Behavioral prompts that encourage reflection on goals and future needs can have significant effects on asset allocation decisions and expected returns.
Summary
Previous research suggests that differences in overconfidence, financial literacy, risk preferences, and present bias all affect saving and investment behavior. This study examines whether behavioral prompts can lessen the effects of these characteristics in young people who were asked to make investment and asset allocation decisions. The prompts considered include setting goals in advance of such decisions, setting goals and receiving investment advice, and thinking about future financial needs.
This study was presented at the June 25, 2020, TIAA Institute Fellows Symposium.
Key Insights
- Individual risk tolerance and discount rates each have a persistent and significant impact on saving and investment decisions.
- Financial literacy is an important driver of investment decisions.
- Higher levels of financial literacy and risk tolerance, as well as lower discount rates, increase the rate of saving and expected returns.
- Behavioral prompts increase expected returns for women and people with lower levels of financial literacy.
