Embedding mandatory investment guarantees in individual retirement accounts (IRAs) can protect workers from equity market shortfalls, but policymakers must understand the economic costs of such guarantees as well as their incidence. Using a life cycle model calibrated for Germany, where investors have access to stocks, bonds, and tax-qualified IRAs, we show that abandoning the guarantee could enhance old-age consumption for over 75% of retirees without harming pre-retirement consumption. Investors averse to equity losses accumulate only moderately more in guaranteed accounts, as these offer only limited protection against market crashes.

This paper is the first to use the WeChat platform, one of the largest social networks, to conduct an online experiment of artificial investment games. We investigate how people’s forecasts about the financial market and investment decisions are shaped by whether they can observe others’ forecasts and whether they engage in public or private investment decisions. We find that with forecast sharing, subjects’ forecasts converge but in different directions across groups; consequently, forecast sharing does not lead to better forecasts nor more individually rational investment decisions. Whether or not subjects engage in public investment decisions does not significantly affect forecasts or investment.

Experiments involving games have two dimensions of difficulty for subjects in the laboratory. One is understanding the rules and structure of the game and the other is forming beliefs about the behavior of other players. Typically, these two dimensions cannot be disentangled as belief formation crucially depends on the understanding of the game. We present the one-player guessing game, a variation of the two-player guessing game (Grosskopf and Nagel 2008), which turns an otherwise strategic game into an individual decision-making task. The results show that a majority of subjects fail to understand the structure of the game. Moreover, subjects with a better understanding of the structure of the game form more accurate beliefs of other player’s choices, and also better-respond to these beliefs.

When faced with the challenge of forming a portfolio containing a risky and a risk-free asset, investors tend to apply the same portfolio weights independently of the volatility of the risky asset. This “percentage heuristic” can lead to different levels of portfolio risk when the same investor is presented with a more or a less risky asset. Using four experiments, we show that asking investors to choose the return distribution for their portfolio while keeping the exact portfolio weights unknown leads to greater similarity in levels of portfolio volatility (across different levels of risk of the risky asset) than asking investors to choose this distribution while additionally facing the portfolio weights. Higher consistency in risk taking is obtained both between and within test subjects.

Many models of investor behavior predict that investors prefer assets that they believe to have positively skewed return distributions. We elicit detailed return expectations for a broad index fund and a single stock in a representative sample of the Dutch population. The data show substantial heterogeneity in individuals’ skewness expectations of which only very little is captured by sociodemographics. Across assets, most respondents expect a higher variance and skewness for the individual stock compared to the index fund. Portfolio allocations increase with the skewness of respondents’ return expectations for the respective asset, controlling for other moments of a respondent’s expectations.

The compromise effect arises when being close to the “middle” of a choice set makes an option more appealing. The compromise effect poses conceptual and practical problems for economic research: by influencing choices, it can bias researchers’ inferences about preference parameters. To study this bias, we conduct an experiment with 550 participants who made choices over lotteries from multiple price lists (MPLs). Following prior work, we manipulate the compromise effect to influence choices by varying the middle options of each MPL. We then estimate risk preferences using a discrete-choice model without a compromise effect embedded in the model. As anticipated, the resulting risk preference parameter estimates are not robust, changing as the compromise effect is manipulated. To disentangle risk preference parameters from the compromise effect and to measure the strength of the compromise effect, we augment our discrete-choice model with additional parameters that represent a rising penalty for expressing an indifference point further from the middle of the ordered MPL. Using this method, we estimate an economically significant magnitude for the compromise effect and generate robust estimates of risk preference parameters that are no longer sensitive to compromise-effect manipulations.

How do risk attitudes change after experiencing gains or losses? For the case of losses, Imas (Am Econ Rev 106:2086–2109, 2016) shows that subsequent risk-taking behavior depends on whether these losses have been realized or not. After a realized loss, individuals’ risk-taking decreases, whereas it increases after an unrealized (paper) loss. He refers to this asymmetry as the realization effect. In this study, we derive theoretical predictions for risk-taking after paper and realized gains, and for investment opportunities with different skewness. We experimentally test these predictions and, at the same time, replicate Imas’ original study. Independent of a prior gain or loss, we show that subsequent risk-taking is higher when outcomes remain unrealized. However, we find no evidence of a realization effect for non-positively skewed lotteries. While the first result suggests that the effect is more general, the second result reveals its boundary conditions.

