Individuals’ Decision for Discretionary Retirement Saving: A Joint Model of How Much and How to Invest

Abstract
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. 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 estimating how much and how to invest for retirement with Multiple Discrete-Continuous Extreme Value (MDCEV) model, based on a representative survey of 3, 200 U.S. residents. We also integrate three main potential sources of heterogeneity into this model: 1. Socio-demographic differences such as age, gender, and education level, 2. Differences in individuals' regulatory focus, personal goals, and other personal traits 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. Individual heterogeneity also plays a role in financial decision making.