Fatalism, Locus of Control and Retirement Saving

Fatalism, Locus of Control Fatalism, Locus of Control and Retirement Savingand Retirement Saving

July, 2009July, 2009

Miles Kimball and Tyler ShumwayMiles Kimball and Tyler Shumway

Cognitive Economics:Cognitive Economics:The Economics of The Economics of What is in People’s What is in People’s

MindsMinds

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Named by Analogy to Named by Analogy to “Cognitive Psychology”“Cognitive Psychology”

• Cognitive Psychology = the area of psychology that examines internal mental processes such as problem solving, memory and language.

• Cognitive Psychology was a departure from Behaviorism--the idea that only outward behavior is a legitimate object of study.

• Milton Friedman famously advocated behaviorism in Economics.

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Areas of Economics by Areas of Economics by Distinctive Data TypeDistinctive Data Type

• Standard Economics (including “Mindless” Psychological Economics a la Gul and Pesendorfer): actual market choices only.

• Experimental Economics: choices in artificial situations but with real stakes.

• Neuroeconomics: FMRI, saccades, skin conductance, …

• Bioeconomics: genes, hormones• Cognitive Economics: mental contents (based

on tests and self-reports) and hypothetical choices.

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Four Themes of Cognitive Four Themes of Cognitive EconomicsEconomics

1. New Types of Data

2. Heterogeneity

3. Finite and Scarce Cognition

4. Welfare Economics Revisited

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3. Finite and Scarce Cognition3. Finite and Scarce Cognition

• Finite cognition=the reality that people are not infinitely intelligent.

• Scarce cognition=some decisions required by our modern environment—at work and in private lives—can require more intelligence for full-scale optimization than an individual has

4. Welfare Economics Revisited4. Welfare Economics Revisited

• Behavioral economics and finance have found many kinds of anomalous behavior– Exotic preferences?– Cognitive limitations?

• Answer matters for welfare and policy• Research strategy of Cognitive Economics:

see how much one can explain with cognitive limitations before invoking exotic preferences

Dimensions of CognitionDimensions of Cognition

• Sophistication (some say literacy)– Distance from truth

• Overconfidence– Awareness of distance from truth

• Folk theories– Direction of departure from truth

Total SavingTotal Saving

• We looked for a wide range of psychological factors that might affect total saving

–Survey Practicum course

–Focus groups

• Savings questions on the June, 2008 Survey of Consumers

Laurie Pounder (2006): High and Low Savers? Laurie Pounder (2006): High and Low Savers? Circumstances, Patience and Cognition Circumstances, Patience and Cognition

Average Propensity to Consume Average Propensity to Consume Out of Full Modigliani WealthOut of Full Modigliani Wealth(Kreps-Porteus Preferences)(Kreps-Porteus Preferences)

• Suppose you got a (new) job that has a 401(k) retirement savings plan. You can contribute up to ten percent of your pay. For every dollar you put in, your new employer will put in a dollar (twenty-five cents). What percentage of your pay would you choose to contribute?

Employer 100% Match

Employer25% Match

Factor Loading for Contribution

Rate0.849 0.841

Factor Loading for Top Code

Dummy0.835 0.809

• Factor Loading: 0.411

• Compared to people who are similar to you in age, income, and family size, do you think you have:– More retirement savings: 26.4%– About the same amount of ret. savings:

34.8%– Less retirement savings: 35.3%

• Factor Loading: 0.475• Suppose that the government decided that in

addition to current Social Security taxes, everyone under sixty-five who is working would be required to put an additional ten percent of their pre-tax income into a personal retirement account. How hard would it be for you to adjust to your (and your spouse/partner’s) lower take-home pay – would you say it would be:– Extremely Hard: 12.9%– Quite Hard: 11.9%– Somewhat Hard: 34.0%– Not so hard: 20.2%– Not hard at all: 16.4%


• Would you vote for such a program?– Yes: 35.6%– No: 60.2%


• If you unexpectedly received one thousand dollars, would you:– Save it: 33.4%– Pay off debt with it: 19.7%– pay bills with it: 30.5%– Have fun with it: 12.1%


• Other than employer retirement plans from current or past employers, do you have anything saved for retirement?– Yes: 55.3%– No: 41.2%


• Residual of total savings/income regressed on age, age2

Savings Behavior RegressionsSavings Behavior RegressionsDependent Variable: Participate in 401(k) PlanDependent Variable: Participate in 401(k) Plan

