Investor Behavior: The Psychology of Financial Planning and Investing

CHAPTER 16

Retirement Planning: Contributions from the Field of Behavioral Finance and Economics

James A. Howard

Professor of Finance, University of Maryland, University College

Rassoul Yazdipour

Professor of Finance, California State University and

Academy of Behavioral Finance and Economics

INTRODUCTION

Retirement involves withdrawal from one's position or occupation or from active working life. Often people less than 50 years old have difficulty imagining themselves in a retirement state. Planning for the future takes effort, especially when considering the generally unpleasant thought of aging and eventual mortality. Kahneman (2011) discusses this propensity for people to fail to deal with issues such as planning. He characterizes the mind as composed of two systems: system 1 represents intuition and system 2 represents cognition. System 1 functions rapidly in considering a course of action, while system 2 is slower, requires effort, and is naturally “lazy.” When faced with a decision-making challenge, system 1 has the initial option of deciding whether to deal with the situation using intuition or heuristics or to defer to system 2. An individual needs discipline, effort, and the right incentives to employ system 2 and engage in financial/wealth planning when many uncertainties exist and the perceived need for immediate action is low.

Other obstacles exist in the way the human brain has evolved over time. Humans appear to have acquired ingrained behaviors that motivate them ...