Individual Heterogeneity in Loss Aversion and Its Impact on Social Security Claiming Decisions

John W. Payne, Suzanne Shu, Elizabeth Webb, Namika Sagara

NBER Retirement Research Center Paper No. NB 15-07
Issued in September 2015

We begin by documenting the development of an easy to use, model free, measure of loss aversion based on responses to pairs of mixed (gain and loss) three-outcome gambles. This measure is tested using surveys with a cumulative total of more than 7000 respondents of pre-retirement age. We show that the measure has both internal validity and external validity. Specifically, the results fit well with data from other loss aversion research and are correlated with respondent demographics in reasonable ways. We test external validity by showing that the measure predicts consumer financial preferences for retirement savings investments, Social Security claiming, and life annuity preferences. Using these findings, we hope to continue to develop decision tools and interventions that are targeted based on individual heterogeneity in measures such as loss aversion.

PDF (577 K)Executive Summary (152 K)