I hope you had a wonderful Diwali, full of family gatherings, eating and sharing mithai and the Diwali delicacies. If this has also been accompanied by late nights, erratic meal times, etc., I am sure you are with me in this realization that it would be nice to shed a few kgs/pounds.

But let’s be honest, if the choice is between a piece of jalebi/cake for dessert or pushing the plate away, that is, between current gratification and deferred gratification, many of us will opt for the former. After all, nobody likes to give up what is pleasant. Though we all know what the right choice is, sometimes we can’t follow through.

Before you all confuse this piece with being a health advisory, I must clarify that it is just an attempt to highlight not only the imperfections of markets but also the areas where self-evaluation may provide ideas for improvement.

We all have gotten pretty good at combing the market for opportunities but less skilful at examining ourselves for potential cognitive flaws. People realize that they sometimes need self-imposed disciplines and rules. They also recognize that controlling their environment can be helpful.

Continuing our weight loss analogy, one can see that diet is a set of rules. For example, one diet might specify that one is not supposed to eat more than a certain number of calories per day or is not allowed any dessert. Environmental control is essential if you are on a no dessert diet. It is probably not wise to accompany your friends to a dessert restaurant.

The choice between current and deferred gratification is what influences retirement planning decisions. Saving for retirement is a decades-long endeavour with both expected and unexpected factors affecting confidence and preparedness. Much of the conversation focuses on amassing a nest egg, it’s also important to look at what other factors play in planning for retirement.

How workers decide to save, manage their retirement investments, and draw down their assets in retirement is important. It is interesting to see how workers and retirees deviate from the rational, well-informed aspects that underpin economic and financial theory. Often expectations are misaligned with current income levels. An individual believes in having champagne Budgets on Little Savings—indicating disconnect between savings and reality, belief that the retirement income will cover basic living expenses and provide a budget for at least some travel and leisure.

Surveys and studies find that most people fear that they will not have enough income, will not have enough money for medical expenses and may not be able to live independently for the entirety of their retirement.

Another regret is not keeping up with the inflation, which today’s retirees will struggle with current yields in debt products.  Ideally, the financial decisions made by investors should be based on underlying fundamentals. However, in reality, extraneous non-financial factors influence it, for instance, the presentation of choice menus, which can influence decisions across many domains. It is popularly referred as “menu effects.”

Mostly, individuals allocate their assets evenly across the alternatives provided, regardless of the underlying intrinsic nature of each option. This phenomenon is referred to as ‘naive diversification’.

The evidence suggests that many people save too little, others make poor investment decisions, and others spend their accumulated assets too quickly in retirement. The ‘behavioural’ reasons for such tendencies include overconfidence, limited self-control, overvaluation of the present at the expense of the future, framing and loss aversion biases.

The literature suggests that the plan design should be automatic for the many individuals unwilling to exercise complete control over their retirement savings choices. Recommended design features include automatic enrolment, scheduled annual savings increases, default investment options or managed account programs that represent optimal portfolio choices.

To conclude, remember my dear readers, be it your fitness regime or your investing decisions, sensible and sustainable is the only detox you need!

Best Regards

Dr. Tarunika Jain Agarwal Ph.D.

Alpha Research