Towards a practical and scientifically sound tool for measuring time and risk preferences in pension savings decisions

We present a recently developed experimental method to estimate individuals’ time and risk preferences and test it for its suitability in the pension context. Participants allocate money between an account that pays out at an earlier date and an account that pays out at later dates. Money allocated to the earlier date is paid out with certainty, while the money allocated to the later account is paid out with varying probabilities. This reflects the trade-off between certain immediate consumption and saving for uncertain future consumption. We test if time and risk preferences are different in the pension context as compared to a neutral context. Our main finding is that estimated discount rates are close to actual market interest rates if allocation decisions involve a long term period and involves a trade-off between receiving money one year from now and receiving money shortly after the expected retirement age. The elicited discount rates from our long-term decisions are therefore useful for pension funds that are interested in knowing the internal discount rates of their clients. We also estimate time and risk preferences on an individual level. These estimates indicate that, after further tests and when suitably adopted, the tested method could lead to an ‘easy-to-use’ tool for creating personalized profiles regarding clients’ time and risk preferences, generally as well as specifically in the context of pensions.