Costly ignorance

Enhancing consumer financial decision making

Given that one has saved enough to enjoy a comfortable old age and is aging healthy, growing older is certainly a privilege and something to look forward to. Neither wealth nor health at old age can be taken for granted, but consumers can increase their chances of an enjoyable retreat from working life – for example by saving for retirement. However, most people do not like to think about or prepare for this phase of their life: a recent study by a large American nancial services provider, for example, nds that consumers spent less time on planning an individual retirement account investment than they do choosing a restaurant, buying a at screen TV or tablet (TIAA-CrEF 2014). Many participants in pension plans know little about saving for retirement, do not read information provided by pension funds, do not consult a nancial advisor and consider pension information as too di cult (Gustman et al. 2012; Lusardi and Mitchell 2011). That way, they may not learn on time whether they are nancially prepared for retirement: a worldwide survey among more than 16,000 respondents showed that two thirds of retirees who did not prepare adequately for retirement did not realize this until they had retired (HSBC 2015).

Financial planning and planning for retirement in particular becomes even more important in the light of current developments: according to a recent UN report, ”the proportion of persons aged 60 and over is expected to double between 2007 and 2050, and their actual number will more than triple, reaching 2 billion by 2050” (UN 2016). This unprecedented demographic change as well as the consequences of the nancial crisis and low interest rate environment put pension systems around the world under pressure. As a result, governments and employers increasingly shift risks and responsibility for retirement planning towards individuals, such as pension plan participants (Bodie, Marcus, and Merton 1988; Knoef et al. 2016; Lindbeck and Persson 2003; Van rooij, Kool, and Prast 2007). These developments imply that it is getting more and more crucial that pension plan participants become active and nd out whether they are on target to meet their retirement income goals. If consumers know that there is free nancial information available but decide to ignore it, their behavior can be categorized as “information avoidance” (Golman, Hagmann, and Loewenstein 2017) – or “costly ignorance” as it is phrased in the title of my dissertation.

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