The strange thing about how people exercise self-control is that they’re better imagining it in the future than doing it now. When we make present-day decisions, we often pick what brings us the most gratification, not what is best for us. When asked to make a decision about the future, we often get it right. What does this have to do with investing? Well, a lot actually.
Two behavioral economists, Shlomo Bernartzi and Richard Thaler, devised a plan to improve the savings rates of Americans. Their surprisingly simple program, appropriately dubbed “Save More Tomorrow,” was incredibly effective and can teach us a lot about our financial decision making.
In this fascinating TED Talk, Bernartzi describes loss aversion, present bias and the power of the default option. What can we learn from this? Many things:
- Don’t frame savings as a loss.
- A great time to increase your saving for retirement is when you get a raise. For example, if you receive a $2,000 raise on Jan 1st, why not invest an extra $1,000 into your 401k and then spend the extra $1,000? This way, your standard of living is still going up by $1,000 and your savings is also increasing. Win-win.
- If you’re the owner of a company, make the default option what’s best for the employee.
- And remember…be an organ donor!
You can find the full study here.
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