The role of behavioral economics and behavioral decision making in Americans' retirement savings decisions.

TLDR

Traditional economic theory assumes rational utility maximization, yet behavioral economics demonstrates that incomplete information, limited cognition, and biases cause systematic deviations from optimal savings behavior. This article aims to outline findings from judgment and decision‑making and behavioral‑economics literature that reveal behavioral impediments to retirement savings. It explains how self‑control, emotions, and choice architecture can inform policymakers about non‑economic factors influencing savings decisions.

Abstract

Traditional economic theory posits that people make decisions by maximizing a utility function in which all of the relevant constraints and preferences are included and weighed appropriately. Behavioral economists and decision-making researchers, however, are interested in how people make decisions in the face of incomplete information, limited cognitive resources, and decision biases. Empirical findings in the areas of behavioral economics and judgment and decision making (JDM) demonstrate departures from the notion that man is economically rational, illustrating instead that people often act in ways that are economically suboptimal. This article outlines findings from the JDM and behavioral-economics literatures that highlight the many behavioral impediments to saving that individuals may encounter on their way to financial security. I discuss how behavioral and psychological issues, such as self-control, emotions, and choice architecture can help policymakers understand what factors, aside from purely economic ones, may affect individuals' savings behavior.