Consider the following choices:
1. You are offered a snack to eat now—would you prefer a chocolate bar or an orange?
2. You are offered a snack now to eat next week—would you prefer a chocolate bar or an orange?
People predominantly choose the tasty but unhealthy snack for immediate consumption, but pick the healthy snack for the future. However, once that future date arrives, if given the option to switch, they again go for the high-sugar high-fat chocolate bar.
This example highlights one of the main behavioral challenges in saving for retirement: As humans, not only do we tend to overweight our experiences today at the expense of those in our future, veering towards instant gratification, but we also change our preferences over time. In effect, we make choices today that our future selves would prefer not to be making, whether it’s to eat healthier or quit smoking. This is known as the present bias. In today’s post, I’ll take a look at this phenomenon—and several others—that investors often face when saving and investing for retirement.
Common Saving and Investing Behavioral Derailers
In addition to present bias, behavioral mistakes in saving and investing for retirement include:
1. A lack of discipline to take the actions we know would be right for the longer term.