Three Models of Retirement: Computational Complexity Versus Predictive Validity

Robin L. Lumsdaine, James H. Stock, David A. Wise

NBER Working Paper No. 3558 (Also Reprint No. r1760)
Issued in December 1990
NBER Program(s):   AG

Empirical analysis often raises questions of approximation to underlying individual behavior. Closer approximation may require more complex statistical specifications, On the other hand, more complex specifications may presume computational facility that is beyond the grasp of most real people and therefore less consistent with the actual rules that govern their behavior, even though economic theory may push analysts to increasingly more complex specifications. Thus the issue is not only whether more complex models are worth the effort, but also whether they are better. We compare the in-sample and out-of-sample predictive performance of three models of retirement -- "option value," dynamic programming, and probit -- to determine which of the retirement rules most closely matches retirement behavior in a large firm. The primary measure of predictive validity is the correspondence between the model predictions and actual retirement under the firm's temporary early retirement window plan. The "option value" and dynamic programming models are considerably more successful than the less complex probit model in approximating the rules individuals use to make retirement decisions, but the more complex dynamic programming rule approximates behavior no better than the simpler option value rule.

download in pdf format
   (512 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (512 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3558


Users who downloaded this paper also downloaded these:
Lumsdaine, Stock, and Wise Three Models of Retirement: Computational Complexity versus Predictive Validity
Stock and Wise w2686 Pensions, The Option Value of Work, and Retirement
Rust A Dynamic Programming Model of Retirement Behavior
Boersch-Supan, Schnabel, Kohnz, and Mastrobuoni Micro-Modeling of Retirement Decisions in Germany
Gustman and Steinmeier w1237 A Structural Retirement Model
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us