Rationality, decision flexibility and pensions

In this thesis several different aspects of the standard economic theory (SET) are examined. One of the premises of the SET is that whether or not an agent has choice flexibility does not influence his behavior. In the first chapter of the thesis we design an experiment to test the validity of this claim. We find that subjects behave in a way that justifies their earlier choices and therefore, choice flexibility does affect behavior. The standard economic framework is commonly used to examine consumption behavior of individuals and households. According to the SET, consumption growth is unchanged when a worker loses his job or when an unemployed individual finds a job as long as the transition event is anticipated. In the second chapter of this thesis we test this particular prediction of the SET. We use self-reported expectations of individuals to measure how much they anticipate a given transition. We find that consumption behavior is compatible with the SET. Internal consistency of preferences is another important premise of the SET. In the third and fourth chapters, we are interested in the question of whether decision makers have inconsistent time preferences and if so whether they behave in a sophisticated manner. To investigate these issues we conduct a two-stage experiment, where choices made in the first stage could affect the choices that will be available to the subject in the second stage. We find that the majority of our subjects have inconsistent preferences and roughly half of them exhibit sophisticated behavior. In the fourth chapter we consider the roles of uncertainty and the decision makers’ preference for choice flexibility. We find that uncertainty plays an important role and our subjects tend to avoid making a choice in the second stage