An Experimental Survey of Investment Decisions for Retirement Savings

Abstract

We implement a choice experiment to investigate the extent to which retirement savers follow standard mean-variance analysis when choosing from a menu of investment options. We conduct this survey once during a period of …nancial tranquility (March 2007) and once during …nancial crisis (October 2008). We model choices using the scale-adjusted version of a latent class choice (…nite mixture) model. We identify income and age as important determinants of the preference classes, and underlying risk tolerance and age as key determi- nants of variability (scale). Estimated marginal eects of variations in net expected returns and risk on choice of investment option show classes populated by young and low income individuals as more likely to respond consistently with standard mean-variance analysis. However classes populated by older and higher income individuals react positively to both higher returns (lower fees) and increasing risk in returns where risk is presented as a widen- ing range of possible investment outcomes. Crisis-period results con…rm these conclusions, although we see some moderating of overall risk exposures compared with tranquil-period results.