Proper financial planning that provides for our financial needs in retirement is perhaps the prototypical example of willful blindness. We all know that most people have not saved enough to provide for a sustainable long-term income in retirement. The core issue here is that we (as a society and as individuals) are making consistently bad financial decisions that affect our futures, beginning with how we pay for college.
Sure, it’s always easier to simply ignore the long-term issues and plan to deal with them later in life. As humans, we have an enormous behavioral bias to focus on the now and not on the future. In his recent Ted talk, Shlomo Benartzi estimates that only 11% of Americans are saving enough to meet their future financial needs. This is, in my opinion, a disaster in the works.
What are we thinking?
Benartzi explores the ways that our innate behavioral biases allow us to ignore the looming crisis. He frames the question of how and why people make consistently bad decisions in a range of example, like taking out a mortgage you can’t afford. Using a series of lab experiments, he explains how we seem to have some hard-wired (neurological) biases that tend to make us totally discount our future needs in favor of current consumption. To quote Benartzi:
“Self-control is not a problem in the future. It’s only a problem now when the chocolate is next to us.”
Another speaker on Ted, economist Daniel Goldstein, characterizes this problem as the conflict between our present and future selves. His main thesis is that we have an incredibly difficult time actually envisioning future outcomes. Because we cannot see our future selves, we are less likely to save on his or her behalf. Our choices today are implicitly a conflict between our own interests and the interests of some other person—meaning our future selves. Our future self is someone that we don’t even know—some old, gray-haired stranger.
The fundamental issue here is that consumption is instantly gratifying while denying ourselves in the present is not. Denying our impulses to consume requires effort, whereas consuming is both easy and pleasurable. Yet, there are plenty of people who manage to train themselves to eat healthy, to exercise, or to save for retirement. The problem is how we, as a society, motivate more people towards making better, and (sometimes harder) decisions.
The Implications of Poor Financial Choices
When society does not teach high school students that their choices about what they spend on a college education are directly tied to a potential substantial debt that their future selves will have to repay, it is no wonder that so many young people take on such enormous debt burdens without grasping the personal implications.
When mortgage brokers and realtors talk homebuyers into a larger house that they can’t afford (or even that buying as large a house as possible is a good investment, which they have been known to do) we cannot be surprised when they take on an unsustainably large mortgage. The thought here is that it does not take a lot of convincing to get someone to make a choice that they want to make in the first place.
The field of behavioral economics is fascinating and I hope it will help policy makers figure out new ways to motivate people to make better financial decisions. The problems of inadequate savings and the propensity to take on too much debt, have enormous implications for our society. The research into why it is easier (or perhaps more natural) to make bad financial decisions does not alleviate that individual responsibility.
We all have to choose the harder path of consuming less and saving more.
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