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Retirement Savings, Subjective Expectations and Survey Measurement

a PSC Research Project [ARCHIVE DISPLAY]

Investigator:   Robert Willis

This project aims at uncovering the effect of people's expectations on their retirement savings. In particular, we focus on whether and how expectations about stock market returns affect the share of stocks and mutual funds in household savings, including retirement accounts. The Health and Retirement Study collects data on savings and stock market expectations, the latter elicited in forms of subjective probability questions. Previous research has shown that answers to these questions contain useful information but they are also very noisy. In this research, we plan to build on the novel approach to analyzing probability questions developed by Hill, Perry and Willis (2005). We focus on people's expectations about the performance of the stock market and contrast those to their investment decisions. We plan to generalize the approach of Hill, Perry and Willis to more complex situations, and to the extent it's possible, separate heterogeneity that is relevant for important decisions from heterogeneity unique to errors in answering survey questions. We also extend their work by making a more explicit connection between survey response, economic model and observed behavior. Our results may explain why people hold so few stocks by relating expectations (e.g. optimism and uncertainty) to the composition of savings.

Funding Period: 02/01/2007 to 01/31/2010

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