BROAD · Learning to bracket broadly

Learning to bracket broadly

Reforms of social security systems in many EU countries have led to greater personal responsibility of consumers for their retirement savings and financial well-being. Consumers increasingly face numerous decisions that involve risk, such as how to allocate their retirement savings between risky and safe assets. However, there is ample scientific evidence that consumers often fail to make optimal choices. The overall objective of this project was therefore to better understand aspects of how consumers perceive and deal with these risky decisions. Standard theory in economics assumes “broad bracketing” of risky choices: an individual considers the consequences of all her decisions under risk together. However, accumulating evidence suggests that people often bracket narrowly, i.e., they view each choice in isolation and not in the context of the other choices they face. This has consequences for the amount of risk an individual is willing to take and might lead to detrimental consequences (e.g., buying overpriced smartphone insurance). From a policy and an academic perspective, an important open question is whether people can “learn” to bracket broadly through a clever design (or “framing”) of the decision environment. The objective of Work Package 1 was to investigate whether a certain display of information induces learning to bracket broadly. In particular, do people continue to bracket broadly over time and in other related contexts? This is crucial for understanding the potential long-term effects of policy measures. Work Package 2 also focused on risk perception in consumers’ investment decisions. Many otherwise puzzling investment phenomena (e.g., underdiversification) can be explained by assuming that consumers have a preference for skewness. Put simply, an investor with a preference for skewness likes assets which she expects to have a right-skewed, i.e., lottery like, payoff distribution, and (everything else equal) dislikes those which she expects to have a left-skewed distribution. However, testing this in the field is quite difficult because consumers’ expectations about the performance of an asset are usually unknown. The objective of Work Package 2 was to measure return expectations for several assets for a representative sample of the population in the Netherlands and to use these to test whether consumers’ investment choices reflect a preference for skewness.

Data: CORDIS, © European Union