THE DECISIONAL-MAKING PROCESS AND ITS APPLICATION ON SUPPLEMETARY PENSION PLANS

Abstract

When people find themselves in front of a situation where they have to make a choice, whether it is a financial choice or not, there are several factors, psychological, emotional, and also patterns related to the knowledge, which characterize their final decision. Therefore, the study of choices in situations of uncertainty touches a multitude of spheres that combined help individuals to come up with solutions to their problems. This observation is also acceptable for financial choices. Uncertain situations perfectly mirror financial decisions which individuals are likely to take throughout their lives. In particular, maybe the most fundamental financial choice concerns where to allocate savings for the future. Indeed, as for every financial choice, people tend to follow their guts and, most of the time, they misperceive important opportunities that can provide higher results. This work aims to identify behavioral errors and to analyze the usefulness of financial education in correcting these errors that influence individuals’ choices. It is now commonly thought that investors when they choose which assets to invest in, do not behave fully rationally. Individuals do not follow classical utility theory axioms following the perfect rationality and respecting the principles of the perfect efficiency of the markets. Instead, individuals seem to be victims of cognitive and emotional errors, biases, and heuristics, which push them away from an optimal financial choice. In classical utility theory, this optimal choice would translate into the homo economicus who is perfectly rational and able, by definition, to correctly use all the information available to make decisions that maximize his objective function. This utopian figure has been exploited by economists to formulate elegant theories on financial choices in conditions of uncertainty, at the expense of little consistency with reality and a sort of detachment from empirical evidence. A relatively new field called Behavioral Finance developed, over the years, a new approach based on empirical pieces of evidence and cognitive foundations which have allowed economists to explain attitudes and behavior of investors inside the market. Empirical data denied the possibility of individuals to be perfectly rational and thus, classical economic theories reduce to just a portrait that provides guidelines to what people would theoretically do in a perfect world. Behavioral Finance bases its work on the different way individuals consistently violates rational reasoning. This thesis will discuss the crucial role of biases that affect individuals’ decisional process and it will address these cognitive mistakes toward a very fundamental kind of financial decision. These are the retirement planning and supplementary pension plans which, in a particular way in Italy, have an enormous importance, especially for younger workers. Unfortunately, the combination of demographical and educational patterns is worsening the Italian public pension system. To face this emergency, the government has established regulations on supplementary pensions system which allow individuals to accumulate savings to integrate the future continuously reduced public pension. Thus, the central theme of this work will focus on behavioral and cognitive aspects that affect individuals’ minds by framing the decisional making process in choosing a supplementary pensionitic plan.