Building a bridge to behavioral economics: countervailing cognitive biases in lifetime saving decisions

Abstract

AbstractThis research project bridges system dynamics and behavioral economics by importing tools and concepts, such as feedback dynamics, into mainstream behavioral economics research. This project focuses on countervailing cognitive biases, a theory where two competing cognitive biases can interact or even cancel out each other. We apply this concept to a key problem in behavioral economics: the difficulty that people have in making optimal trade‐offs between spending and saving for retirement. The simple model introduced in this paper represents the first iteration in the effort, and provides a proof‐of‐concept model that reproduces theoretical optimal behaviors from behavioral economics. Our exploratory analysis then adds to the simulation two cognitive biases that partially cancel each other out in ways that we had not initially expected. In the next step, we modify our original system dynamics model as an example of how to replace an economic optimization calculation with a decision‐making heuristic involving information feedback.© 2019 System Dynamics Society