With a novel experimental design we investigate whether risk perception, return expectations, and investment propensity are influenced by the scale of the vertical axis in charts. We explore this for two presentation formats, namely return charts and price charts, where we depict low- and high-volatility assets with distinct trends. We find that varying the scale strongly affects people’s risk perception, as a narrower scale of the vertical axis leads to significantly higher perceived riskiness of an asset even if the underlying volatility is the same. Furthermore, past returns predict future return expectations almost perfectly. In our setting perceived profitability was considered more important than perceived riskiness when making investment choices. Overall we show that adapting the scale of a chart makes it easier to recognize yearly return variations within a single security, but at the same time makes it harder to identify differences between dissimilar securities. This is something regulators should be aware of and take into account in the rules they set.

Smith et al. (Econometrica 56(5):1119, 1988) reported large bubbles and crashes in experimental asset markets, a result that has been replicated many times. Here we test whether the occurrence of bubbles depends on the experimental subjects’ cognitive sophistication. In a two-part experiment, we first run a battery of tests to assess the subjects’ cognitive sophistication and classify them into low or high levels. We then invite them separately to two asset market experiments populated only by subjects with either low or high cognitive sophistication. We observe classic bubble and crash patterns in markets populated by subjects with low levels of cognitive sophistication. Yet, no bubbles or crashes are observed with our sophisticated subjects, indicating that cognitive sophistication of the experimental market participants has a strong impact on price efficiency.

We design an experiment to study how reversible entry decisions are affected by public and private payoff disclosure policies. In our environment, subjects choose between a risky payoff, which evolves according to an autoregressive process, and a constant payoff. The treatments vary the information disclosure rule on the risky payoff, such that in the public information treatment the risky payoff is always observable, while in the private information treatment, the risky payoff is observable only to the participants who enter the market. We find that under private information, market entry is higher, which suggests that subjects engage in exploration and place value on information.

We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5 percent chance of financial ruin can withdraw just 2.31 percent per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).

We replicate Meissner (Exp Econ 19:281–298, 2016), where debt aversion was reported for the first time in an intertemporal consumption and saving problem. While Meissner (2016) uses a German sample, our participants are US undergraduate students. All of the original study’s main findings replicate with similar effect sizes. Additionally, we extend the original analysis by introducing a new individual index of debt aversion, which we use to compare debt aversion across countries. Interestingly, we find no significant differences in debt aversion between the original German and the new US sample. We then test whether debt aversion correlates with individual characteristics such as gender, cognitive reflection ability, and risk aversion. Overall, this paper confirms the importance of debt aversion in intertemporal consumption and saving problems and validates the approach of Meissner (2016).

We use the 529 college savings plan setting to investigate whether and why households make suboptimal choices to invest in local assets. We estimate that 67% of open accounts between 2010 and 2020 were located suboptimally due to the plans’ tax inefficiencies and high expenses. Over the accounts’ projected lifetimes, such investments yielded expected losses of 8% on average or $15.6 billion in 2020 alone. We then investigate why suboptimal investment is so prevalent. Consistent with households’ lack of understanding of state-level tax benefits, we find that a meaningful proportion of households does not account for the potential tax benefits and costs of local versus nonlocal 529 investment. Household financial literacy and plan disclosure complexity appear to explain suboptimal investment patterns, which further supports the role of information-processing frictions. Our study presents novel evidence on individuals’ preferences for local assets and how information-processing frictions shape their investment decisions, reducing their financial well-being.

