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When Behavioral Economists Advocate Misbehavior

Sep. 14, 2018 3:36 PM ET23 Comments
Laurence Kotlikoff profile picture
Laurence Kotlikoff


  • This article, joint with Rick Miller, President of Sensible Financial Planning, criticizes a recent WSJ article by two behavior economists.
  • Dan Ariely and Aline Holzwarth suggest that people need to spend a whopping 130 percent of pre-retirement earnings in retirement.
  • Why so high? Because they asked people what they wanted to spend, not what they could afford to spend.
  • Household economics has two maxims - smooth your consumption (living standard) through time and do lifetime budgeting.
  • Ariely and Holzwarth are recommending starving when young to party when old. That's bad behavior.

A recent Wall Street Journal article by Dan Ariely and Aline Holzwarth suggests that most people dramatically underestimate how much money they will need in retirement. Unfortunately, their headline conclusion is invalid, even though they rely on an important principle of behavioral economics.

The authors emphasize that detailed planning for spending in retirement is hard (we agree). People tend to underestimate how long they will live, and they are uncertain at best about what they will do in retirement and how much it will cost. Behavioral economics teaches us that we tend to do a poor job of imagining our future, especially if it's distant. We aren't very good at thinking about how long we will live, either.

Forecasting spending is easier than it looks

People struggle to produce detailed spending plans for this year, let alone for 10, 20, or more years into the future (people are living longer, and many of today's retirees will live into their late 80s and even their 90s). However, most people have a living standard they are used to and comfortable with. They would like to continue to enjoy it after they retire. But they are likely to be uncertain how much that living standard costs.

The article correctly indicates that most (but not all) financial advisers ask their clients how much they will want to spend in retirement. These advisers have no alternative - their planning software requires desired retirement spending as an input. Clients will almost certainly guess wrong, and their advisers will tell them to save too much (if the guess is high) or too little (if it's low).

A more sophisticated planning software tool, developed by one of us (Kotlikoff) and used by one of us (Miller) in his financial advisory, is available that allows advisers to advise their clients on how much they

This article was written by

Laurence Kotlikoff profile picture
Laurence J. Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, Head of International Department for Fiscal Sustainability Studies, the Gaidar Institute, President of Economic Security Planning, Inc., a company specializing in financial planning software, and the Director of the Fiscal Analysis Center. Professor Kotlikoff is a NY Times Best Selling author and an active columnist. His columns and blogs have appeared in The New York Times, The Wall Street Journal, The Financial Times, the Boston Globe, Bloomberg, Forbes, Vox, The Economist, Yahoo.com, Huffington Post and other major publications. In addition, he is a frequent guest on major television and radio stations. In 2014, he was named by The Economist as one of the world's 25 most influential economists. In 2015 he was name one of the 50 most influential people in Aging by Next Avenue. Professor Kotlikoff received his B.A. in Economics from the University of Pennsylvania in 1973 and his Ph.D. in Economics from Harvard University in 1977. From 1977 through 1983 he served on the faculties of economics of the University of California, Los Angeles and Yale University. In 1981-82 Professor Kotlikoff was a Senior Economist with the President's Council of Economic Advisers. Professor Kotlikoff is author or co-author of 19 books and hundreds of professional journal articles. His most recent book, Get What's Yours -- the Secrets of Maxing Out Your Social Security Benefits (co-authored with Philip Moeller and Paul Solman, Simon & Schuster) is a runaway New York Times Best Seller. His other recent books are The Clash of Generations (co-authored with Scott Burns, MIT Press), The Economic Consequences of the Vickers Commission (Civitas), Jimmy Stewart Is Dead (John Wiley & Sons), Spend ‘Til the End, (co-authored with Scott Burns, Simon & Schuster), The Healthcare Fix (MIT Press), The Coming Generational Storm (co-authored with Scott Burns, MIT Press), and Generational Policy (MIT Press). Through his company, Professor Kotlikoff has designed the nation's top-ranked personal financial planning software and Social Security lifetime benefit maximization software. Professor Kotlikoff has served as a consultant to the International Monetary Fund, the World Bank, the Harvard Institute for International Development, the Organization for Economic Cooperation and Development, the Swedish Ministry of Finance, the Norwegian Ministry of Finance, the Bank of Italy, the Bank of Japan, the Bank of England, the Government of Russia, the Government of Ukraine, the Government of Bolivia, the Government of Bulgaria, the Treasury of New Zealand, the Office of Management and Budget, the U.S. Department of Education, the U.S. Department of Labor, the Joint Committee on Taxation, The Commonwealth of Massachusetts, The American Council of Life Insurance, Merrill Lynch, Fidelity Investments, AT&T, AON Corp., and other major U.S. corporations. He has provided expert testimony on numerous occasions to committees of Congress including the Senate Finance Committee, the House Ways and Means Committee, and the Joint Economic Committee.

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