Behavioral finance and pension decisions
by Lampros Romanos
in conjunction with Erasmus University Rotterdam and Transamerica Center for Retirement Studies
An extensive literature review and a focused analysis on how framing effects, financial literacy, self-control and loss aversion affect pension decisions
The retirement landscape is rapidly changing with pension savings shifting to Defined Contribution plans. This means that individuals are increasingly confronted with more responsibilities to make decisions about their retirement savings. This paper examines the impact of framing effects, financial literacy, self-control and loss aversion on those decisions. It finds strong framing and anchoring effects on the match threshold of a matching contribution feature within 401 (k) or similar plans. Moreover, the findings of this paper suggest that financial literacy cannot significantly mitigate these framing effects. Lastly, this paper shows that commitment devices such as having multiple savings accounts can significantly increase ‘out of work’ savings for retirement.