fatalism, locus of control and retirement saving
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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”. - PowerPoint PPT PresentationTRANSCRIPT
Fatalism, Locus of Control Fatalism, Locus of Control and Retirement Savingand Retirement Saving
July, 2009July, 2009
Miles Kimball and Tyler ShumwayMiles Kimball and Tyler Shumway
Cognitive Economics:Cognitive Economics:The Economics of The Economics of What is in People’s What is in People’s
MindsMinds
33
Named by Analogy to Named by Analogy to “Cognitive Psychology”“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.
44/65/65
Areas of Economics by Areas of Economics by Distinctive Data TypeDistinctive 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.
55/65/65
Four Themes of Cognitive Four Themes of Cognitive EconomicsEconomics
1. New Types of Data
2. Heterogeneity
3. Finite and Scarce Cognition
4. Welfare Economics Revisited
66/65/65
3. Finite and Scarce Cognition3. 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
4. Welfare Economics Revisited4. 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
Dimensions of CognitionDimensions of Cognition
• Sophistication (some say literacy)– Distance from truth
• Overconfidence– Awareness of distance from truth
• Folk theories– Direction of departure from truth
Total SavingTotal 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
Laurie Pounder (2006): High and Low Savers? Laurie Pounder (2006): High and Low Savers? Circumstances, Patience and Cognition Circumstances, Patience and Cognition
Average Propensity to Consume Average Propensity to Consume Out of Full Modigliani WealthOut of Full Modigliani Wealth(Kreps-Porteus Preferences)(Kreps-Porteus Preferences)
• 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?
Employer 100% Match
Employer25% Match
Factor Loading for Contribution
Rate0.849 0.841
Factor Loading for Top Code
Dummy0.835 0.809
• 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%
• 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%
• Factor Loading: 0.237
• Would you vote for such a program?– Yes: 35.6%– No: 60.2%
• 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%
• 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%
• Factor Loading: 0.285
• Residual of total savings/income regressed on age, age2
Savings Behavior RegressionsSavings Behavior RegressionsDependent Variable: Participate in 401(k) PlanDependent Variable: Participate in 401(k) Plan
Variable Coefficient p-value
Intercept 0.524 0.4271
Savings Index 0.101 0.0005
Log of Income -0.007 0.8993
West Region 0.015 0.8340
Midwest Region 0.022 0.7317
Northeast Region -0.004 0.9496
Years of Education
0.012 0.3242
Male -0.001 0.9818
Married -0.074 0.2460
Black 0.093 0.3435
Hispanic -0.098 0.3663
Native American 0.435 0.1508
Asian 0.019 0.8996
Homeowner 0.099 0.2602
Age 0.014 0.4151
Age2 0.000 0.3104
143 observations, adjusted R2 = 7.14%
Savings Behavior RegressionsSavings Behavior RegressionsDependent Variable: Take money from refinanceDependent Variable: Take money from refinance
Variable Coefficient p-value
Intercept 1.203 0.3448
Savings Index 0.120 0.0347
Log of Income -0.076 0.3522
West Region 0.053 0.6766
Midwest Region -0.092 0.4271
Northeast Region -0.144 0.2661
Years of Education
0.005 0.8247
Male 0.055 0.5512
Married 0.014 0.9015
Black -0.118 0.5782
Hispanic -0.282 0.5879
Native American -0.295 0.5861
Asian 0.420 0.1089
Homeowner - -
Age -0.004 0.9057
Age2 0.000 0.7515
129 observations, adjusted R2 = 4.60%
Savings Behavior RegressionsSavings Behavior RegressionsDependent Variable: Pay off credit card balanceDependent Variable: Pay off credit card balance
Variable Coefficient p-value
Intercept 3.320 0.1124
Savings Index 0.503 0.0001
Log of Income 0.121 0.4944
West Region -0.423 0.1361
Midwest Region -0.258 0.3292
Northeast Region -0.415 0.1495
Years of Education
0.049 0.3089
Male 0.047 0.8178
Married 0.010 0.9650
Black -0.591 0.1386
Hispanic -0.422 0.3937
Native American -1.748 0.1438
Asian 0.616 0.3039
Homeowner 0.032 0.9303
Age -0.059 0.1629
Age2 0.001 0.0818
275 observations, adjusted R2 = 11.30%
Savings Behavior RegressionsSavings Behavior RegressionsDependent Variable: Better off without credit cardDependent Variable: Better off without credit card
Variable Coefficient p-value
Intercept -0.698 0.2133
Savings Index 0.050 0.0986
Log of Income 0.083 0.0820
West Region 0.149 0.0507
