Bear Markets As Disasters: Re-Evaluating How People Actually Behave As Retirement Savers

Saving for retirement is a financial priority for many workers, a pursuit that ever more relies on ordinary individuals to make their own investment decisions and bear the brunt of market risk. The institutional shift away from employer-sponsored pensions to individual retirement accounts has made shareholders out of many who would not ordinarily invest in the stock market. Unlike designated brokerage accounts, retirement accounts represent an aspirational life phase after work has ceased and thus become loaded with emotional and symbolic value. Do market shocks therefore cause retirement savers to behave in unexpected ways? This study tests the effect of severe bear markets on aggregate 401(k) portfolio risk using interrupted time series analysis. I find that bear market events cause retirement savers to alter their 401(k) portfolios to more conservative allocations, which persist over prolonged periods– a finding that runs counter to varying predictions put forth by both economists and behavioral economists, for example rational action or loss aversion. Rather, this situates the risk response of retirement savers within the literatures on natural and manmade disasters. Following a disaster, norms of lasting conservatism serve to buttress society from future shocks. The unfortunate irony is that retirement savers, who often have long investment time horizons, actually do themselves a great disservice by buttressing– with greater risk comes greater expected return, and underinvestment in stocks to limit losses also curbs potential gains. The consequence is that severe bear markets can lead to an impending social problem years on: retirement unpreparedness and downward social mobility in old age due to inadequate savings. The practical rule of conservation that works well for many disaster scenarios, here creates an unfortunate discrepancy between the objective chances of retirement security and the subjective hopes of 401(k) savers trying to do what they think is right.