Friday, November 6, 2009

Many people do not plan ahead

It is a well know story: people do not save enough for retirement, which is inconsistent with standard theory. Hyperbolic discounting comes here to the rescue, justifying this with the twisted preferences people have: they just value the present a lot. And what if people are just not planning ahead?

John Bone, John Hey and John Suckling conduct an experiment that allows to separate preferences from planning ahead. In particular, players should be anticipating what other players are doing. It turns out about a third do not. And asking them to pre-commit does not change this.

What should we take from this? The conclusion of the three Johns may only apply to the experimental environment, but not when it really matters, like planning for retirement. But there is plenty of evidence that many do not plan. While it may be rational for some (who do not expect to stop working or live long enough), many are still caught empty-handed at retirement. Should government then plan for them?

No comments: