Investment Decisions in Retirement: The Role of Subjective Expectations

The rapid transition from defined benefit (DB) pension plans to defined contribution (DC) plans has a potential benefit of offering pension holders greater control over how their pension accumulations are invested. If pension holders are willing to take some risk, investments in the stock market could increase their economic preparation for retirement. Indeed, standard life-cycle models of economic behavior predict that essentially everybody should invest in risky assets to some extent, which is also reflected in the typical advice of financial advisors. Yet, the rate of stock holding is much below what theory suggests it should be. In our data, less than 40 percent of households own stocks. Moreover, conditional on stock holding, standard models with realistic values of preference parameters predict much higher fractions of wealth invested in risky assets than we observe in the data.