The Role of Risk Perception in Risk Management Decisions: Who's Afraid of a Poor Old-Age?

Retirement planning and voluntary as well as mandated contributions to pension plans require a series of decisions under uncertainty. Those range from initial decisions about the magnitude of contributions and allocation among different investment options and choice of option providers, to periodic reviews of these decisions in light of possible changes in goals or circumstances. Behavioral decision research over the last 30 years provides a series of lessons about how such decisions are made and thus for the optimal design of pension plans. This paper will address the role of affect in perceptions of risk and subsequent decisions to take actions that reduce or manage perceived risks. I will review evidence showing that individual and group differences in risk perception, much more than differences in risk attitude, are responsible for differences in the choices people make. If people fail to be alarmed about a risk or hazard, they fail to take precautions. Risk perception, on the other hand, is predictable from general characteristics of the hazard and from prior, personal history. The risks associated with inadequate retirement planning have all the characteristics associated with hazards that do not evoke strong visceral reactions.