savings.  Then, to determine the causal effects of these biases as well presenting a “proof of concept” for overcoming them, we implement a hypothetical choice experiment in which participants choose contributions to their savings accounts under various employer policies. Treatments are designed to specifically target exponential-growth bias and present bias. First, as theory predicts we find that people with more exponential-growth bias respond more to an informational treatment that reveals how additional contributions translate to monthly retirement income. Second, as theory predicts we find that those with more present bias respond more to immediate financial incentives for filling out the contribution forms.  The evidence suggests that both biases play an important role in Americans’ retirement savings.