Chris Browning

Cognitive Ability and Post-Retirement Asset Decumulation

There is evidence that retirees are decumulating their assets very slowly or not at all. This behavior does not follow the normative framework of the life-cycle hypothesis (LCH). Decumulating in a manner that maximizes expected utility is a complex process that requires the estimation and input of multiple factors when analyzing consumption alternatives. As a result, the decumulation decisions of retirees may be impacted by their cognitive ability. Evidence suggests that cognitive ability is relevant to financial decisions and that the presence or absence of cognitive ability is important when considering choices in combination across multiple time periods. We find that both life-cycle factors and cognitive ability are significant predictors of the rate of asset decumulation, and that those with higher levels or cognitive ability are decumulating at a significantly higher rate. We also show that the level of cognitive ability influences the effects of expected longevity, market returns, and medical costs. While the estimates for these factors are consistent between those with high and low cognitive ability, there are significant differences in how the estimates are incorporated into the asset decumulation decisions of the two groups.

Public reaction to stock market volatility: evidence from the ATUS

ABSTRACT How does the public react to changes in the stock market? We know from the existing body of research that sentiment can predict future stock-market movements. However, do market movements affect sentiment? This article addresses these questions by testing whether market movements precede changes in the emotional well-being of the general public. Using Granger causality analysis, we compare how market movements affect public well-being during periods of increased (2010) and decreased (2012) volatility. The results show that 30-day-lagged returns are associated positively and significantly with the public’s emotional well-being, and that this effect is stronger during periods of increased volatility. The results also show that this effect may persist for up to 120 days.

Don’t like the picture? Change the frame: the impact of cognitive ability and framing on risky choice

This article identifies the effect a perceived upfront cost (UFC) has on the subsequent risky choice of older Americans with varying levels of cognitive ability. When respondents are faced with outcome alternatives framed with and without a UFC, we observe variation in respondents’ required outcomes based on the order in which the two frames are presented. We provide evidence that among respondents with lower cognitive ability, losses need not be realized to affect subsequent risky choice, and that a UFC lowers the willingness to take risk in a future period.

Don't Like the Picture, Change the Frame: The Effects of Framing and Cognitive Ability on Risky Choice

This paper identifies the effect a perceived up-front cost has on subsequent risky choice of older Americans. When respondents are faced with outcome alternatives framed in an up-front cost and no up-front cost domain, we observe variation in the respondents’ required outcomes based on the order in which the two domains are presented. We provide evidence that among respondents with lower cognitive ability, losses need not be realized to affect subsequent risky choice, and that an up-front cost lowers the willingness to take risk in a future period. Implications for annuitization demand are discussed.

Do retirement planning strategies alter the effect of time preference on retirement wealth

ABSTRACT An individual’s willingness to accumulate retirement wealth is influenced by their preference for intertemporal consumption. People with a strong preference for current consumption (high personal discount rate) may choose to save less and face the risk of decreased retirement preparedness. A negative relation between a high personal discount rate and retirement wealth may be reduced when individuals engage in some form of retirement planning. Using the National Longitudinal Survey of Youth, we provide evidence that respondents with a high personal discount rate accumulated 37% less retirement wealth, on average, between 2004 and 2008, when compared with respondents with a low personal discount rate. However, when retirement planning strategies were included in the model, there was no statistical difference in retirement wealth between people with high and low personal discount rates. The retirement planning strategies included calculating a retirement income need, hiring a financial planner for retirement or engaging in both of these activities.

Cognitive Status, Self-Control, & Asset Decumulation: Evidence from the HRS

Evidence suggests cognitive ability is important when making financial decisions. The presence or absence of cognitive ability is important in estimating the likelihood of uncertain events, considering choices in combination across multiple periods, and recognizing the need for commitment to combat inconsistent preferences and deficiencies in self-control. Given the negative relationship between cognitive ability and age, retirees may be affected as their ability in these areas diminishes. Self-control, or a lack there of, may also impact the consistency of preferences and behavior over time. When making asset decumulation decisions retirees are likely influenced by both their long-term concerns and short-term emotions. These competing forces highlight the importance of self-control on one’s ability to carry out long-term consumption goals. Thus, self-control may help explain variation in retirement spending and the risk of asset depletion in old age. We explore the relationship between cognitive status – the presence or absence of notable cognitive decline – self-control, and asset decumulation among retired households in the United States. After controlling for age, initial wealth, stock ownership, and income our findings indicate that cognitive status is important in determining the rate of asset decumulation.