Practical analysis for investment professionals
21 June 2013

Weekend Reads for Financial Advisors: Fragile Nest Eggs, Happiness, and Luck vs. Skill

Posted In: Weekend Reads

I want it, and I want it NOW! Sound familiar? While that petulant behavior may remind you of your toddler, it’s surprisingly common in adults, too. That’s because it is an example of “temporal discounting” — our tendency to want things now rather than later. It seems we are hardwired for instant gratification.

In “The Challenges of Living Longer,” Francesca Gino, a social scientist and associate professor at Harvard Business School, writes that when it comes to retirement planning, we face two barriers: first, our financial knowledge; and second, psychological barriers that stand in the way of being prepared for those extra years. “The most critical one is our inability to plan for the distant, long-term future,” she says. “Research from both the fields of psychology and economics suggests that people care more about present outcomes than they do about future ones, a tendency called temporal discounting.”

There are two main factors that contribute to this tendency, says Gino. “First, present rewards trigger stronger emotional reactions than do future ones . . . And second, we mispredict how we might feel in the future if certain events were to transpire.”

With that in mind, here are some “present rewards” in the form of recent articles (and video clips) you may have missed:

Retirement

  • Remember the widely viewed and much discussed PBS Frontline documentary “The Retirement Gamble” that aired in April? Well, John Rekenthaler, vice president of research for Morningstar, offers a detailed “takedown” of the assertions in “To the Back of the Line, Frontline: Rekenthaler Drop-Kicks PBS’s Documentary.” (Morningstar)
  • Jeff Sommer’s article “For Retirees, a Million-Dollar Illusion” also struck a nerve. There were nearly 650 comments, prompting Sommer to write a follow-up, “Suddenly, Retiree Nest Eggs Look More Fragile,” to address some of the issues that were raised. Sommers noted that he focused on $1 million because of its symbolic power, not because it represents the savings of a typical American family. In fact, he points out, the median financial net worth of American households of all ages, excluding homes and cars, is $10,890, as estimated by Edward N. Wolff, an economics professor at New York University. For households headed by those in the 55-to-64 age bracket, it’s $61,300. In the follow-up article, Sommers addresses some of the systemic issues that led to this state of affairs. “As Jack VanDerhei, research director of the nonprofit, nonpartisan Employee Benefit Research Institute, puts it, ‘very large numbers of people are at risk of running out of money in retirement.’ In a recent study, the institute found that roughly 44 percent of households in the baby boom and Gen X generations — those born from 1948 to 1975 — were likely to run short of cash in their retirement years.” (New York Times)
  • Here’s an interesting retirement solution I had never heard of: a “tontine.” Moshe A. Milvesky (@RetirementQuant) explains that if you want retirement security, look to the Renaissance. (Wall Street Journal)
  • Are we comparing ourselves too closely with others when planning for retirement? In “Letting Go of Keeping Up,” Mina Cikara, an assistant professor at Carnegie Mellon University, argues that behavioral research shows that comparing ourself to others can sometimes prove detrimental — especially when it comes to financial decision making. (Prudential sponsored content via The Atlantic)

Practice Management/Technology

Note to Self

Happiness

Tax and Estate Planning

Behavioral Finance/Innovation

Financial Literary/Future of Finance

Investing/Bubbles

And Now For Something Completely Different


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: ©iStockphoto.com/JLGutierrez

About the Author(s)
Lauren Foster

Lauren Foster is a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

2 thoughts on “Weekend Reads for Financial Advisors: Fragile Nest Eggs, Happiness, and Luck vs. Skill”

  1. Very well written post here. Thanks for sharing!

  2. Is it because we have lived in times of prosperity? Do we no longer need for safety from future shocks? I guess what I am asking is temporal discounting a product of our environment or is it something else?

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