Johannes Binswanger

What is an Adequate Standard of Living during Retirement

Many economists and policy-makers argue that households do not save enough to maintain an adequate standard of living during retirement. However, there is no consensus on the answer to the underlying question what this standard should be, despite the fact that it is crucial for the design of saving incentives and pension reforms. We address this question with a randomized survey design, individually tailored to each respondents financial situation, and conducted both in the U.S. and the Netherlands. Key findings are that adequate levels of retirement spending exceed 80 percent of working life spending for a majority of respondents, minimum acceptable replacement rates depend strongly on income, and households in the Netherlands are much more risk averse than U.S. households.

How Real People Make Long-Term Decisions: The Case of Retirement Preparation

A canonical but untested assumption in economics is that choices are determined only by preferences and budget constraints, but not by how people approach decision making. In particular, it is believed that people behave “as if they optimized�?, even if they do not engage in any formal planning. We test this empirically in the domain of retirement saving using a specifically designed survey. We find that people who rely on a rule of thumb indeed behave like literal planners/optimizers. However, people without any systematic approach save substantially less. We discuss the implications of this finding.

What is an adequate standard of living during retirement

Many economists and policy-makers argue that households do not save enough to maintain an adequate standard of living during retirement. However, there is no consensus on the answer to the underlying question what this standard should be, despite the fact that it is crucial for the design of saving incentives and pension reforms. We address this question with a randomized survey design, individually tailored to each respondents financial situation, and conducted both in the U.S. and the Netherlands. Key findings are that adequate levels of retirement spending exceed 80 percent of working life spending for a majority of respondents, minimum acceptable replacement rates depend strongly on income, and households in the Netherlands are much more risk averse than U.S. households.

Towards Understanding Life Cycle Saving of Boundedly Rational Agents: A Model with Feasibility Goals

This paper develops a new life cycle model that aims to describe the savings and asset allocation decisions of boundedly rational agents. The paper’s main theoretical contribution is the provision of a simple, tractable and parsimonious framework within which agents make forward looking decisions in the absence of full contingent planning. Instead, agents pursue two simple so-called feasibility goals. The paper uses this framework to shed light on important empirical patterns of asset allocation that are puzzling from the point of view of existing models.

A Simple Bounded-Rationality Life Cycle Model

Life cycle saving decisions belong to the most complex financial decisions that we are faced with in our life. Psychologists have found that when making complex decisions people use short-cuts in the form of minimum requirements for particular attribute categories of choice options. This paper presents a new simple life cycle model where agents do invoke such minimum requirements. The model is highly tractable and parsimonious. Calibrations show that it allows us to better understand important data on saving and asset allocation. It is shown that the model is much better able to explain these data than standard workhorse models even when generously controlling for subtle differences in the “degrees of freedom” between the new and existing models.

The Role of Desicion Making Processes in the Correlation between Wealth and Health

There are many pathways explaining the relationship between socioeconomic status and health; one possibility is that some normally unobservable characteristic causes people to invest both in their financial well-being and their health. Here we consider the possibility that the decision making processes are similar across domains and that the steps individuals take to make decisions can help to explain the correlation in outcomes across domains. We focus particularly on retirement savings decisions and decisions in the health domain. Choices in both domains have long-term consequences and therefore require foresight and the ability to process complex information. Our results suggest that up to 44% of the correlation between wealth and health is due to the processes that people use to make these choices.

Disagreement and Learning About Reforms

Abstract: When it comes to economic reforms in developing countries, many economists agree on broad objectives (such as fostering outward orientation). Broad objectives, however, can be pursued in many di¤erent ways, and policy experimentation is often indispensable for learning which alternative works locally. We propose a simple model to study this societal learning process. The model explores the role of disagreeing beliefs about “what works”. It suggests that this type of disagreement can stall the societal learning process and cause economic stagnation. Interestingly, this can happen even if everybody knows that Pareto-improving reforms do exist. Our analysis is motivated by the empirical observation of a negative relationship between disagreement and economic growth among poorer countries.

The Miracle of Compound Interest: Does Our Intuition Fail?

When it comes to estimating the benefits of long-term savings, many people rely on their intuition. Focusing on the domain of retirement savings, we use a randomized experiment to explore people’s intuition about how money accumulates over time. We ask half of our sample to estimate future consumption given savings (the forward perspective). The other half of the sample is asked to estimate savings given future consumption (the backward perspective). From an economic point of view, both subsamples are asked identical questions. However, we discover a large “direction bias”: the perceived benefits of long-term savings are substantially higher when individuals adopt a backward perspective. Our findings have important impli- cations for economic modeling, in general, and for structuring advice and financial literacy programs, in particular.