Optimism Is Good For Many Things, But Not Pension Savings
I will live longer than average, social security will enable me decent living in retirement and if I will need more income, I will just take up a part-time job or delay my retirement for a few years. These are just some optimistic thoughts that many of us think about our retirement. The culprit? Optimism bias, or our tendency to overestimate the probability of positive future events and underestimate the probability of negative ones.
Optimism bias is considered to be one of the most prevalent and robust cognitive biases observed in behavioral economics that transcends gender, race, nationality, and age [1]. But like most things in life, even optimism has its negative sides that can have huge impact on our lives. According to the FED 40% of Americans, today can’t cover an unexpected $400 expense and the majority approaching retirement have no or inadequate savings bringing the nation to a retirement saving crisis [3].
Mortgage and student debt are at record heights and mounting studies suggest our over-optimistic outlook of the future is partly to blame, making further research in this field crucial for the financial wellbeing of future generations.
Why is the glass half full?
Tali Sharot, one of the leading neuroscientists in this field, describes optimism bias as a cognitive illusion to which we are blind to and live with, though without realizing its impact on our behavior. She provides a chilling explanation for its development. Since humans possess, as one of the few species, a unique ability of conscious foresight (mental time travel) this also means we are aware that somewhere in the future death and other bad things await us. Without developing positive biases during our evolution, we could not function normally every day knowing death is around the corner [4].
Biologist Ajit Varki argues that the awareness of mortality on its own, would for humans have led evolution to a stop, thus making our biggest evolutionary advantage – self-awareness, also our greatest weakness [5]. Haselton et al explain that cognitive biases like optimism are not necessarily design flaws as most perceive them—instead, they could be design features that evolved because they positively impact our health [6].
Sharot argues further that a brain that could consciously travel through time would be an evolutionary barrier and not an asset and that it is this combination of conscious prospection and optimism that made most of humanity’s achievements possible. Our brain’s ability to underestimate the likely hood of negative future events reduces our levels of stress and anxiety which is good for our health and without it, we would be grounded to a halt by all the worries of life [4]. From our childhood into our adulthood, we constantly simplify in our minds how the future will unfold and overestimate how successful we will be, and by that the optimism bias gives us certainty [1].
References
[1] O`Sullivan, P. Owen. The neural basis of always looking on the bright side (Dialogues in philosophy, mental and neuro sciences), 2015.
[2] Vižintin, Žiga. Pretirani optimizem lahko tudi škoduje (How optimism bias can have a negative impact on our personal finance). Dnevnik newspaper, Volume April, 2018. Retrieved from: https://www.dnevnik.si/1042767739/posel/novice/oglasno-sporocilo-pretirani-optimizem-lahko-tudi-skoduje
[3] Rhee, Nari & Boivie, Ilana. The Continuing Retirement Savings Crisis. 2015. Retrieved from: https://laborcenter.berkeley.edu/pdf/2015/RetirementSavingsCrisis.pdf
[4] dodan med linke[4] Sharot, Tali. The optimism Bias – A Tour of the Irrationally Positive Brain. New York, NY, US: Pantheon/Random House, 2012.
[5] Varki, Ajit. Human Uniqueness and the denial of death. Nature 460, No. 7256, 2009.
[6] Haselton, Martie G., Nettle, Daniel & Murray, Damian R.. The Evolution of Cognitive Bias. Part VII. Interfaces with Traditional Psychology Disciplines. 2015.
[7] Sharot, Tali, Riccardi, Alison M., Raio, Candance M., & Phelps, Elizabeth. A. Neural mechanisms mediating optimism bias. Nature, vol. 450, 102–105. 2007
[8] Eil, David and Justin M. Rao. The Good News-Bad News Effect: Asymmetric Processing of Objective Information about Yourself. American Economic Journal: Microeconomics, 3 (2): 114-38, 2011.
[9] Sharot, Tali, Guitart-Masip, Marc, Korn, Christoph W., Chowdhury, Rumana, Dolan & Raymond J.. How dopamine enhances an optimism bias in humans. Curr Biol, 22:1477-1481, 2012.
[10] Sharot, Tali, Shiner, Tamara., Brown, Annemarie. C., Fan, Judy., & Dolan, Raymond. J. Dopamine enhances expectation of pleasure in humans. Current biology : CB, 19(24), 2077-80, 2009.
[11] Nettle, Daniel. Adaptive illusions: Optimism, control and human rationality (In Evans, D. & Cruse, P., Emotion, evolution and rationality – pp. 193–208). Oxford University Press, 2004.
[12] Lefebvre, Germain, Lebreton, Maël, Meyniel, Florent, Bourgeois-Gironde, Sacha & Palminteri, Stefano. Behavioural and neural characterization of optimistic reinforcement learning. Nature Human Behaviour. 1. 0067. 10.1038/s41562-017-0067, 2017.
[13] Puri, Manju & Robinson, T. David. Optimism and economic choice. Journal of financial ecnonomics. 86, No 1, 71-99, 2007.
[14] Munnell, Alicia H., Sanzenbacher, Geoffrey T. & Rutledge, Matthew S. What causes workers to retire before they plan? Center for Retirement Research at Boston College, 2015. Retrieved from: https://crr.bc.edu/wp-content/uploads/2015/09/wp_2015-22.pdf
[15] Employee Benefit Research Institute (EBRI) & Greenwald & Associates. Retirement Confidence Survey 2018. Retrieved from https://www.ebri.org/pdf/surveys/rcs/2018/2018RCS_Report_V5MGAchecked.pdf
[16] Perna, Laura W., Kvaal, James. & Ruiz, Roman. An Updated Look at Student Loan DebtRepayment and Default. Penn Wharton Public Policy Initiative, Volume 46, 2017. Retrieved from: https://repository.upenn.edu/pennwhartonppi/46
[17] Hershfield, Hal E. H., Shu, Stephen., Benartzi, Shlomo). Temporal Reframing and Savings: A Field Experiment (Working Paper). January 2018.
[18] Roberts, Martha. The joy of anticipation. 2014. Retrieved from: https://www.psychologies.co.uk/self/life-lab-experiment-mind-2.html
[19] Mazar, Nina, Mochon, Daniel & Ariely, Dan. If You Are Going to Pay Within the Next 24 Hours, Press 1: Automatic Planning Prompt Reduces Credit Card Delinquency. Journal of Consumer Psychology. 2018. Retrieved from: https://onlinelibrary.wiley.com/journal/15327663
About the Author
Žiga Vižintin
Žiga Vižintin is an advisor to the Management Board at Pokojninska družba A in Slovenia. He has a M.Sc. in economics from the University of Ljubljana and is interested in behavioral biases related to pension saving. He is particularly interested in applying behavioral economics to help people save more for retirement.
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