Risk tolerance and rationality in the case of retirement savings

Abstract

Purpose This research aims to examine the decision-making process involved in saving for retirement and compare it with decision-making processes regarding other financial products (such as loans and savings plans) as well as real products (such as a car or a home). Design/methodology/approach This research is based on the distribution of 107 questionnaires. The questionnaire is composed of two parts: questions examining and focusing on the individual’s decision-making process and questions regarding socioeconomic factors. The average level of risk tolerance is calculated for each respondent with respect to the first four chapters. (These chapters include buying a car or a home, opening a savings plan and taking a loan). Afterward, the consistency (rationality) of the respondents is examined with regard to their decision-making concerning retirement savings plans. Then, an econometric model is used to further test the consistency of the respondents. Findings The results suggest that the level of risk tolerance associated with a retirement savings plan is consistent with that associated with the other financial products, but not with the real products. Majority of the respondents demonstrate high risk tolerance with respect to retirement savings, and their decision-making process is similar to a random thinking process. The level of deliberation and information-gathering regarding retirement savings is the lowest when compared with the other financial and real products examined in this paper. Majority of the respondents are less risk-tolerant toward the other financial and real products. Originality/value In this research, the authors examine how different individuals with different characteristics get different decisions about their personal retirement savings. The authors also examine these decisions’ deviation from the rational model, and compare it with decision-making processes regarding other financial products as well as real products.

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“…The recent trends in welfare cuts, implemented by many Western governments, often imply a shift of responsibility for retirement income onto individuals through private pensions and personal saving schemes. The importance of understanding saving behaviours across sections of the population cannot be underestimated (Tavor and Garyn-Tal, 2016) as many employers in the UK are also seeking to ameliorate the costs and risks of defined benefit pension schemes by replacing them with defined contribution schemes. The changes in public and occupational pension schemes introduced recently in the UK imply a transfer of JEL classification -J15, J16, D01 Retirement saving in the UK risk and responsibility for retirement income from state and employers to individuals/ employees.…”