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Lessons from Pension Reform in the Americas$
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Stephen J. Kay and Tapen Sinha

Print publication date: 2007

Print ISBN-13: 9780199226801

Published to Oxford Scholarship Online: January 2008

DOI: 10.1093/acprof:oso/9780199226801.001.0001

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Bounded Rationality in Latin-American Pension Reform

Bounded Rationality in Latin-American Pension Reform

(p.185) Chapter 7 Bounded Rationality in Latin-American Pension Reform
Lessons from Pension Reform in the Americas

Kurt Weyland

Oxford University Press

This chapter analyzes the decision-making process surrounding pension reform in Latin America. It argues decision to emulate the Chilean model did not follow the procedures of full, ‘economic’ rationality. Rather they were shaped by shortcuts of bounded rationality. Instead of proactively scanning the international environment for the relevant information, experts and policymakers mostly reacted to information about Chilean-style privatization that happened to be available to them. Rather than conducting systematic, balanced, cost-benefit analyses of this innovation, many of them were overly impressed by the initial success of Chile's private pension funds and used associative reasoning in depicting social security privatization as the main cause for the dramatic increase in domestic savings and productive investment and the resulting growth boom experienced by Chile. Furthermore, instead of thoroughly adapting the Chilean import to their own country's requirements, decision-makers in a number of countries stayed strikingly close to the original. Thus, these pension reformers did not apply the principles of comprehensive rationality, but displayed the three principal shortcuts documented by cognitive psychologists in innumerable experiments and field studies: the heuristics of availability, representativeness, and anchoring.

Keywords:   Latin America, Chilean privatization model, pension system, Bolivia, El Salvador, Peru, availability, representativeness, anchoring

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