INDIVIDUAL LOSS AVERSION AND IMPLICATIONS FOR SAVING AND INVESTING Suzanne Shu, UCLA and NBER Annuity research supported by Russell Sage and Alfred P. Sloan Foundations SSA claiming research was pursuant to a grant from the U.S. Social Security Administration (SSA) as part of the Retirement Research Consortium (RRC). The findings and conclusions are solely those of the authors and do not represent the views of SSA, any agency of the Federal Government, the NBER Retirement Research Center, UCLA, or Duke University. We have iden6fied four significant individual level drivers of savings & re6rement decisions: Life expecta6ons Perceived ownership Intertemporal pa6ence Loss aversion One big uncertainty: How long do you expect to live? Subjective Life Expectations Task: Live-­‐to or Die-­‐by Life expectation measures from Payne et al 2013 How you ask changes predic6ons Median
85 years old
Median
75 years old
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Answers have a direct effect on re6rement decisions The longer one forecasts to live, the more aPrac6ve annuity purchase and related re6rement savings decisions are. Task (n=830) Expec <80 yrs Expec ≥80 old yrs old Annuity purchase probabilities .35 .44*** SSA claiming age 65.8 66.6*** Savings contribution 10.7% 11.2%** Allocation to equities 56% 59%* § 
Effects of ques6on framing are significant (live-­‐to versus die-­‐by) when life expecta6ons task completed first. § 
Measured loss aversion also affects these decisions.... One big individual difference: How do you feel about losses? Assessing Loss Aversion: 9 ques6ons 45% 10% 45% Gamble 1 $600 $0 -­‐$600 Gamble 2 $400 $0 -­‐$400 45% 10% 45% Gamble 1 $400 $0 -­‐$400 Gamble 2 $700 $0 -­‐$600 45% 10% 45% Gamble 1 -­‐$400 $0 $400 Gamble 2 -­‐$600 $0 $900 69% 58% 44% Individual level loss aversion affects preference for annui6es Pr(buy the annuity vs. nothing) 0.5
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0.25
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Preference for annuities stronger for those with lower loss aversion 5
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Preference for period certain guarantees weaker for individuals with no loss aversion 30
Period certain (years) Assumptions: No yearly increase, AAA, future payoffs discounted at 3% per year Percent claiming before age 65 Individual level loss aversion affects SSA benefit claiming inten6ons 70% 60% 50% 40% 30% 20% 10% 0% lowest quartile life expectancy highest quartile life expectancy Highest Lowest quartile loss quartile loss aversion aversion Other important individual differences: Ownership (fairness) Intertemporal pa6ence Effects of ownership & pa6ence on claiming decisions 70% Percent claiming before age 65 Percent claiming before age 65 70% 60% 50% 40% 30% 20% 10% 0% Highest quartile Lowest quartile perceived perceived ownership ownership 60% 50% 40% lowest quartile life expectancy 30% highest quartile life expectancy 20% 10% 0% Lowest quartile Highest quartile intertemporal intertemporal patience patience Individual level behavioral biases can lead to subop6mal savings and re6rement spending decisions, but… we can use insights from consumer psychology to nudge people toward bePer decisions