bdi models and its application to retirement savings
DESCRIPTION
Presented at the Society of Advancement of Behavioral Economics in 2007. This talk uses the BDI model of reasoning under limited resources used in programming software agents as a paradigm to understand the behavioral barriers behind retirement savings.TRANSCRIPT
BDI Models and its Application to Retirement Savings
Anand S. RaoDiamond Management & Technology Consultants
SABE-2007 Presentation
May 18, 2007
Page 2
© 2006 Diamond.
Contents
• Inadequate Retirement Savings
• Key Retirement Decisions & Barriers to Decision-Making
• Goal-directed and Reactive Investment Planning (GRIP)
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Inadequate Retirement Savings Mistaken beliefs amongst the majority of workers is one of the contributing factors for inadequate retirement savings
A large proportion of the US population, the ‘boomer’ generation, is entering the retirement stage, but are not saving enough to maintain their standard of living
and provide for health, longevity risk, and long-term care
People expect to work longer than they actually do
People think they are saving more than they really are
People think they have more pension coverage than they do
People underestimate the age at which they will receive social security
Workers consistently underestimate what percentage of pre-retirement income is needed during retirement
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Inadequate Retirement Savings More than 50% of late boomers and retirees are ‘at risk’ of being unable to maintain pre-retirement standard of living
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Inadequate Retirement Savings People expect to work longer and the amount of savings for retirement, excluding employer contribution is very close to zero
People expect to work longer than they actually do
People think they are saving more than they really are
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Inadequate Retirement Savings People expect to have more pension coverage and also expect social security to be available earlier
People think they have more pension coverage than they do
People underestimate the age at which they will receive social security
Eligibility for social security payment increasing from 62 to 67 by 2022
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Inadequate Retirement Savings Majority of workers estimate 50-85% of pre-retirement income as being adequate while the current income of retirees is 95% or above
Workers consistently underestimate what percentage of pre-retirement income is needed during retirement
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Contents
• Inadequate Retirement Savings
• Key Retirement Decisions & Barriers to Decision-Making
• Goal-directed and Reactive Investment Planning (GRIP)
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Key Retirement Decisions and Barriers to Decision-Making Retirement planning involves four key decisions regarding enrollment, contribution rate, choice of asset allocation and ongoing portfolio balancing
EnrollmentContribution
RateAsset
AllocationPortfolio Re-
Balancing
Key Retirement Decisions
Inertia to act
Key Barriers to Decision Making
ProcrastinationLack of self-control
Complexity of products Explosion of choices Customer ignorance
Should I enroll in a retirement savings plan (e.g., 401k) or
not?
How much should I contribute every
pay period?
How to allocate the funds across different
asset classes?
How to change the contribution rate and asset allocation over time and in
response to life events?
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Key Retirement Decisions and Barriers to Decision-Making Behavioral economics inspired interventions, such as the US Pension Protection Act 2006, aim to address the barriers to decision-making
Pension Protection Act
Automatic Enrollment• Automatic enrolment of employees in 401(K) and
403(b) plans with explicit opt-out instead of voluntary opt-in
Automatic Increases• Employers can automatically increase the
percentage of an employees salary that is directed to the plan
• Employers are encouraged to meet certain minimum requirements when matching automatic deductions with additional employer contributions
Default Investment• Employers can default their employees into broadly
diversified investments– Balanced Funds– Lifestyle Funds– Managed Accounts
Advice• Asset managers can offer investment advice for
employer-sponsored defined contribution plans• Use of third-party approved computer models for
specific investment recommendations
Source: EBRI and Investment Company Institute, Press Clippings, Company Websites, Diamond Research
Complexity of products
Explosion of choices
Customer ignorance
1
2
3
4
1
Procrastination 1 2
3
3
3
Inertia to act 1 2 3
4
4
4
Key Barriers Addressed
Lack of self-control 2 43
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Key Retirement Decisions and Barriers to Decision-Making SMaRTTM or Save More Tomorrow offers a prescriptive savings program that was trialed by retirement solution providers (e.g., Vanguard, John Hancock)
SMaRTTM
Precommitment• Employees are approached to increase their
contribution rates well before their scheduled pay increase
Loss-Aversion• For employees who join the program the
contributions are increased from the first paycheck after the raise to mitigate against perceived loss-aversion of a decrease in take-home pay
Auto-Increase: • The contribution continues to increase at each
scheduled raise until a preset maximum is reached, exploiting the human inertia to the benefit of long-term savings
Opt-Out: • The employee can opt-out of the plan at any time.
