Department of Economics
London School of Economics
and Political Science
London WC2A 2AE
NBER Working Papers and Publications
|August 2015||The Role of Time Preferences and Exponential-Growth Bias in Retirement Savings|
with Gopi Shah Goda, Colleen Flaherty Manchester, Aaron Sojourner, Joshua Tasoff: w21482
There is considerable variation in retirement savings within income, age, and educational categories. Using a broad sample of the U.S. population, we elicit time preference parameters from a quasi-hyperbolic discounting model, and perceptions of exponential growth. We find that present bias (PB), the tendency to value utility in the present over the future in a dynamically inconsistent way, and exponential-growth bias (EGB), the tendency to neglect compounding, are prevalent and distinct latent variables. PB, EGB, and the long-run discount factor are all highly significant in predicting retirement savings, even while controlling for measures of IQ and general financial literacy as well as a rich set of demographic controls. We find that lack of self-awareness of these biases has an additio...