C01: Financial decisions over the life cycle

This project investigates the role of non-standard expectations and ambiguity in a number of life-cycle contexts. We start from the observation that more often than not, households need to take important decisions in situations which are characterized by an absence of objectively correct probabilities. At the same time, almost all estimated models of the life cycle assume that all individuals’ expectations coincide with the econometrician’s estimates. Faced with unstructured decision situations, however, it is likely that many people turn to rules of thumb or recur to experiences from their social environment. The overarching objective of the project is to develop empirically tractable models of life-cycle decisions that incorporate decision-making under ambiguity and non-standard decision rules.

During the first funding period, the emphasis has been on collecting novel longitudinal data — a prerequisite to making progress towards the project’s objective. This has included the preparation of an unusually detailed administrative dataset which can be merged with the self-collected data at the individual level. In parallel with this effort, we have worked on learning spillovers, the role of reference points in retirement decisions, and the formation of stock market beliefs.

In the second funding period, we will focus our attention on analyzing the datasets we have prepared. On the methodological side, we will use tools that range from design-based empirical approaches to carefully specified models of life-cycle decision-making, which will often incorporate non-standard elements of behavior. This broad range of approaches mirrors the wide range of life-cycle decisions that we will consider; it will also allow us to connect to many other projects of this CRC.