“The timing of inquiring about participants’ risk appetite matters”

Published on: 2 March 2023

If people get more freedom of choice regarding their pensions, how can you best guide them in that selection process in a way that an optimal result is achieved for both the individual and society? This is the central question of the research Jorgo Goossens recently used to obtain his doctorate. As the transition to the new pension system draws ever closer, the subject is becoming increasingly relevant. All the more reason to put the insights from his research to the test.


The title of your research is “Non-standard Preferences in Asset Pricing and Household Finance.” Can you explain what it is about?

“My dissertation is about preferences in general. How can we use participants’ preferences to better explain their behavior and also better explain and understand the behavior of stocks, bonds and interest rates. Current models for that in the scientific literature struggle to do this. For the explanation of that behavior, I introduce the factors ‘risk preference’ and ‘time preference’ in my research.”

What do these two concepts entail and why are they relevant?

“Risk preference in a pension context refers to the degree of risk a participant is willing to take in their investments. Under the new pension legislation, funds have to ask their participants about that preference at least once every five years, so that question is very relevant. Time preference is all about how patient you are as a person. Do you have an excessive focus on the present and prefer to immediately spend the money that comes in on a new iPhone, or do you use your money to save for the future? I used surveys to identify these individual risk and time preferences among participants, based on APG data. I then aggregated them in such a way as to provide a picture of average risk appetite and average patience per 5-year age cohort.”

How do you utilize research insights regarding participants’ time preferences?

“For example, the Future Pensions Act states that there will be a lump-sum option of up to 10 percent. For participants with an excessive focus on the present, it is tempting to take advantage of that. We found that connection. Participants with an excessive focus on the present are more likely to opt for a lump sum - or for a high-low construction, where someone receives a higher benefit in the first years of retirement and a lower one in the years after that. As a policymaker, you can be paternalistic about this, offering these options only under certain conditions. But you can also say: who are we to decide for the participant whether they want to succumb to such a temptation? As a scientist, it is not up to me to make that choice, but from the perspective of science we can help through the choice architecture and participant communication.”

Can you give us an example to explain that?

“Consider the conscious timing of when to offer a choice, because the temptation to make a particular choice in the present always occurs during a specific time interval. In perception, there is a separation between the present and the future - the present ends at some point and then the future begins. If you know where that time interval of the temptation is, you can make it easier for someone to resist that temptation by having them establish that choice earlier. For example, you could send participants a letter as early as at age 50, offering the lump-sum choice.”

Your research also shows that participants’ risk preferences can fluctuate from day to day. If that is the case, does it make sense to base policy on it?

“This part of the research was done in the context of savings and investments, and the interesting thing about this is the timing of the survey: March 2020. Exactly the time when Covid was at play worldwide and also made its appearance in the Netherlands, resulting in the intelligent lockdown at the end of March. We examined risk and time preferences on a daily basis. And we found that there was a correlation with hospitalizations. On days of when there were more hospitalizations, people were more risk-averse and more patient: that is, they were less willing to take risks and more willing to save money for later.

Because these changes occur from one day to the next, you can’t base investment policy on them, of course. But as a fund, the timing of when you ask participants about their risk appetite matters. And this also applies to time preferences. When people are in an uncertain situation, such as the Covid crisis, they seem to want to allocate more money to a later date. As a pension fund you can take this into account in the timing of your communication, and you can also include it in the interpretation of the results of a survey.”

So, the research shows that you can use participants’ preferences - in terms of time and risk - to better explain their behavior. Does that also mean you can predict that behavior?

“Based on the 2018 time and risk preference survey, we can now explain - for 80 percent of participants - why someone chooses a high-low benefit or a flat benefit. Predicting goes one step further, because then you also need to know whether, at the time they will make that choice, their preferences will be the same as they are now. If you measure that every year, for example, you can make more reliable predictions about it.”

No stranger to APG
Things can move fast. In 2016, Goossens did his graduate internship at what was then APG Strategy and Policy. Some seven years later, he can call himself a doctor and put PhD after his name. Goossens is affiliated with Netspar and Radboud University Nijmegen. APG staff members Eduard Ponds and Rob van den Goorbergh supervised the doctoral candidate during his research, along with Bas Werker (Tilburg University) and Marike Knoef (Tilburg University).  Goossens defended his dissertation on February 17, 2023