How Real People Make Long Term Decisions: The Case of Retirement Preparation and Health Behavior

Presenter: Katherine Carman, Tilburg Unversity

Abstract

There are many paths explaining the relationship between socio-economic status and health; one possibility is that some normally unobservable characteristic causes people to invest both in their financial well-being and their health. We focus particularly on retirement savings decisions and decisions in the health domain. Choices in both domains have long term consequences and therefore require foresight and the ability to process complex information. Ultimately the correlation between wealth and health may be driven by the processes that people use to make these choices. For example, conscientious people may carefully plan or do research both in the financial and health domain.

In order to address this possibility we have fielded a survey in the American Life Panel (ALP). The American Life Panel is an internet panel administered by RAND. The respondents in the ALP are recruited from among individuals age 18 and older who are respondents to the Monthly Survey (MS) of the University of Michigan's Survey Research Center (SRC). Individuals who do not have internet access are provided with internet access using a WebTV.

Our survey was specifically designed to measure outcomes and decision processes in the domains of retirement savings and health. We measure outcomes such as the amount saved for retirement, having a tax deferred account, purchasing long term care insurance or health insurance, and use of health care. In addition we ask people about how they have made these decisions in the past: We identify types of people who make decisions in similar ways: such as following rules of thumb, following expert advice, or even avoiding complex decisions. By asking about decisions in two domains, we can identify whether people use similar strategies across domains. We find evidence that individuals do indeed use similar strategies across the two domains. In addition, we observe pronounced type-gradient effects for many outcome variables, notably accumulated retirement savings, health insurance and long-term care insurance.