We study how Spanish equity investors assessed firms’ exposure to political risk during the regime change of the 1930s. We show that shifts in political uncertainty regularly predicted a general deterioration of future investment opportunities in the stock market. However, we also find that firms differed in their sensitivity to uncertainty, reflecting important differences in their perceived exposures to political risk. The negative impact of uncertainty was significantly milder for firms with political connections to republican parties. The price of some stocks increased in periods of heightened uncertainty, thus allowing investors to hedge against reinvestment risk. In the case of firms that became targets of hostile political actions, we observe that investors frequently adjusted their assessment of individual stocks to changes in firm-specific political circumstances. Over the whole period of the Second Republic, investors' systematic preference for safer equity hedges led to a continuous decline in the price of stocks perceived as more exposed to political risk.

We analyze the disclosures of sustainable investing by Dutch pension funds in their annual reports by introducing a novel textual analysis approach using state-of-the-art natural language processing techniques to measure the awareness and implementation of sustainable investing. We find that a pension fund's size increases both the awareness and implementation of sustainable investing. Moreover, we analyze the role of signing a sustainable investment initiative. Although signing this initiative increases the specificity of pension fund statements about sustainable investing, we do not find an effect on the implementation of sustainable investing.

This paper investigates the relationship between growth and quality of pension funds. It measures growth in terms of changes in the number of participants and cash flow transfers and appreciates the quality of the funds through the set of information on past results and costs published in the official prospectuses. The results show that growth rewards the best performing funds in the long term, while annual performance and costs have no relevance. Nevertheless, other factors, such as market power and commercial pressure, appear to be more powerful. The existence of conditions of market power capable of attracting investors beyond the actual quality of pension products is undesirable as it harms future pensioners. These results have implications for the Authority, as mandatory information should be suitable to induce investors to identify the best products and direct individual choices toward the public objective of a more efficient market.

The decision about when and how much to annuitize is an important element of the retirement planning of most individuals. Optimal annuitization strategies depend on the individual’s exposure to annuity risk, meaning the possibility of meeting unfavorable personal and market conditions at the time of the annuitization decision. This article studies optimal annuitization strategies within a life-cycle consumption and portfolio choice model, focusing on stochastic interest rates as an important source of annuity risk. Closing a gap in the existing literature, our numerical results across different model variants reveal several typical structural effects of interest rate risk on the annuitization decision, which may however vary depending on preference specifications and alternative investment opportunities: When allowing for gradual annuitization, annuity risk is temporally diversified by spreading annuity purchases over the whole pre-retirement period, with annuity market participation starting earlier in the life cycle and becoming more extensive with increasing interest rate risk. Ruling out this temporal diversification possibility, as embedded in many institutional settings, incurs significant welfare losses, which are increasing with higher interest rate risk, together with larger overall demand for annuitization.

The papers in this 20th Anniversary Special Issue reflect to a large extent how the fields of pension economics and pension finance have developed in the past two decades, although there remain very clear connections to the research published in the Journal's first issue. While there has been great progress in research on pensions and retirement economics over the last 20 years, there remain important outstanding questions for future study.

We investigate whether a benchmark and non-constant risk aversion affect the probability density distribution of optimal wealth at retirement. We maximize the expected utility of the ratio of pension wealth at retirement to an inflation-indexed benchmark. Together with a threshold and a lower bound, we are able to generate closed-form solutions. We find that this non-constant risk aversion type of utility could shift the probability density distribution of optimal wealth more towards the benchmark, and that the probability of achieving a certain percentage of the desired benchmark could be increased. The probability density distribution generated under constant relative risk aversion (CRRA) risk preference is more widely spread along the benchmark.

This article questions the drivers behind the distribution of savings in different capital markets in Portugal between 1550 and 1800. A novel dataset of credit transactions, interest rates and debt service documents a shift in the lenders' investment behaviour. By 1712, one of the leading institutional creditors—the Misericórdias—had ceased to allocate funds to the sovereign debt market. Data reveal that this disinvestment was neither related to the poor performance of debt service nor to the lure of potentially higher returns on private credit. We argue that changes in the rationales for issuing debt justify the drop in the number of institutional investors in the public credit market, and this correlates with the heavy allocation of funds into private lending.