Behavioral Economics and Individual Discounting Observed Behaviors in Deferred Retirement Option Plans

January 2024

Authors

Randall A. Stevenson, ASA, MAAA, MSc
Adam Solomon, PhD Candidate
in Economics, M.I.T.

This paper explains the concepts of hyperbolic discounting and provides a tool for improving the modelling of individual decisions. Some individuals appear to use economically discounted cash flows in their decision-making processes, whereas others appear to incorporate some values to cash flows which are not purely economic. This paper provides some tools for improved modeling of the decision-making process for those individuals who do not rely as heavily on economic valuations. The paper also provides some tools for predicting how changes in plan design can impact the demographics of the plan participants.

Report

Behavioral Economics and Individual Discounting

Acknowledgements

The authors’ deepest gratitude goes to those without whose efforts this project could not have come to fruition: the volunteers who generously shared their wisdom, insights, advice, guidance, and arm’s-length review of this study prior to publication. Any opinions expressed may not reflect their opinions nor those of their employers. Any errors belong to the authors alone.

Project Oversight Group members:
Greg Fann, FSA, MAAA, FCA
Bruce Friedland, FSA, MAAA
Kayee Ng, FSA, FCIA
Shaikh Mujtaba Ali
Piotr Krekora, ASA, MAAA, FCA, EA
Renee West, FSA, MAAA
Tina Yang, FSA
Yifan Zhang, FSA

At the Society of Actuaries Research Institute:
Korrel Crawford, Senior Research Administrator
R. Dale Hall, FSA, MAAA, CERA, Managing Director of Research

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