How Do Savers Think About and Respond to Risk? Evidence From a Population Survey and Lessons for the Investment Industry

We find that savers do not tend to think about risk in an integrated way, especially when it comes to long-term risk. Instead they appear to think in segmented boxes. This is very bad for long term planning, since it can lead to inconsistencies. To illustrate, it is possible for people facing a savings shortfall to also be reluctant to either save more or take more investment risk to increase the expected return on their savings. It is important therefore that savers recognize that they might be subject to inconsistencies and behavioral barriers when implementing their savings plans which means they might fail to achieve their savings goals. We propose ways to help savers deal with these issues. These also provide useful lessons for the investment industry, including both financial advisers and product providers