Implications of Hyperbolic Discounting on Retirement Decisions | Munich Center for the Economics of Aging - MEA


Life-Cycle Decisions

Implications of Hyperbolic Discounting on Retirement Decisions

When evaluating present and future plans we usually tend to enter in a conflict with our own selves. When looking at the distant future we promise to accomplish all the difficult goals previously established but when comes to the time and we face our duties, we just tend to leave them for tomorrow and procrastinate just a little bit longer. Much research has been presented on the implication of hyperbolic discounting preferences on savings. These modeling approaches are by no means new but have only recently found widespread attention when they were applied to retirement saving. Nevertheless, retirement decisions themselves have been not been subject to such a thorough examination. Endogenous retirement decisions under hyperbolic discounting have only recently been object of analysis and fail to lead to clear conclusions.

The myriad of outcomes left by the theoretical literature leaves this field of study with an increasing number of questions and few answers. And here is where our paper takes the stage and tests empirically the interplay between hyperbolic discounting and retirement decisions.

In order to detect hyperbolic discounting behavior, we will use the conscientiousness questions on the big -5 questionnaire as a measure for the level of procrastination. In a first moment we will show that procrastination and conscientiousness are strongly inversely related, in order to make the case that a ”conscientiousness index” can be used as a measure for time inconsistency/procrastination to be used in the main model. From here, we depart to our main model that examines retirement expectations and actual retirement behavior in conjunction with savings behavior and old age poverty. To accomplish this, we will use the Health and Retirement Study data. Preliminary results show that average retirement age is lower for hyperbolic individuals who also tend to revise their age of retirement downwards as they get older. Savings tend to be lower for hyperbolics even if they retire earlier.

Contact Person(s)

Dr. Duarte Nuno Semedo Leite