The role of complexity and the source of investment money in superannuation decisions

Tse, Alan Chi Ho (2011). The role of complexity and the source of investment money in superannuation decisions Honours Thesis, School of Economics, The University of Queensland.

       
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Author Tse, Alan Chi Ho
Thesis Title The role of complexity and the source of investment money in superannuation decisions
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2011
Thesis type Honours Thesis
Supervisor Dr Lana Friesen
Mr Kenan Kalayci
Total pages 111
Language eng
Subjects 340000 Economics
Formatted abstract

Superannuation is one of our most important financial assets. The asset value held in Australian superannuation funds was $A1.1 trillion in 2008. Clearly, there are huge financial incentives for working Australians to make informed and active superannuation decisions. However, 46% of employees are not actively managing their superannuation. This study examines how complexity and the source of investment money play a role in superannuation decisions using an experimental approach.  
 

The experiment contains four treatments with two treatments examining the role of complexity (simple versus complex); and the other two treatments examining the source of the investment money (unearned versus earned). Both student and worker subjects are recruited to check whether more experience in general changes superannuation decisions.  
 

There are three main results. Firstly, student subjects make more decision errors and default option choices in a complex fee environment compared to a simple fee environment. However, complexity does not affect risk preferences. Secondly, the source of the investment money does affect risk preferences. In addition, student subjects with earned investment money are less risk-averse than subjects with unearned investment money. However, the source of the investment money does not affect decision errors and default option choices for both student and worker subjects. Lastly, experience makes student subjects with earned investment money less risk-averse than student subjects with unearned investment money. Experience also reduces decision errors and default option choices for both student and worker subjects.  
 

These results have important policy implications for consumer protection. Simplifying the superannuation choice problem by reducing the number of fees encourages more informed and active decisions. This result supports having fewer attributes and fees in superannuation products. However, the results also show that it is insufficient to have a simple fee structure when employees are not repeatedly engaging in superannuation choice problems. This means that making employees face superannuation decisions more frequently can encourage informed and active decisions.

Keyword Experimental economics
Superannuation
House money effect
Complexity
Bounded rationality

 
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Created: Tue, 28 Feb 2012, 12:15:15 EST by Carmen Mcnaught on behalf of School of Economics