A small yet increasingly influential group of economists and psychologists has recently been challenging traditional approaches to economic analysis. The term "behavioral" in the title of the book signifies that many of the chapters in this volume can be viewed as forming part of this challenge. The big idea is that rational economic man so beloved of traditionalists is a fiction, and that replacing him with a counterpart who behaves more like Homo sapiens would be an altogether good idea.
Much of the methodological debate has been played out in the context of savings behavior, so that a book on retirement economics is a natural. The narrow accomplishment of the articles is to strengthen the case that the standard model traditionalists use to capture retirement decisions is inadequate. The broader accomplishment is to open debate on whether one can get deeper insights by dropping the assumption that agents are strictly rational. The answer to this question may well determine the shape of economic policy analysis well into the new millennium.
The traditional model of retirement choices and savings decisions is based on the life cycle model of consumption. This model treats all decisions as being made by a far-sighted rational decisionmaker. At an early point in life, the decisionmaker lays out the entire array of possible savings and retirement policies. The optimal strategy is chosen only after carefully balancing the private costs and benefits of these policies.
While this theory is the natural starting point for those trained in economic theory, for those not so trained it seems far-fetched, even absurd. With respect to the retirement age, do we really have enough information to balance all the important factors that might affect the optimal age of retirement? Don't we rely more on forces of convention in making our retirement decision? With respect to consumption and savings decisions, do we really plan ahead as the theory predicts? Aren't we far more reactive, just waiting for problems to arise before scrambling for the necessary funds?