Individuals’ Decision for Discretionary Retirement Saving

In pension investment field, consumers often face two choices: the discrete choice of which products to choose and the continuous choices of how much to invest in them. A consumer makes both decisions jointly.

As a result, the discrete choice is endogenous with respect to the continuous choice and vice versa. Not modelling these two choices in a mutually consistent manner might undermine estimation accuracy and reliability, thus misleading the understanding and predictions of consumer behavior. Previous research on pension portfolio allocation is limited and relatively little is known about how individuals make discrete and continuous decisions for retirement simultaneously.

This paper contributes to the existing literature by applying Multiple Discrete-Continuous Extreme Value (MDCEV) model to estimate how much and how to invest for retirement in a utility maximization framework. Empirically, we contribute to previous literature by investigating three main potential sources of heterogeneity: 1. Socio-demographic differences such as age, gender, and education level, 2. Differences in individuals' regulatory focus, personal goals, and risk-as-feeling with respect to retirement, and 3. Contextual effects due to the framing of the retirement savings message they receive.

Our results confirm that individuals do make discrete and continuous decisions simultaneously, and individual heterogeneity such as investment goal, risk preference and promotion-orientation play a role in influencing their decision-making.

Keywords: retirement investment, MDCEV, pension fund, heterogeneity, message framing

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