Variable Coefficient p-value

Intercept 0.524 0.4271

Savings Index 0.101 0.0005

Log of Income -0.007 0.8993

West Region 0.015 0.8340

Midwest Region 0.022 0.7317

Northeast Region -0.004 0.9496

Years of Education

0.012 0.3242

Male -0.001 0.9818

Married -0.074 0.2460

Black 0.093 0.3435

Hispanic -0.098 0.3663

Native American 0.435 0.1508

Asian 0.019 0.8996

Homeowner 0.099 0.2602

Age 0.014 0.4151

Age2 0.000 0.3104

143 observations, adjusted R2 = 7.14%

Savings Behavior RegressionsSavings Behavior RegressionsDependent Variable: Take money from refinanceDependent Variable: Take money from refinance




Log of Income -0.076 0.3522


Midwest Region -0.092 0.4271


Years of Education

0.005 0.8247

Male 0.055 0.5512

Married 0.014 0.9015

Black -0.118 0.5782

Hispanic -0.282 0.5879

Native American -0.295 0.5861

Asian 0.420 0.1089

Homeowner - -

Age -0.004 0.9057

Age2 0.000 0.7515


Savings Behavior RegressionsSavings Behavior RegressionsDependent Variable: Pay off credit card balanceDependent Variable: Pay off credit card balance




Log of Income 0.121 0.4944

West Region -0.423 0.1361

Midwest Region -0.258 0.3292


Years of Education

0.049 0.3089

Male 0.047 0.8178

Married 0.010 0.9650

Black -0.591 0.1386

Hispanic -0.422 0.3937


Asian 0.616 0.3039


Age -0.059 0.1629

Age2 0.001 0.0818


Savings Behavior RegressionsSavings Behavior RegressionsDependent Variable: Better off without credit cardDependent Variable: Better off without credit card


Intercept -0.698 0.2133


Log of Income 0.083 0.0820


Midwest Region 0.064 0.3638

Northeast Region 0.128 0.0986

Years of Education

0.036 0.0056

Male -0.014 0.8012

Married -0.029 0.6522

Black -0.042 0.6956

Hispanic -0.030 0.8211


Asian 0.066 0.6827


Age -0.012 0.3020

Age2 0.000 0.2288


A Savings Attitude RegressionA Savings Attitude Regression“Thinking about money stresses me out”“Thinking about money stresses me out”

Dependent Variable: Savings IndexVariable Coefficient Std. Error t-statistic P-value

Intercept -1.932 1.822 -1.06 0.2881

Attitude Var 11 -0.165 0.079 3.15 0.0018

Log of Income 1.116 0.399 2.80 0.0055

West Region 0.668 0.720 0.93 0.3545

Midwest Region -0.497 0.643 -0.77 0.4400

Northeast Region -0.582 0.715 -0.81 0.4164

Years of Education

-0.031 0.119 -0.26 0.7974

Male 0.375 0.507 0.74 0.4604

Married 0.151 0.600 0.25 0.8013

Black -0.967 0.920 -1.05 0.2942

Hispanic 0.238 1.258 0.19 0.8501

Native American 0.053 2.339 0.02 0.9819

Asian -0.592 1.657 -0.36 0.7213

Homeowner 0.805 0.760 1.06 0.2905

Age 0.172 0.110 1.55 0.1212

Age2 -0.001 0.001 -1.11 0.2666


Variable CodingVariable Coding

Strongly Agree 5

Agree 4

Neither Agree Nor Disagree

3

Disagree 2

Strongly Disagree

1

• The reported percentages generally do not sum to 100 percent because some respondents do not answer each question

• Most of the regressions have about 320 observations

Self-Control and Self-ManagementSelf-Control and Self-Management

• I have problems with self control– Strongly Agree: 0.5%– Agree: 10.2%– Neutral: 6.5%– Disagree: 68.7%– Strongly Disagree: 11.3%

Coefficient P-value

Full Saving Factor -0.062 0.3604

401(k) Factor -0.013 0.8529


• I often make impulse purchases– Strongly Agree: 2.7%– Agree: 25.1%– Neutral: 7.3%– Disagree: 50.7%– Strongly Disagree: 11.1%

Coefficient P-value


401(k) Factor -0.061 0.2243


• Breaking a rule gives me a feeling of freedom– Strongly Agree: 10%– Agree: 8.1%– Neutral: 65.5%– Disagree: 13.5%– Strongly Disagree: 0.3%