This gives greater confidence to the employees and encourages them to join
Source: Thaler, R.H., and Shlomo Benartzi, 2004. Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving, Journal of Political Economy; Diamond Analysis
Complexity of products
Explosion of choices
Customer ignorance
1
2
3
4
1
Inertia to act 1 3
Key Barriers Addressed
Lack of self-control 2 431
Procrastination 1 3
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Key Retirement Decisions and Barriers to Decision-Making Both behavioral economics inspired interventions have proven to be successful in increasing number of people enrolling and increasing savings rate
Results of Interventions
Auto-enrollment substantially increases participation across all
customer segments
Significant increase in average savings rate
amongst SMarTTM participants
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Contents
• Inadequate Retirement Savings
• Key Retirement Decisions & Barriers to Decision-Making
• Goal-directed and Reactive Investment Planning (GRIP)
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Goal-directed and Reactive Investment Planning (GRIP) The BDI model has been used to build software agents that can make decisions and act with limited resources in complex, uncertain & changing environments
• Environmental Characteristics: Decision-making in environments that are
– Complex
– Uncertain
– Changing
• Decision-maker Characteristics: Decision-maker under resource constraints
– Time
– Computational power
– Memory
Mars Rover• Unknown terrain• Complex set of tasks• Changing environment• Limited computational
power on-board• ……
Robotics• Complex path planning• Obstacles• Limited time to sense-
plan-act• Limited computational
power to analyze all possibilities
• ….
ExamplesCharacteristics
Source: Influential Paper Award of the decade awarded by IFAAMAS -2007 for Modeling Rational Agents within a BDI Architecture, Originally published in 1991
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Goal-directed and Reactive Investment Planning (GRIP) The three attitudes of the BDI model have been used to balance goal-directed long-term behavior and reactive short-term behavior under resource constraints
Beliefs• Informational
state• Facts about the
world• Beliefs about
other agents
Desires/Goals• Motivational state• Situations agent
wants to be in• Objectives agent
wants to achieve• Committed
desires are goals
Intentions• Deliberative state• Agent commits to a plan of
action• Plans are abstract sequence
of goals
Resource-bounded
Reasoning
Balance between Goal-Directed &
Reactive Behaviors
Belief-Desire-Intention (BDI) Model Key Features
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Goal-directed and Reactive Investment Planning (GRIP) Individuals faced with retirement savings decisions have to make complex decisions under uncertain and changing conditions with limited knowledge
Environment• Complexity – when to save, how much to save, what is the asset
allocation, when and how to change the asset allocation etc.• Uncertainty – interest rates, inflation, longevity of life, cost of
medical and long-term care, market performance, etc.• Change – advances in medicine, technology, life-event changes
(marriage, buying a home, college savings) change in government regulations, social security payments, etc.
Decision-Maker• Time – Preference for current consumption as opposed to future
savings; • Limited knowledge – Balancing a number of needs, explosive
number of investment vehicles and fund choices• Limited cognitive ability – Complex analysis required for
asset allocation, re-balancing, tax-efficient savings etc.
Retirement Savings Situation
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Goal-directed and Reactive Investment Planning (GRIP) Principles used to build software agents can also be used to assist retirement savings and investment planning decision-making
Beliefs• Income needed
to live• Longevity of life• Savings they can
afford
Desires/Goals• When to retire• Standard of
living during retirement
• Level of savings
Intentions• Plan to achieve retirement
goals• Commitment and pre-
commitment to savings• Reconsideration on life-
event changes
Resource-bounded
Reasoning
Balance between Goal-Directed &
Reactive Behaviors
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Goal-directed and Reactive Investment Planning (GRIP) Goal-directed and reactive investment planning is a program that can help in addressing the barriers to retirement savings
Goal-Directed and Reactive Investment Planning
‘Holistic’ abstract long-term plan• Life-stage based ‘abstract’ plan• Investment and retirement savings plan that
addresses all needs – protection, asset accumulation, college savings, tax-efficient savings etc.
Focus on short-term goals• Short-term (annual) goals• Adjustable contribution rate that meets short-term
goals• Automatic asset allocation that meets short-term
investment objectives
Reactive plans• Reconsider investment plan based on life-event
changes (e.g., marriage, birth of child, disability event)
• Rebalance asset allocation based on market changes
Complexity of products
Explosion of choices
Customer ignorance
1
2
3
1
Procrastination 2
3
Inertia to act 2 3
Key Barriers Addressed
Lack of self-control 31
1
1
2
2
2
3
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• A large proportion of the US population, the ‘boomer’ generation, is entering the retirement stage, but are not saving enough to maintain their standard of living and provide for health, longevity risk, and long-term care
• Fundamental behavioral barriers exist that hamper the four key decisions (enrollment, contribution rate, asset allocation, and portfolio re-balancing)
• The Belief-Desire-Intention Model is a behavioral model for building software agents that have limited resources and have to act in a dynamically changing environment. This behavioral model can be applied to retirement savings to address the underlying barriers to key retirement decisions
• Goal-directed and Reactive Investment Plan (GRIP) is a program that with three key features that help savers save for long-term retirement goals, while balancing their short-term and life-event based goals
Conclusion