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Social Science

Welfare costs of suboptimal retiree decisions

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Harun Aydilek,

Harun Aydilek


Asiye Aydilek

Asiye Aydilek


  Peer Reviewed

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© attribution CC-BY

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540 Views

Added on

2024-10-19

Doi: http://dx.doi.org/10.1371/journal.pone.0307379

Related Subjects
Law
Politics
Economics
Geography
Education
Sociology

Abstract

We make a novel investigation of welfare costs associated with various suboptimal decisions made by retirees, both analytically and numerically. We utilize a unique framework that incorporates recursive utility with housing, and also encompasses expected utility and recursive utility without housing as special cases. Our findings indicate that under-investment in stocks incurs lower welfare costs compared to an equivalent over-investment. Suboptimal allocations in bond holdings result in higher costs than similar misallocations in stocks. Choosing not to participate in the stock market is less detrimental than avoiding the bond market. Should retirees opt to simplify their decision-making by investing solely in one type of asset, it is less costly for them to invest exclusively in bonds. Overconsumption of housing is less costly than an equivalent underconsumption. Suboptimal consumption imposes the highest welfare cost. Decisions regarding consumption, housing, and savings are found to be more crucial than the choice of how to distribute liquid savings between stocks and bonds. Additionally, recursive utility model better captures retirees’ preference for bonds over stocks than expected utility model. Our results, which are consistent across various parameter settings, provide valuable insights for academics and policymakers aiming to enhance retiree welfare.

Key Questions

1. What is the purpose of the study?

The study aims to assess the welfare costs associated with various suboptimal decisions made by retirees, utilizing a unique framework that incorporates recursive utility with housing.

2. What are the main findings regarding investment decisions?

The study finds that under-investment in stocks incurs lower welfare costs compared to an equivalent over-investment.

3. How do bond holdings affect welfare costs?

Suboptimal allocations in bond holdings result in higher costs than similar misallocations in stocks.

4. What is the impact of choosing not to participate in the stock or bond markets?

Choosing not to participate in the stock market is less detrimental than avoiding the bond market.

5. How does overconsumption of housing compare to underconsumption?

Overconsumption of housing is less costly than an equivalent underconsumption.

6. What is the most costly suboptimal decision?

Suboptimal consumption imposes the highest welfare cost.

7. How do decisions regarding consumption, housing, and savings compare to asset allocation?

Decisions regarding consumption, housing, and savings are found to be more crucial than the choice of how to distribute liquid savings between stocks and bonds.

8. Which utility model better captures retirees' preferences?

The recursive utility model better captures retirees’ preference for bonds over stocks than the expected utility model.

Summary

Aydilek and Aydilek's study investigates the welfare costs associated with various suboptimal decisions made by retirees, utilizing a unique framework that incorporates recursive utility with housing. The findings indicate that under-investment in stocks incurs lower welfare costs compared to an equivalent over-investment. Suboptimal allocations in bond holdings result in higher costs than similar misallocations in stocks. Choosing not to participate in the stock market is less detrimental than avoiding the bond market. Overconsumption of housing is less costly than an equivalent underconsumption. Suboptimal consumption imposes the highest welfare cost. Decisions regarding consumption, housing, and savings are found to be more crucial than the choice of how to distribute liquid savings between stocks and bonds. Additionally, the recursive utility model better captures retirees’ preference for bonds over stocks than the expected utility model. These insights provide valuable information for academics and policymakers aiming to enhance retiree welfare.

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ARTICLE USAGE


Article usage: Oct-2024 to May-2025
Show by month Manuscript Video Summary
2025 May 120 120
2025 April 72 72
2025 March 69 69
2025 February 49 49
2025 January 95 95
2024 December 59 59
2024 November 57 57
2024 October 19 19
Total 540 540
Show by month Manuscript Video Summary
2025 May 120 120
2025 April 72 72
2025 March 69 69
2025 February 49 49
2025 January 95 95
2024 December 59 59
2024 November 57 57
2024 October 19 19
Total 540 540
Related Subjects
Law
Politics
Economics
Geography
Education
Sociology
copyright icon

© attribution CC-BY

  • 0

rating
540 Views

Added on

2024-10-19

Doi: http://dx.doi.org/10.1371/journal.pone.0307379

Related Subjects
Law
Politics
Economics
Geography
Education
Sociology

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