Coefficient P-value


401(k) Factor -0.022 0.7501


• I can stick with a task until it is done, even if it is unpleasant– Strongly Agree: 16.4%– Agree: 70.6%– Neutral: 4.0%– Disagree: 5.1%– Strongly Disagree: 0.8%

Coefficient P-value

Full Saving Factor 0.100 0.1801

401(k) Factor 0.091 0.2328


• I am very thrifty– Strongly Agree: 7.8%– Agree: 48.5%– Neutral: 14.0%– Disagree: 24.5%– Strongly Disagree: 1.6%

Coefficient P-value


401(k) Factor -0.010 0.8612


• Before I buy something, I ask myself if I am really going to use it.– Strongly Agree: 20.2%– Agree: 62.0%– Neutral: 4.6%– Disagree: 10.2%– Strongly Disagree: 0.3%

Coefficient P-value


401(k) Factor 0.032 0.6187


• Before I buy something, I think twice to make sure it is something I really need– Strongly Agree: 16.4%– Agree: 65%– Neutral: 4%– Disagree: 11.9%– Strongly Disagree: 0%

Coefficient P-value


401(k) Factor -0.001 0.9847


• Pretending to yourself that you have less money than you really do is a good idea– Strongly Agree: 3%– Agree: 39.4%– Neutral: 11.9%– Disagree: 37.5%– Strongly Disagree: 5.4%

Coefficient P-value


401(k) Factor -0.031 0.5380

Planning, Thinking and BudgetingPlanning, Thinking and Budgeting

• How much have you thought about retirement?– A lot: 37.7%– Some: 27.2%– A little: 15.1%– Hardly at all: 13.5%

Coefficient P-value


401(k) Factor 0.090 0.0803


• I enjoy planning activities like vacations well in advance– Strongly Agree: 30.2%– Agree: 45.3%– Neutral: 8.6%– Disagree: 10.2%– Strongly Disagree: 2.7%

Coefficient P-value


401(k) Factor 0.010 0.8442


• I am good at seeing the big picture– Strongly Agree: 11.9%– Agree: 71.7%– Neutral: 6.5%– Disagree: 6.5%– Strongly Disagree: 0.5%

Coefficient P-value


401(k) Factor -0.044 0.5663


• Thinking about money stresses me out– Strongly Agree: 3.0%– Agree: 25.9%– Neutral: 7.6%– Disagree: 54.7%– Strongly Disagree: 6.2%

Coefficient P-value


401(k) Factor -0.165 0.0018


• I often wonder, “Where did all my money go?”– Strongly Agree: 5.4%– Agree: 35%– Neutral: 7%– Disagree: 42.9%– Strongly Disagree: 7%

Coefficient P-value


401(k) Factor -0.054 0.2662

Institutional Trust and Institutional Trust and Reliance on OthersReliance on Others

• If I try to save through financial institutions, someone is likely to figure out a way to cheat me out of the money– Strongly Agree: 4.3%

– Agree: 9.4%

– Neutral: 14.3%

– Disagree: 48.3%

– Strongly Disagree: 20.2%

Coefficient P-value


401(k) Factor -0.124 0.0247


• Whether for political or other reasons, the US government will always make sure that senior citizens have basic food, shelter, clothing and medical care– S. Agree: 4.3%, Agree: 9.4%

– Neutral: 14.3%

– Disagree: 48.3%, St. Disagree: 20.2%

Coefficient P-value


401(k) Factor 0.059 0.2036


• Even in the worst case, I will be okay financially when I am old because I will have government programs to fall back on– Strongly Agree: 1.9%

– Agree: 11.9%

– Neutral: 11.1%

– Disagree: 55.5%


Coefficient P-value


401(k) Factor 0.035 0.5570


• My children will make sure I am okay financially when I am old– Strongly Agree: 1.9%– Agree: 11.9%– Neutral: 11.1%– Disagree: 55.5%– Strongly Disagree: 16.7%

Coefficient P-value


401(k) Factor -0.053 0.3587

Negative Attitudes Toward Being Negative Attitudes Toward Being Careful with MoneyCareful with Money

• Money doesn’t buy happiness– Strongly Agree: 33.7%– Agree: 49.6%– Neutral: 5.7%– Disagree: 6.5%– Strongly Disagree: 1.4%

