Do wishful thinkers have less saved for retirement?
It’s entirely possible, according to a new working paper from the National Bureau of Economic Research.
The paper — by Andrew Caplin, a professor of economics at New York University, and John Leahy, a professor of macroeconomics at the University of Michigan — examines the economic implications of wishful thinking.
According to the paper, wishful thinking involves “choosing to believe that the truth is what one would like the truth to be.”
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For example, as shown in a 1968 study, bettors at a race track placed higher odds on their preferred horse when interviewed after placing their bets than bettors did when interviewed while in line waiting to place their bets.
“Wishful thinking is strongest when outcomes are uncertain and payoff differences are large,” the paper explains. “Such situations might plausibly include choices that are made infrequently so that the [person] lacks experience. Planning for retirement is an example.”
In particular, the paper finds that wishful thinking can lead to reduced saving.
To determine this, the economists used a model with a risk-free bond and idiosyncratic income risk to determine how wishful thinkers and objective thinkers may differ in their savings.
“Wishful thinkers tend to be optimistic regarding their future labor income,” the paper states. “This leads them to consume more and save less, and therefore accumulate less wealth than do those who are objective.”
The paper notes that in this particular case the wishful thinking affects only the expectation of labor because the bond return is fixed.