Conference of Economics of Household Saving

July 18, 2009
Erik Hurst and James Poterba, Organizers

Annamaria Lusardi, Dartmouth College and NBER; and Olivia S. Mitchell, University of Pennsylvania and NBER
How Ordinary Consumers Make Complex Economic Decisions: How Ordinary Consumers Make Complex Economic Decisions: Financial Literacy and Retirement Readiness

Lusardi and Mitchell report on several measures of financial literacy recently added to the American Life Panel (ALP) and link them to efforts that consumers make in planning for retirement. They can evaluate the causal relationship between financial literacy and retirement planning by exploiting information about respondents' financial knowledge acquired in school -- before entering the labor market and certainly before starting to plan for retirement. Their results show that those with more advanced financial knowledge are more likely to be retirement-ready.

Executive Summary

John Beshears, National Bureau of Economic Research; James J. Choi, Yale University and NBER; David Laibson, Harvard University and NBER; Brigitte C. Madrian, Harvard University and NBER; and Katherine L. Milkman, University of Pennsylvania
The Effect of Providing Peer Information on Retirement Savings Decisions

Beshears and his co-authors conducted a field experiment to evaluate the effect of receiving information about the retirement savings decisions of one's peers.Non-participants and low savers in one firm's 401(k) plan received letters offering them the opportunity to enroll or to increase their plan contribution rates by returning a simple reply form. The researchers randomly assigned employees to receive no peer information, information about the fraction of their co-worker peers who were saving in the plan, or information about the fraction of their co-worker peers who were contributing at least 6 percent of their salary to the plan. The authors find that peer information reduced plan enrollment rates among unionized non-participating employees, but increased enrollment rates among non-unionized nonparticipants. These results highlight the possibilities and limitations of peer information interventions designed to increase retirement savings.

Executive Summary

Ulrike Malmendier, UC, Berkeley and NBER; and Stefan Nagel, Stanford University and NBER
Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?

Malmendier and Nagel investigate whether individuals' experiences of macroeconomic outcomes have long-term effects on their risk attitudes, as often suggested for the generation that experienced the Great Depression. Using data from the Survey of Consumer Finances from 1964-2004, they find that individuals who have experienced low stock-market returns throughout their lives report lower willingness to take financial risk, are less likely to participate in the stock market, and -- conditional on participating -- invest a lower fraction of their liquid assets in stocks. Individuals who have experienced low bond returns are less likely to own bonds. All of the results are estimated controlling for age, year effects, and a broad set of household characteristics. These estimates indicate that more recent return experiences have stronger effects, but experiences early in life still have significant influence, even several decades later. For example, the results can explain the relatively low stock- market participation of young households in the early 1980s, following the disappointing stock-market returns in the 1970s, and the relatively high participation of young investors in the late 1990s, following the boom years in the 1990s. In the aggregate, investors' lifetime stock-market return experiences predict aggregate stock-price dynamics as captured by the price/earnings ratio.

Executive Summary

Peter J. Kuhn, UC, Santa Barbara and NBER; Peter Kooreman, Tilburg University; Adriaan Soetevent, University of Amsterdam; and Arie Kapteyn, RAND Corporation
The Own and Social Effects of an Unexpected Income Shock:Evidence from the Dutch Postcode Lottery

In the Dutch Postcode Lottery, a postal code (19 households on average) is randomly selected weekly, and prizes - cash and a new BMW - are awarded to lottery participants in that postal code.On average, this generates a temporary, unexpected income shock equal to about eight months of income for about one third of the households in a winning code, while leaving the incomes of non-winning, neighboring households unaffected.

Kuhn and his co-authors find that the "own" effects of winnings are confined largely to cars and other durables; the social effects are confined to cars and are highly localized. Relative to the modest effects of the lottery wins on households' own consumption choices (consistent with the life-cycle hypothesis), the social effects are substantial.

Executive Summary

Miles Kimball, University of Michigan and NBER; Tyler Shumway, University of Michigan

Fatalism, Locus of Control, and Retirement Saving

Kimball and Shumway analyze the responses to 81 questions about saving and saving attitudes that they collected in the June 2008 University of Michigan Survey of Consumers. Using factor analysis on the responses to ten questions about saving behavior, they develop an index to measure a respondent's propensity to save. The 401(k) contribution rate the respondent would choose in a new job with a 401(k) explains most of the variance of this first factor in the factor analysis. The authors then correlate this propensity to save with the responses to a number of questions about attitudes toward saving and consuming. They find that questions that identify a locus-of-control issue, or an attitude that saving and consumption decisions and the future in general are out of a respondent's control, are powerful predictors of the propensity to save. Questions about self-control, budgeting skill, institutional trust, and the propensity to plan are other significant categories of attitudes that matter for savings. Several other categories of variables do not seem significantly related to savings, such as the attitude that either someone else or the government will take care of the respondent,or negative attitudes about worrying about money too much. Overall, these results point to several promising new directions for studying the effects on saving of psychological attitudes that are largely missing from standard economic models.

Executive Summary
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