The dynamics of deferred decision

AbstractDecision makers are often unable to choose between the options that they are offered. In these settings they typically defer their decision, that is, delay the decision to a later point in time or avoid the decision altogether. In this paper, we outline eight behavioral findings regarding the causes and consequences of choice deferral that cognitive theories of decision making should be able to capture. We show that these findings can be accounted for by a deferral-based time limit applied to existing sequential sampling models of preferential choice. Our approach to modeling deferral as a time limit in a sequential sampling model also makes a number of novel predictions regarding the interactions between choice probabilities, deferral probabilities, and decision times, and we confirm these predictions in an experiment. Choice deferral is a key feature of everyday decision making, and our paper illustrates how established theoretical approaches can be used to understand the cognitive underpinnings of this important behavioral phenomenon

Savings Adequacy Uncertainty: Driver or Obstacle to Increased Pension Contributions?

Deciding how much to save for retirement is a difficult task that includes many uncertainties. In this paper, we use data from a representative Dutch household panel to study the impact of uncertainty regarding one's savings adequacy on retirement savings contributions and information search processes. We combine ideas from the literature in psychology and economics that provide opposing predictions regarding the impact of uncertainty on retirement savings contributions. Our results indicate that the effect of uncertainty is moderated by two factors: an individual's perceived adequacy of current savings and that individual's financial constraints. In particular, we find that uncertainty increases retirement contributions for those who believe that they save adequately; however, it hinders retirement contributions for those who believe that they save inadequately. This effect of uncertainty is further moderated by the availability of financial means: a reduction in uncertainty results in greater contributions to savings only when financial constraints are absent. We also find that uncertainty has both indirect and direct effects on savings information search. In particular, uncertainty indirectly affects savings information search because it impacts individuals' intentions to save, which consequently forces individuals to engage in purchase-oriented information search; however, uncertainty also has a direct effect because individuals engage in ongoing information search processes to directly reduce uncertainty. The implications of these findings are discussed

Neural mechanisms of economic commitment in the human medial prefrontal cortex

Neurobiologists have studied decisions by offering successive, independent choices between goods or gambles. However, choices often have lasting consequences, as when investing in a house or choosing a partner. Here, humans decided whether to commit (by acceptance or rejection) to prospects that provided sustained financial return. BOLD signals in the rostral medial prefrontal cortex (rmPFC) encoded stimulus value only when acceptance or rejection was deferred into the future, suggesting a role in integrating value signals over time. By contrast, the dorsal anterior cingulate cortex (dACC) encoded stimulus value only when participants rejected (or deferred accepting) a prospect. dACC BOLD signals reflected two decision biases–to defer commitments to later, and to weight potential losses more heavily than gains–that (paradoxically) maximised reward in this task. These findings offer fresh insights into the pressures that shape economic decisions, and the computation of value in the medial prefrontal cortex. - See more at: http://elifesciences.org/content/3/e03701#sthash.rpmo51q5.dpu

Optimal Life Cycle Portfolio Choice with Variable Annuities Offering Liquidity and Investment Downside Protection

This paper assesses optimal life cycle consumption and portfolio allocations when households have access to Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuities over their adult lifetimes. Our contribution is to evaluate demand for these products which provide access to equity investments with money-back guarantees, longevity risk hedging, and partially-refundable premiums, in a realistic world with uncertain labor and capital market income as well as mortality risk. Others have predicted that consumers will only purchase such annuities late in life, but we show that they will optimally purchase GMWBs prior to retirement, consistent with their recent rapid uptick in sales. Additionally, many individuals optimally adjust their portfolios and consumption streams along the way by taking cash withdrawals from the products. These products can substantially enhance consumption, by up to 10% for those who experience highly unfavorable experiences in the stock market

Transition Strategies in Fundamental Tax Reform

This paper discusses alternative transition strategies of moving towards an S-base cash-flow business tax. While the tax has attractive neutrality properties, moving from the current situation towards the new system often involves a stark trade-off between short-run losses and long-run gains. We evaluate several alternative transition strategies. The preferred strategy consists of instantaneous implementation, an 80% devaluation of historical tax depreciation claims, and transitory deficit financing for intertemporal tax smoothing. This policy prevents windfall gains or losses on old capital, avoids a negative impact on labor market performance and thereby prevents short-run income losses. Simulations with a calibrated model for Germany indicate that this transition policy induces strong investment driven growth and yields a 7% gain in GDP per capita and a reduction in the unemployment rate by 1.5 percentage points in the long-run.Cash-flow tax, investment, unemployment, transition policy