Dr. Yevgeny Mugerman
Hebrew University of Jerusalem
Long Term Savings Decisions: Inertia, Peer Effects and Ethnicity
We investigate long term savings decisions following a major financial reform in Israel. Employees who had previously been required to contribute to a default saving fund were given the freedom to choose from a multitude of different funds. A unique dataset from a large employer provides a rare window into the savers’ decisions. We find that during the first year of implementation, less than 7% of the employees exercise their new freedom and switch out of the default fund. Furthermore, even when employees do switch, the funds chosen do not outperform other funds in observable measures such as the Sharpe Ratio or associated costs. However, the choice of funds appears to be strongly influenced by the employee’s social environment. We exploit within-department variation in the choice of funds made by co-workers from one’s ethnic group to identify strong peer effects. Results suggest that an increase in the popularity of a particular fund among co-workers from one’s ethnic group, significantly increases the likelihood that an employee would subsequently choose that same fund. Interviews with a subsample of the population also indicate the influence of non-professional colleagues. This has important implications for the design of effective financial reforms..