Do individuals optimize in intertemporal consumption/savings decisions? A liberal method to encourage savings

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Abstract

Rational consumption/saving choice requires rough knowledge regarding how much a dollar saved now could be compounded to become after various numbers of years. An indicative questionaire reveals that most people grossly underestimate the significance of compound interest. When told of the right figures, they indicate their willingness to save much more. A simple model of intertemporal optimization under plausible parameters (4-5% real rate of return) prescribe many times higher consumption at older ages than at younger ages, implying very high rates of savings when young.

Original languageEnglish
Pages (from-to)101-114
Number of pages14
JournalJournal of Economic Behavior and Organization
Volume17
Issue number1
DOIs
Publication statusPublished - 1992

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