How Do Emotions Influence Saving Behavior

Abstract

Employers have moved away from traditional defined benefit pension plans to defined contribution plans such as 401(k)s. As a result, many individuals are now required to make their own retirement saving and investment decisions, which has raised concerns about their ability and desire to handle these decisions. Since investment choices have major implications for future financial welfare, it is important to understand how individuals make these decisions and to identify potential ways to improve the decision-making process. Researchers have explored various factors affecting retirement saving, such as income, age, job tenure, self-control failure, financial literacy and trust. No prior research, however, has looked at the effects of emotions on retirement savings. This Issue in Brief examines how two different emotions – hope and hopefulness – affect 401(k) participation and asset allocation. The first section defines the terms. The second section describes the structure of a recent field experiment. The third section summarizes the results, which reveal that having high hope (i.e. yearning) – for a secure retirement leads to different investment behaviors than having high hopefulness (i.e. perceived likelihood). Furthermore, threats to hope and threats to hopefulness are found to have different effects on 401(k) participation and investment decisions. The final section concludes.