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. 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. 4/65 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. 5/65 Four Themes of Cognitive Economics 1.New Types of Data 2.Heterogeneity 3.Finite and Scarce Cognition 4.Welfare Economics Revisited

6. 6/65 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)

15. 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 Employer 25% Match Factor Loading for Contribution Rate 0.8490.841 Factor Loading for Top Code Dummy 0.8350.809

16. 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%

17. 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%

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

19. 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%

20. 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%

21. Factor Loading: 0.285 Residual of total savings/income regressed on age, age 2

22. Savings Behavior Regressions Dependent Variable: Participate in 401(k) Plan VariableCoefficientp-value Intercept0.5240.4271 Savings Index0.1010.0005 Log of Income-0.0070.8993 West Region0.0150.8340 Midwest Region0.0220.7317 Northeast Region-0.0040.9496 Years of Education 0.0120.3242 Male-0.0010.9818 Married-0.0740.2460 Black0.0930.3435 Hispanic-0.0980.3663 Native American0.4350.1508 Asian0.0190.8996 Homeowner0.0990.2602 Age0.0140.4151 Age 2 0.0000.3104 143 observations, adjusted R 2 = 7.14%

23. Savings Behavior Regressions Dependent Variable: Take money from refinance VariableCoefficientp-value Intercept1.2030.3448 Savings Index0.1200.0347 Log of Income-0.0760.3522 West Region0.0530.6766 Midwest Region-0.0920.4271 Northeast Region-0.1440.2661 Years of Education 0.0050.8247 Male0.0550.5512 Married0.0140.9015 Black-0.1180.5782 Hispanic-0.2820.5879 Native American-0.2950.5861 Asian0.4200.1089 Homeowner-- Age-0.0040.9057 Age 2 0.0000.7515 129 observations, adjusted R 2 = 4.60%

24. Savings Behavior Regressions Dependent Variable: Pay off credit card balance VariableCoefficientp-value Intercept3.3200.1124 Savings Index0.5030.0001 Log of Income0.1210.4944 West Region-0.4230.1361 Midwest Region-0.2580.3292 Northeast Region-0.4150.1495 Years of Education 0.0490.3089 Male0.0470.8178 Married0.0100.9650 Black-0.5910.1386 Hispanic-0.4220.3937 Native American-1.7480.1438 Asian0.6160.3039 Homeowner0.0320.9303 Age-0.0590.1629 Age 2 0.0010.0818 275 observations, adjusted R 2 = 11.30%

25. Savings Behavior Regressions Dependent Variable: Better off without credit card VariableCoefficientp-value Intercept-0.6980.2133 Savings Index0.0500.0986 Log of Income0.0830.0820 West Region0.1490.0507 Midwest Region0.0640.3638 Northeast Region0.1280.0986 Years of Education 0.0360.0056 Male-0.0140.8012 Married-0.0290.6522 Black-0.0420.6956 Hispanic-0.0300.8211 Native American-0.0900.7783 Asian0.0660.6827 Homeowner0.1080.2713 Age-0.0120.3020 Age 2 0.0000.2288 275 observations, adjusted R 2 = 7.84%

26. A Savings Attitude Regression “Thinking about money stresses me out” Dependent Variable: Savings Index VariableCoefficientStd. Errort-statisticP-value Intercept-1.9321.822-1.060.2881 Attitude Var 11-0.1650.0793.150.0018 Log of Income1.1160.3992.800.0055 West Region0.6680.7200.930.3545 Midwest Region-0.4970.643-0.770.4400 Northeast Region-0.5820.715-0.810.4164 Years of Education -0.0310.119-0.260.7974 Male0.3750.5070.740.4604 Married0.1510.6000.250.8013 Black-0.9670.920-1.050.2942 Hispanic0.2381.2580.190.8501 Native American0.0532.3390.020.9819 Asian-0.5921.657-0.360.7213 Homeowner0.8050.7601.060.2905 Age0.1720.1101.550.1212 Age 2 -0.0010.001-1.110.2666 344 observations, adjusted R 2 = 9.35%