Midwest Region 0.064 0.3638
Northeast Region 0.128 0.0986
Years of Education
0.036 0.0056
Male -0.014 0.8012
Married -0.029 0.6522
Black -0.042 0.6956
Hispanic -0.030 0.8211
Native American -0.090 0.7783
Asian 0.066 0.6827
Homeowner 0.108 0.2713
Age -0.012 0.3020
Age2 0.000 0.2288
275 observations, adjusted R2 = 7.84%
A Savings Attitude RegressionA Savings Attitude Regression“Thinking about money stresses me out”“Thinking about money stresses me out”
Dependent Variable: Savings IndexVariable Coefficient Std. Error t-statistic P-value
Intercept -1.932 1.822 -1.06 0.2881
Attitude Var 11 -0.165 0.079 3.15 0.0018
Log of Income 1.116 0.399 2.80 0.0055
West Region 0.668 0.720 0.93 0.3545
Midwest Region -0.497 0.643 -0.77 0.4400
Northeast Region -0.582 0.715 -0.81 0.4164
Years of Education
-0.031 0.119 -0.26 0.7974
Male 0.375 0.507 0.74 0.4604
Married 0.151 0.600 0.25 0.8013
Black -0.967 0.920 -1.05 0.2942
Hispanic 0.238 1.258 0.19 0.8501
Native American 0.053 2.339 0.02 0.9819
Asian -0.592 1.657 -0.36 0.7213
Homeowner 0.805 0.760 1.06 0.2905
Age 0.172 0.110 1.55 0.1212
Age2 -0.001 0.001 -1.11 0.2666
344 observations, adjusted R2 = 9.35%
Variable CodingVariable Coding
Strongly Agree 5
Agree 4
Neither Agree Nor Disagree
3
Disagree 2
Strongly Disagree
1
• 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
Self-Control and Self-ManagementSelf-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%
Coefficient P-value
Full Saving Factor -0.062 0.3604
401(k) Factor -0.013 0.8529
Self-Control and Self-ManagementSelf-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%
Coefficient P-value
Full Saving Factor -0.097 0.0534
401(k) Factor -0.061 0.2243
Self-Control and Self-ManagementSelf-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%
Coefficient P-value
Full Saving Factor -0.022 0.7393
401(k) Factor -0.022 0.7501
Self-Control and Self-ManagementSelf-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%
Coefficient P-value
Full Saving Factor 0.100 0.1801
401(k) Factor 0.091 0.2328
Self-Control and Self-ManagementSelf-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%
Coefficient P-value
Full Saving Factor 0.017 0.7525
401(k) Factor -0.010 0.8612
Self-Control and Self-ManagementSelf-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%
Coefficient P-value
Full Saving Factor 0.062 0.3311
401(k) Factor 0.032 0.6187
Self-Control and Self-ManagementSelf-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%
Coefficient P-value
Full Saving Factor 0.013 0.8427
401(k) Factor -0.001 0.9847
Self-Control and Self-ManagementSelf-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%
Coefficient P-value
Full Saving Factor -0.044 0.3750
401(k) Factor -0.031 0.5380
Planning, Thinking and BudgetingPlanning, 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%
Coefficient P-value
Full Saving Factor 0.121 0.0193
401(k) Factor 0.090 0.0803
Planning, Thinking and BudgetingPlanning, 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%
Coefficient P-value
Full Saving Factor 0.084 0.1090
401(k) Factor 0.010 0.8442
Planning, Thinking and BudgetingPlanning, 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%
Coefficient P-value
Full Saving Factor 0.055 0.4730
401(k) Factor -0.044 0.5663
Planning, Thinking and BudgetingPlanning, 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%
Coefficient P-value
Full Saving Factor -0.250 0.0001
401(k) Factor -0.165 0.0018
Planning, Thinking and BudgetingPlanning, 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%
Coefficient P-value
Full Saving Factor -0.100 0.0383
401(k) Factor -0.054 0.2662
Institutional Trust and Institutional Trust and Reliance on OthersReliance 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%
Coefficient P-value
Full Saving Factor -0.117 0.0347
401(k) Factor -0.124 0.0247
Institutional Trust and Institutional Trust and Reliance on OthersReliance 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%
Coefficient P-value
Full Saving Factor 0.090 0.0491
401(k) Factor 0.059 0.2036
Institutional Trust and Institutional Trust and Reliance on OthersReliance 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%
Coefficient P-value
Full Saving Factor 0.067 0.2522
401(k) Factor 0.035 0.5570
Institutional Trust and Institutional Trust and Reliance on OthersReliance 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%
Coefficient P-value
Full Saving Factor -0.048 0.3891
401(k) Factor -0.053 0.3587
