Transcript The Role of Time Preferences and Exponential-

The Role of Time Preferences and ExponentialGrowth Bias in Retirement Savings
Discussion by Melissa Knoll| CFPB
Disclaimer: The views expressed are those
of the speaker and do not necessarily
reflect those of the Consumer Financial
Protection Bureau or the United States.
Present Bias and Retirement Savings
 Current paper shows how present bias can hinder retirement
savings
 Previous work in psychology and behavioral economics has
demonstrated how PB can be exploited “for good”
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Thaler and Benartzi’s (2004) “Save more tomorrow” (SMarT)
plan
• Exploit present bias to get employees to pre-commit to saving
from future raises
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Beshears, Madrian, Choi, Laibson… defaults in 401(k) plans
• Employees don’t move away from the default—they may believe
they will reallocate in the future, but never do
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Present Bias and SS Retirement Benefit Claiming

Current paper talks about PB and financial outcomes, but PB may also be
related to benefit claiming
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Could have huge financial implications later in life
Prospective retirees have to choose between a larger benefit later or a smaller
benefit now
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Present bias could explain why many people want to claim as soon as possible
• Current paper estimates that 55% of sample is present-biased
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Knoll et al. (2015) found that people who were already eligible to claim
benefits preferred earlier claiming ages than people who were not yet eligible
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People have intentions to delay claiming, but may actually claim when benefits
are available now
EBRI consistently finds that expectations of retirement age and actual
retirement age don’t match
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Exponential Growth Bias and Retirement Savings
 Current paper discusses how EGB can hinder retirement savings
 Importantly, paper also shows that EGB can be debiased using
visualization tools

Income treatment—additional retirement income stream
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Balance treatment—additional balance at retirement
 SSA attempted a similar visualization—results?
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Self-Awareness and Overconfidence
 Does self-awareness mitigate bias?

PB, yes if it leads you to pre-commit
• Retirement accounts are pre-commitment devices
– Discourage impulsive behaviors through penalties
• Barriers to committing should be low
– Those without employer-sponsored plans may find it difficult to save
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EGB, yes if it leads you to seek or accept help (e.g., tool, advice)
• In general, those who are overconfident may be less likely to seek
advice or use tools to help in financial decision making
• Tools used in study treatments are effective in reducing the bias
– Shows promise for the use of tools in financial decision making
– But how do we get overconfident people to use tools?
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Suggestions for Next Steps
 Provide more insight into policy implications
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How do we get overconfident people to use tools?
• Assess uptake of tool by overconfident people
• How did tool use differ by degree of overconfidence?
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Are there underlying characteristics of the tool that could be
useful to explore further?
• Balance vs. annual income? Monthly income? Allow them to
choose preferred display?
• Pre-populated rate of return vs. user’s estimate
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How do we address heterogeneity when creating tools?
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