27. Variable Coding Strongly Agree 5 Agree4 Neither Agree Nor Disagree 3 Disagree2 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

28. 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% CoefficientP-value Full Saving Factor-0.0620.3604 401(k) Factor-0.0130.8529

29. 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% CoefficientP-value Full Saving Factor-0.0970.0534 401(k) Factor-0.0610.2243

30. 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% CoefficientP-value Full Saving Factor-0.0220.7393 401(k) Factor-0.0220.7501

31. 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% CoefficientP-value Full Saving Factor0.1000.1801 401(k) Factor0.0910.2328

32. 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% CoefficientP-value Full Saving Factor0.0170.7525 401(k) Factor-0.0100.8612

33. 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% CoefficientP-value Full Saving Factor0.0620.3311 401(k) Factor0.0320.6187

34. 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% CoefficientP-value Full Saving Factor0.0130.8427 401(k) Factor-0.0010.9847

35. 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% CoefficientP-value Full Saving Factor-0.0440.3750 401(k) Factor-0.0310.5380

36. 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% CoefficientP-value Full Saving Factor0.1210.0193 401(k) Factor0.0900.0803

37. 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% CoefficientP-value Full Saving Factor0.0840.1090 401(k) Factor0.0100.8442

38. 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% CoefficientP-value Full Saving Factor0.0550.4730 401(k) Factor-0.0440.5663

39. 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% CoefficientP-value Full Saving Factor-0.2500.0001 401(k) Factor-0.1650.0018

40. 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% CoefficientP-value Full Saving Factor-0.1000.0383 401(k) Factor-0.0540.2662

41. 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% CoefficientP-value Full Saving Factor-0.1170.0347 401(k) Factor-0.1240.0247

42. 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% CoefficientP-value Full Saving Factor0.0900.0491 401(k) Factor0.0590.2036

43. 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% CoefficientP-value Full Saving Factor0.0670.2522 401(k) Factor0.0350.5570

44. 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% CoefficientP-value Full Saving Factor-0.0480.3891 401(k) Factor-0.0530.3587

45. 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% CoefficientP-value Full Saving Factor0.1000.0949 401(k) Factor0.0890.1387

46. 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% CoefficientP-value Full Saving Factor0.0260.6734 401(k) Factor0.0450.4601

47. 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% CoefficientP-value Full Saving Factor-0.1680.0229 401(k) Factor-0.1300.0873

48. 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% CoefficientP-value Full Saving Factor-0.0330.5206 401(k) Factor-0.0530.3103

49. 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% CoefficientP-value Full Saving Factor0.1190.1542 401(k) Factor0.0600.4695

50. 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% CoefficientP-value Full Saving Factor0.1220.1424 401(k) Factor0.0830.3260

51. Positive 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% CoefficientP-value Full Saving Factor-0.0470.5370 401(k) Factor-0.0590.4484

52. Social 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% CoefficientP-value Full Saving Factor-0.0400.4479 401(k) Factor-0.0490.3566

53. Social 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% CoefficientP-value Full Saving Factor-0.0500.2748 401(k) Factor-0.0480.2947

54. Social 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% CoefficientP-value Full Saving Factor-0.0350.5271 401(k) Factor-0.0390.4857

55. Social 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% CoefficientP-value Full Saving Factor0.0330.5459 401(k) Factor0.0470.3854

56. Strong 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% CoefficientP-value Full Saving Factor0.1980.0004 401(k) Factor0.1460.0089

57. Strong 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% CoefficientP-value Full Saving Factor0.1030.0423 401(k) Factor0.0820.1090

58. Fatalism 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% CoefficientP-value Full Saving Factor-0.0840.0889 401(k) Factor-0.0450.3733

59. Fatalism 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% CoefficientP-value Full Saving Factor-0.3650.0001 401(k) Factor-0.2930.0001

60. Locus 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% CoefficientP-value Full Saving Factor-0.1760.0010 401(k) Factor-0.1290.0179

61. Locus 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% CoefficientP-value Full Saving Factor-0.1750.0002 401(k) Factor-0.1260.0088