Keywords
experience extrapolation, 401(k) savings, investor behavior
Abstract
We show that individual investors over-extrapolate from their personal experience when making savings decisions. Investors who experience particularly rewarding outcomes from 401(k) saving—a high average and/or low variance return—increase their 401(k) savings rate more than investors who have less rewarding experiences. This finding is not driven by aggregate time-series shocks, income effects, rational learning about investing skill, investor fixed effects, or time-varying investor-level heterogeneity that is correlated with portfolio allocations to stock, bond, and cash asset classes. We discuss implications for the equity premium puzzle and interventions aimed at improving household financial outcomes.
Original Publication Citation
“Reinforcement Learning and Savings Behavior.” 2009. Journal of Finance, 64(6): 2515-34 (with James J. Choi, David Laibson and Andrew Metrick). https://doi:10.1111/j.1540-6261.2009.01509.x
BYU ScholarsArchive Citation
Choi, James J.; Laibson, David; Madrian, Brigitte C.; and Metrick, Andrew, "Reinforcement Learning and Savings Behavior" (2009). Faculty Publications. 9054.
https://scholarsarchive.byu.edu/facpub/9054
Document Type
Peer-Reviewed Article
Publication Date
2009
Publisher
Journal of Finance
Language
English
College
Marriott School of Business
Department
Finance
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