Negative Attitudes Toward Being Negative Attitudes Toward Being Careful with MoneyCareful with Money
• Money doesn’t buy happiness– Strongly Agree: 33.7%– Agree: 49.6%– Neutral: 5.7%– Disagree: 6.5%– Strongly Disagree: 1.4%
Coefficient P-value
Full Saving Factor 0.100 0.0949
401(k) Factor 0.089 0.1387
Negative Attitudes Toward Being Negative Attitudes Toward Being Careful with MoneyCareful 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%
Coefficient P-value
Full Saving Factor 0.026 0.6734
401(k) Factor 0.045 0.4601
Negative Attitudes Toward Being Negative Attitudes Toward Being Careful with MoneyCareful 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%
Coefficient P-value
Full Saving Factor -0.168 0.0229
401(k) Factor -0.130 0.0873
Negative Attitudes Toward Being Negative Attitudes Toward Being Careful with MoneyCareful 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%
Coefficient P-value
Full Saving Factor -0.033 0.5206
401(k) Factor -0.053 0.3103
Positive Attitudes Toward SavingPositive 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%
Coefficient P-value
Full Saving Factor 0.119 0.1542
401(k) Factor 0.060 0.4695
Positive Attitudes Toward SavingPositive 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%
Coefficient P-value
Full Saving Factor 0.122 0.1424
401(k) Factor 0.083 0.3260
Positive Attitudes Toward SavingPositive Attitudes Toward Saving
• I really respect people who have managed to save a lot of money– Strongly Agree: 21.0%
– Agree: 64.7%
– Neutral: 7.3%
– Disagree: 3.8%
– Strongly Disagree: 0.3%
Coefficient P-value
Full Saving Factor -0.047 0.5370
401(k) Factor -0.059 0.4484
Social PressureSocial Pressure• My parents or guardians encouraged me to
save– Strongly Agree: 21.3%
– Agree: 53.9%
– Neutral: 5.4%
– Disagree: 13.5%
– Strongly Disagree: 2.7%
Coefficient P-value
Full Saving Factor -0.040 0.4479
401(k) Factor -0.049 0.3566
Social PressureSocial Pressure• When I was growing up, my parents were
good at saving their money– Strongly Agree: 12.9%
– Agree: 46.4%
– Neutral: 5.9%
– Disagree: 25.9%
– Strongly Disagree: 5.7%
Coefficient P-value
Full Saving Factor -0.050 0.2748
401(k) Factor -0.048 0.2947
Social PressureSocial Pressure• I would hate to have people think I am
careless with money– Strongly Agree: 13.5%
– Agree: 54.5%
– Neutral: 14.6%
– Disagree: 11.3%
– Strongly Disagree: 3.2%
Coefficient P-value
Full Saving Factor -0.035 0.5271
401(k) Factor -0.039 0.4857
Social PressureSocial Pressure• I would feel guilty about going bankrupt, even
if I had to– Strongly Agree: 30.2%
– Agree: 47.4%
– Neutral: 5.7%
– Disagree: 12.1%
– Strongly Disagree: 1.9%
Coefficient P-value
Full Saving Factor 0.033 0.5459
401(k) Factor 0.047 0.3854
Strong JudgmentsStrong Judgments• People who don’t save for retirement are
being irresponsible– Strongly Agree: 24.5%
– Agree: 51.2%
– Neutral: 5.4%
– Disagree: 15.4%
– Strongly Disagree: 0.8%
Coefficient P-value
Full Saving Factor 0.198 0.0004
401(k) Factor 0.146 0.0089
Strong JudgmentsStrong Judgments• Using a credit card without paying off the
balance every month is really stupid– Strongly Agree: 21.3%
– Agree: 47.2%
– Neutral: 8.1%
– Disagree: 19.4%
– Strongly Disagree: 1.1%
Coefficient P-value
Full Saving Factor 0.103 0.0423
401(k) Factor 0.082 0.1090
FatalismFatalism• If you don’t let yourself get too worried,
everything tends to work out in the end– Strongly Agree: 6.7%
– Agree: 45.0%
– Neutral: 10.5%
– Disagree: 32.6%
– Strongly Disagree: 2.4%
Coefficient P-value
Full Saving Factor -0.084 0.0889
401(k) Factor -0.045 0.3733
FatalismFatalism• No one can predict the future, so trying to
save doesn’t do much good– Strongly Agree: 0.8%
– Agree: 4.9%
– Neutral: 2.2%
– Disagree: 61.7%
– Strongly Disagree: 27.8%
Coefficient P-value
Full Saving Factor -0.365 0.0001
401(k) Factor -0.293 0.0001
Locus of ControlLocus of Control• It is difficult to stay ahead financially because
of the things my family members want to buy– Strongly Agree: 1.1%
– Agree: 23.7%
– Neutral: 10.8%
– Disagree: 52.8%
– Strongly Disagree: 8.1%
Coefficient P-value
Full Saving Factor -0.176 0.0010
401(k) Factor -0.129 0.0179
Locus of ControlLocus of Control• Many of the things that keep me from saving
more money are out of my control– Strongly Agree: 6.7%
– Agree: 42.6%
– Neutral: 5.1%
– Disagree: 38.5%
– Strongly Disagree: 4.3%
Coefficient P-value
Full Saving Factor -0.175 0.0002
401(k) Factor -0.126 0.0088