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Fatalism, Locus of Control and Retirement Saving

Fatalism, Locus of Control and Retirement Saving. July, 2009 Miles Kimball and Tyler Shumway. Cognitive Economics: The Economics of What is in People’s Minds. Named by Analogy to “Cognitive Psychology”.

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Fatalism, Locus of Control and Retirement Saving

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  1. Fatalism, Locus of Control and Retirement Saving July, 2009 Miles Kimball and Tyler Shumway

  2. Cognitive Economics:The Economics of What is in People’s Minds

  3. Named by Analogy to “Cognitive Psychology” • Cognitive Psychology = the area of psychology that examines internal mental processes such as problem solving, memory and language. • Cognitive Psychology was a departure from Behaviorism--the idea that only outward behavior is a legitimate object of study. • Milton Friedman famously advocated behaviorism in Economics.

  4. Areas of Economics by Distinctive Data Type • Standard Economics(including “Mindless” Psychological Economics a la Gul and Pesendorfer): actual market choices only. • Experimental Economics: choices in artificial situations but with real stakes. • Neuroeconomics: FMRI, saccades, skin conductance, … • Bioeconomics: genes, hormones • Cognitive Economics: mental contents (based on tests and self-reports) and hypothetical choices.

  5. Four Themes of Cognitive Economics • New Types of Data • Heterogeneity • Finite and Scarce Cognition • Welfare Economics Revisited

  6. 3. Finite and Scarce Cognition • Finite cognition=the reality that people are not infinitely intelligent. • Scarce cognition=some decisions required by our modern environment—at work and in private lives—can require more intelligence for full-scale optimization than an individual has

  7. 4. Welfare Economics Revisited • Behavioral economics and finance have found many kinds of anomalous behavior • Exotic preferences? • Cognitive limitations? • Answer matters for welfare and policy • Research strategy of Cognitive Economics: see how much one can explain with cognitive limitations before invoking exotic preferences

  8. Dimensions of Cognition • Sophistication (some say literacy) • Distance from truth • Overconfidence • Awareness of distance from truth • Folk theories • Direction of departure from truth

  9. Total Saving • We looked for a wide range of psychological factors that might affect total saving • Survey Practicum course • Focus groups • Savings questions on the June, 2008 Survey of Consumers

  10. Laurie Pounder (2006): High and Low Savers? Circumstances, Patience and Cognition

  11. Average Propensity to Consume Out of Full Modigliani Wealth(Kreps-Porteus Preferences)

  12. Suppose you got a (new) job that has a 401(k) retirement savings plan. You can contribute up to ten percent of your pay. For every dollar you put in, your new employer will put in a dollar (twenty-five cents). What percentage of your pay would you choose to contribute?

  13. Factor Loading: 0.411 • Compared to people who are similar to you in age, income, and family size, do you think you have: • More retirement savings: 26.4% • About the same amount of ret. savings: 34.8% • Less retirement savings: 35.3%

  14. Factor Loading: 0.475 • Suppose that the government decided that in addition to current Social Security taxes, everyone under sixty-five who is working would be required to put an additional ten percent of their pre-tax income into a personal retirement account. How hard would it be for you to adjust to your (and your spouse/partner’s) lower take-home pay – would you say it would be: • Extremely Hard: 12.9% • Quite Hard: 11.9% • Somewhat Hard: 34.0% • Not so hard: 20.2% • Not hard at all: 16.4%

  15. Factor Loading: 0.237 • Would you vote for such a program? • Yes: 35.6% • No: 60.2%

  16. Factor Loading: 0.242 • If you unexpectedly received one thousand dollars, would you: • Save it: 33.4% • Pay off debt with it: 19.7% • pay bills with it: 30.5% • Have fun with it: 12.1%

  17. Factor Loading: 0.326 • Other than employer retirement plans from current or past employers, do you have anything saved for retirement? • Yes: 55.3% • No: 41.2%

  18. Factor Loading: 0.285 • Residual of total savings/income regressed on age, age2

  19. Savings Behavior RegressionsDependent Variable: Participate in 401(k) Plan 143 observations, adjusted R2 = 7.14%

  20. Savings Behavior RegressionsDependent Variable: Take money from refinance 129 observations, adjusted R2 = 4.60%

  21. Savings Behavior RegressionsDependent Variable: Pay off credit card balance 275 observations, adjusted R2 = 11.30%

  22. Savings Behavior RegressionsDependent Variable: Better off without credit card 275 observations, adjusted R2 = 7.84%

  23. A Savings Attitude Regression“Thinking about money stresses me out” Dependent Variable: Savings Index 344 observations, adjusted R2 = 9.35%

  24. Variable Coding • The reported percentages generally do not sum to 100 percent because some respondents do not answer each question • Most of the regressions have about 320 observations

  25. Self-Control and Self-Management • I have problems with self control • Strongly Agree: 0.5% • Agree: 10.2% • Neutral: 6.5% • Disagree: 68.7% • Strongly Disagree: 11.3%

  26. Self-Control and Self-Management • I often make impulse purchases • Strongly Agree: 2.7% • Agree: 25.1% • Neutral: 7.3% • Disagree: 50.7% • Strongly Disagree: 11.1%