Coefficient P-value


401(k) Factor 0.089 0.1387


• Thinking about money all the time, even when you have enough, is a terrible way to live– Strongly Agree: 33.7%

– Agree: 49.6%

– Neutral: 5.7%

– Disagree: 6.5%


Coefficient P-value


401(k) Factor 0.045 0.4601


• It is nice to have money saved up, but you have to live– Strongly Agree: 9.7%

– Agree: 73.1%

– Neutral: 7.0%

– Disagree: 7.3%


Coefficient P-value


401(k) Factor -0.130 0.0873


• I would hate to have someone think that I am stingy with my money– Strongly Agree: 3.8%

– Agree: 40.2%

– Neutral: 14%

– Disagree: 35.9%


Coefficient P-value


401(k) Factor -0.053 0.3103

Positive Attitudes Toward SavingPositive Attitudes Toward Saving

• Most Americans save too little– Strongly Agree: 20.0%– Agree: 68.2%– Neutral: 4.9%– Disagree: 3.8%– Strongly Disagree: 0.5%

Coefficient P-value


401(k) Factor 0.060 0.4695


• Most Americans borrow too much– Strongly Agree: 25.9%– Agree: 64.4%– Neutral: 3.8%– Disagree: 2.7%– Strongly Disagree: 0.3%

Coefficient P-value


401(k) Factor 0.083 0.3260


• I really respect people who have managed to save a lot of money– Strongly Agree: 21.0%

– Agree: 64.7%

– Neutral: 7.3%

– Disagree: 3.8%


Coefficient P-value


401(k) Factor -0.059 0.4484

Social PressureSocial Pressure• My parents or guardians encouraged me to

save– Strongly Agree: 21.3%

– Agree: 53.9%

– Neutral: 5.4%

– Disagree: 13.5%


Coefficient P-value


401(k) Factor -0.049 0.3566

Social PressureSocial Pressure• When I was growing up, my parents were

good at saving their money– Strongly Agree: 12.9%

– Agree: 46.4%

– Neutral: 5.9%

– Disagree: 25.9%


Coefficient P-value


401(k) Factor -0.048 0.2947

Social PressureSocial Pressure• I would hate to have people think I am

careless with money– Strongly Agree: 13.5%

– Agree: 54.5%

– Neutral: 14.6%

– Disagree: 11.3%


Coefficient P-value


401(k) Factor -0.039 0.4857

Social PressureSocial Pressure• I would feel guilty about going bankrupt, even

if I had to– Strongly Agree: 30.2%

– Agree: 47.4%

– Neutral: 5.7%

– Disagree: 12.1%


Coefficient P-value


401(k) Factor 0.047 0.3854

Strong JudgmentsStrong Judgments• People who don’t save for retirement are

being irresponsible– Strongly Agree: 24.5%

– Agree: 51.2%

– Neutral: 5.4%

– Disagree: 15.4%


Coefficient P-value


401(k) Factor 0.146 0.0089

Strong JudgmentsStrong Judgments• Using a credit card without paying off the

balance every month is really stupid– Strongly Agree: 21.3%

– Agree: 47.2%

– Neutral: 8.1%

– Disagree: 19.4%


Coefficient P-value


401(k) Factor 0.082 0.1090

FatalismFatalism• If you don’t let yourself get too worried,

everything tends to work out in the end– Strongly Agree: 6.7%

– Agree: 45.0%

– Neutral: 10.5%

– Disagree: 32.6%


Coefficient P-value


401(k) Factor -0.045 0.3733

FatalismFatalism• No one can predict the future, so trying to

save doesn’t do much good– Strongly Agree: 0.8%

– Agree: 4.9%

– Neutral: 2.2%

– Disagree: 61.7%


Coefficient P-value


401(k) Factor -0.293 0.0001

Locus of ControlLocus of Control• It is difficult to stay ahead financially because

of the things my family members want to buy– Strongly Agree: 1.1%

– Agree: 23.7%

– Neutral: 10.8%

– Disagree: 52.8%


Coefficient P-value


401(k) Factor -0.129 0.0179

Locus of ControlLocus of Control• Many of the things that keep me from saving

more money are out of my control– Strongly Agree: 6.7%

– Agree: 42.6%

– Neutral: 5.1%

– Disagree: 38.5%


Coefficient P-value


401(k) Factor -0.126 0.0088

Fatalism, Locus of Control and Retirement Saving

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