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Saving for retirement: Overcoming human biases and knowledge deficits

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401k-decline

The societal shift from defined retirement benefits (pensions) to contribution retirement savings mechanisms — for example, the 401(k) — has placed a greater burden on the decision-making capacity of Americans. As this dynamic continues to unfold, evidence suggests that many people are not making wise investment choices for their retirement money.

Traditional economic theory assumes that individuals are able to rationally manage investment decisions. Behavioral economists, by contrast, often demonstrate that people can make decisions that are less than optimal. They look to human biases and imperfections when explaining the discrepancy between what investors want to and should do, and what they actually do.

A 2010 review of relevant studies by the Social Security Administration, “The Role of Behavioral Economics and Behavioral Decision Making in Americans’ Retirement Savings Decisions,” outlines four key impediments to successful retirement investment decisions:

  • Informational issues:  People avoid choices that involve ambiguity and rely too heavily on anecdotal evidence, particularly when they have limited knowledge of the issue.
  • Biases: They rely on default options or “rules of thumb” and favor the status quo, rather than critically evaluating options.
  • Inter­temporal choice: People favor short-benefits over long-term gains, overvaluing present needs and emotions. This often leads to underinvestment.
  • Decision context: Investment and savings decisions are dependent on context and how options are framed.

The author explains that greater financial literacy, savings incentives, automatic default options that are pre-set to the most optimal outcome and mandated decisions can all help individuals most effectively invest their retirement money.

Tags: retirement, Social Security, consumer affairs


    Writer: | Last updated: March 10, 2011

    Citation: Knoll, Melissa, "The Role of Behavioral Economics and Behavioral Decision Making in Americans' Retirement Savings Decisions," Social Security Bulletin, November, 2010, Vol. 70, No. 4, 1-23. PDF.

    Analysis assignments

    Read the issue-related Time magazine article "Why It’s Time to Retire the 401(k)."

    1. If you were to rewrite the article based on knowledge of the study, what key changes would you make?

    Read the full Social Security Administration study "Saving for Retirement: Overcoming Human Biases and Knowledge Deficits."

    1. Summarize the study in fewer than 40 words.
    2. Express the study's key term(s) in language a lay audience can understand.
    3. Evaluate the study's limitations. (For example: Do the results conflict with those of other reliable studies? Are there weaknesses in the study's data or research design?)

    Newswriting assignments

    1. Write a lead (or headline or nut graph) based on the study.
    2. Spend 60 minutes exploring the issue by accessing sources of information other than the study. Write a lead (or headline or nut graph) based on the study but informed by the new information. Does the new information significantly change what one would write based on the study alone?
    3. Interview two sources with a stake in or knowledge of the issue. Be prepared to provide them with a short summary of the study in order to get their response to it. Write a 400-word article about the study incorporating material from the interviews.
    4. Spend additional time exploring the issue and then write a 1,200-word background article, focusing on major aspects of the issue.

    1 comment

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    Bob Mar 18, 2011 3:25

    As a former social psychologist and now an investment adviser, I was taken with the human tragedy behind the report of the Social Security Administration. The ignorance, bias, and misjudgment that undo so many lives are entirely avoidable. You do a public service in calling attention to the issue.

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