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Reinforcement Learning and Savings Behavior
Author(s) -
CHOI JAMES J.,
LAIBSON DAVID,
MADRIAN BRIGITTE C.,
METRICK ANDREW
Publication year - 2009
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2009.01509.x
Subject(s) - investor behavior , equity premium puzzle , bond , portfolio , equity (law) , economics , behavioral economics , stock (firearms) , cash , asset allocation , reinforcement learning , monetary economics , financial economics , risk premium , microeconomics , finance , test (biology) , computer science , mechanical engineering , paleontology , artificial intelligence , political science , law , biology , engineering
We show that individual investors over‐extrapolate from their personal experience when making savings decisions. Investors who experience particularly rewarding outcomes from 401(k) saving—a high average and/or low variance return—increase their 401(k) savings rate more than investors who have less rewarding experiences. This finding is not driven by aggregate time‐series shocks, income effects, rational learning about investing skill, investor fixed effects, or time‐varying investor‐level heterogeneity that is correlated with portfolio allocations to stock, bond, and cash asset classes. We discuss implications for the equity premium puzzle and interventions aimed at improving household financial outcomes.