1. High and Low Savers? Circumstances and Preferences Laurie Pounder

2. Differences in Consumption (Saving) Rates Across Households: Circumstances? Such as income shocks; differences in pensions (income replacement rate in retirement); income profiles; etc. Or Types of Savers? By “inherent” characteristics such as preferences or ability

3. Answers from C/M  Subject to less “noise” from circumstances, C/M is an ideal measure for looking at differences across households in consumption and revealing underlying parameters  Compare model prediction of C/M to observed

4. Neoclassical Model  Uncertainty only in mortality and rate of return  Krep-Porteus type preferences; recursive formulation  Household returns to scale & fixed cost of work Subject to:

5. Fixed cost of work Household returns to scale  Expression governing curvature of recursive value function: γ= coefficient of relative risk aversion θ= intertemporal substitution  Components of K(i,t):

6. Average Propensity to Consume Implications: C is proportional in M C/M depends only on preferences, stochastic return characteristics, and mortality. C/M does not depend directly on M, income profile, or outcome of past income shocks Infinite Horizon (no mortality):

7. Findings  Estimated model has simple correlation with observed C/M of 0.23 (R 2 =0.06)  Survey estimates of model factors (mortality, bequests, risk aversion) matter in expected direction  Unexplained heterogeneity in observed C/M! Rich save more (lower propensity to consume)  “Inherent” characteristics, or preferences, important in explaining C/M

8. What Model Does Explain Predicted Variation from: Mortality & Returns to Scale in Household Size +Utility Cost of Working (Retirement Status) +Actual Risky Asset Allocation & Expected Returns Simple Correlation 0.2060.2130.234

9. What Model Doesn’t Explain Rich Have Lower Consumption Rate Note: Bars indicate 25th and 75th percentiles of the Log Income Distribution Moving Average Income Profile

10. Dependent Variable: ln(C/M)with additional demographics with additional demographics with additional demographics Subjective Life Expectancy Ratio-0.137*** (0.044) -0.080* (0.043) Probability of Bequest >$10k (Continuous) -0.002*** (0.001) Probability of Bequest >$100k (Continuous) -0.003*** (0.001) Risk Aversion Survey Measure -0.022*** (0.007) Model Prediction1.33*** (0.363) 1.04*** (0.359) 1.45*** (0.454) Constant 3.69 -3.55 -5.77 R 2 =0.231R 2 =0.287R 2 =0.226 N=1190 N=894 Adding Survey Measures of Model Factors

11. Time/Intertemporal Preference Heterogenegity Still substantial unexplained heterogeneity Still strong correlation of residual heterogeneity and prosperity Heterogeneity in discount rate and intertemporal substitution only model factors unaccounted for These would explain observation of rich save more

12. Dependent Variable: Residual of ln(C/M) after OLS on model prediction, demographics, bequests, life expectancy, and health (1)(2) “Conditional” Accumulated Net Worth Net Worth / Sum of Earnings -0.043** (0.015) -0.044** (0.016) Age of Household Head-0.062 (0.046) Ratio of Pensions and Social Security to Earnings-0.0001 (0.0002) Constant 0.013 1.955 N=1095R 2 =0.01 Residual Explained by Time/Intertemporal Preferences (Patience)?

13. Cognition and Planning in Consumption: Rejecting the Neoclassical Model Laurie Pounder

14.  Bounded cognition  Propensity to plan  Expectations formation Beyond the Neoclassical Model Abilities: Cognition & Planning

15. Measures in HRS  HRS asks questions on basic cognition (recall, counting, subtraction) plus planning horizon and subjective expectations → Lillard & Willis “focal point” answers; precision of expectations formation related to financial decisions  Measures matter such that lower cognition, less precision, and shorter planning horizons all imply higher propensities to consume

16. Cognition/Planning Predict C/M Dependent Variable: Residual of ln(C/M) after full regression Long Financial Planning Horizon-0.070** (0.028) Fraction of Precise Answers-0.088* (0.053) High Word Recall -0.062** (0.030) Counting Backwards -0.124** (0.048) Hardest Subtraction Problem-0.049* (0.030) N=1645R 2 =0.027 Note: Standard errors in parentheses. Standard errors adjusted for two-step regression.

17. Dependent Variable: Residual of ln(C/M) after full regression (1)(2)(3)(4) Financial Literacy Index-0.174** (0.070) -0.206** (0.070) -0.212** (0.074) Planning & Budgeting Index0.042* (0.024) 0.056** (0.023) 0.057** (0.024) Long Financial Planning Horizon-0.128 (0.109) Fraction of Precise Answers0.118 (0.200) High Word Recall -0.165 (0.120) Counting Backwards 0.248 (0.179) Hardest Subtraction Problem0.008 (0.113) N=116R 2 =0.032R 2 =0.026R 2 =0.075R 2 =0.100 Lusardi Literacy & Planning Module

18. Dependent Variable: Residual of ln(C/M) after full regression Personality Questions Seldom apprehensive about future0.028 (0.022) 0.048** (0.023) Strive for excellence-0.097** (0.024) -0.109** (0.029) Clear set of goals and work toward them-0.026 (0.023) -0.006 (0.025) Work hard to accomplish goals-0.063* (0.034) -0.011 (0.039) N=235 1999 Mailout Personality Qs

19. Form for fixed cost of work α = degree of substitutability of consumption and leisure η = Frisch labor supply elasticity?