Too many savers choose immediate gratification instead of taking advantage of larger long-term payoffs.
Few would argue that we have a retirement crisis in America. What people might debate is how we solve the problem.
Slowly but surely, however, researchers are producing work that offers much-needed insight into how we can reduce the severity of the problem. Case in point: A working paper just published by the National Bureau of Economic Research, on two explanations for why consumers have trouble with financial decisions.
"One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations, such as computing compound interest, which could cause them to make suboptimal financial decisions," wrote Olivia Mitchell, the director of the Pension Research Council, and Justine Hastings, an economics professor at Yale University, in their paper, "How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors."
"A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs."
In other words, people generally don't much know, if anything, about money. And two, consumers — even when they are financially literate — sometimes can't help themselves from making bad decisions. It's the way we are wired. The lizard part of our brain overrules the more rational part when it comes to things financial. The lizard part of the brain says that the joy of spending (or not saving) today is greater than the pleasure of having a nest egg later on.
"Impatience or present bias seems to be an inability to plan for long-term consequences," said Stephen P. Utkus, a principal with the Vanguard Center for Retirement Research. "It may be a learned trait from family and peers, or it may be inherited. There is some evidence from neuroeconomics that impatience may be related to certain brain structures.
Read more here.
Few would argue that we have a retirement crisis in America. What people might debate is how we solve the problem.
Slowly but surely, however, researchers are producing work that offers much-needed insight into how we can reduce the severity of the problem. Case in point: A working paper just published by the National Bureau of Economic Research, on two explanations for why consumers have trouble with financial decisions.
"One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations, such as computing compound interest, which could cause them to make suboptimal financial decisions," wrote Olivia Mitchell, the director of the Pension Research Council, and Justine Hastings, an economics professor at Yale University, in their paper, "How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors."
"A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs."
In other words, people generally don't much know, if anything, about money. And two, consumers — even when they are financially literate — sometimes can't help themselves from making bad decisions. It's the way we are wired. The lizard part of our brain overrules the more rational part when it comes to things financial. The lizard part of the brain says that the joy of spending (or not saving) today is greater than the pleasure of having a nest egg later on.
"Impatience or present bias seems to be an inability to plan for long-term consequences," said Stephen P. Utkus, a principal with the Vanguard Center for Retirement Research. "It may be a learned trait from family and peers, or it may be inherited. There is some evidence from neuroeconomics that impatience may be related to certain brain structures.
Read more here.
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