  27. Self-Control and Self-Management • Breaking a rule gives me a feeling of freedom • Strongly Agree: 10% • Agree: 8.1% • Neutral: 65.5% • Disagree: 13.5% • Strongly Disagree: 0.3%

  28. Self-Control and Self-Management • I can stick with a task until it is done, even if it is unpleasant • Strongly Agree: 16.4% • Agree: 70.6% • Neutral: 4.0% • Disagree: 5.1% • Strongly Disagree: 0.8%

  29. Self-Control and Self-Management • I am very thrifty • Strongly Agree: 7.8% • Agree: 48.5% • Neutral: 14.0% • Disagree: 24.5% • Strongly Disagree: 1.6%

  30. Self-Control and Self-Management • Before I buy something, I ask myself if I am really going to use it. • Strongly Agree: 20.2% • Agree: 62.0% • Neutral: 4.6% • Disagree: 10.2% • Strongly Disagree: 0.3%

  31. Self-Control and Self-Management • Before I buy something, I think twice to make sure it is something I really need • Strongly Agree: 16.4% • Agree: 65% • Neutral: 4% • Disagree: 11.9% • Strongly Disagree: 0%

  32. Self-Control and Self-Management • Pretending to yourself that you have less money than you really do is a good idea • Strongly Agree: 3% • Agree: 39.4% • Neutral: 11.9% • Disagree: 37.5% • Strongly Disagree: 5.4%

  33. Planning, Thinking and Budgeting • How much have you thought about retirement? • A lot: 37.7% • Some: 27.2% • A little: 15.1% • Hardly at all: 13.5%

  34. Planning, Thinking and Budgeting • I enjoy planning activities like vacations well in advance • Strongly Agree: 30.2% • Agree: 45.3% • Neutral: 8.6% • Disagree: 10.2% • Strongly Disagree: 2.7%

  35. Planning, Thinking and Budgeting • I am good at seeing the big picture • Strongly Agree: 11.9% • Agree: 71.7% • Neutral: 6.5% • Disagree: 6.5% • Strongly Disagree: 0.5%

  36. Planning, Thinking and Budgeting • Thinking about money stresses me out • Strongly Agree: 3.0% • Agree: 25.9% • Neutral: 7.6% • Disagree: 54.7% • Strongly Disagree: 6.2%

  37. Planning, Thinking and Budgeting • I often wonder, “Where did all my money go?” • Strongly Agree: 5.4% • Agree: 35% • Neutral: 7% • Disagree: 42.9% • Strongly Disagree: 7%

  38. Institutional Trust and Reliance on Others • If I try to save through financial institutions, someone is likely to figure out a way to cheat me out of the money • Strongly Agree: 4.3% • Agree: 9.4% • Neutral: 14.3% • Disagree: 48.3% • Strongly Disagree: 20.2%

  39. Institutional Trust and Reliance on Others • Whether for political or other reasons, the US government will always make sure that senior citizens have basic food, shelter, clothing and medical care • S. Agree: 4.3%, Agree: 9.4% • Neutral: 14.3% • Disagree: 48.3%, St. Disagree: 20.2%

  40. Institutional Trust and Reliance on Others • Even in the worst case, I will be okay financially when I am old because I will have government programs to fall back on • Strongly Agree: 1.9% • Agree: 11.9% • Neutral: 11.1% • Disagree: 55.5% • Strongly Disagree: 16.7%

  41. Institutional Trust and Reliance on Others • My children will make sure I am okay financially when I am old • Strongly Agree: 1.9% • Agree: 11.9% • Neutral: 11.1% • Disagree: 55.5% • Strongly Disagree: 16.7%

  42. Negative Attitudes Toward Being Careful with Money • Money doesn’t buy happiness • Strongly Agree: 33.7% • Agree: 49.6% • Neutral: 5.7% • Disagree: 6.5% • Strongly Disagree: 1.4%

  43. Negative Attitudes Toward Being Careful with Money • Thinking about money all the time, even when you have enough, is a terrible way to live • Strongly Agree: 33.7% • Agree: 49.6% • Neutral: 5.7% • Disagree: 6.5% • Strongly Disagree: 1.4%

  44. Negative Attitudes Toward Being Careful with Money • It is nice to have money saved up, but you have to live • Strongly Agree: 9.7% • Agree: 73.1% • Neutral: 7.0% • Disagree: 7.3% • Strongly Disagree: 0.3%

  45. Negative Attitudes Toward Being Careful with Money • I would hate to have someone think that I am stingy with my money • Strongly Agree: 3.8% • Agree: 40.2% • Neutral: 14% • Disagree: 35.9% • Strongly Disagree: 3.5%

  46. Positive Attitudes Toward Saving • Most Americans save too little • Strongly Agree: 20.0% • Agree: 68.2% • Neutral: 4.9% • Disagree: 3.8% • Strongly Disagree: 0.5%

  47. Positive Attitudes Toward Saving • Most Americans borrow too much • Strongly Agree: 25.9% • Agree: 64.4% • Neutral: 3.8% • Disagree: 2.7% • Strongly Disagree: 0.3%

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