Saving for Tomorrow
Watch the following video:
- In this discussion, we continue to explore the reasons why 2/3 of households end up at age 65, the typical retirement age, with little or no money or assets.
- In the prior Week 2 discussion, we saw some evidence that we are subject to genetic, inherited traits that give us a predilection to make irrational decisions about risk versus return (just like our monkey relatives).
- In this Week 3 video, Prof. Benartzi uses the example of the monkey having an apple taken away to illustrate the principle of “loss aversion” – losing something that we have is painful. He argues that people mentally frame saving as a loss (compared to spending now) – so saving is painful.
- The idea of loss aversion is a basic concept of behavioral finance; for example, it explains why people tend to hold onto losing stocks instead of selling them (as long as they continue holding them, they avoid a realized loss, and they can pretend that the stock price will recover).
- Bernartzi’s work suggests that automatic payroll deduction helps people overcome the pain of loss aversion with respect to saving for retirement.
The response should be 150 to 250 words:
Question: Looking to your own future savings for retirement, do you agree that you are more likely to save $200 every month with an automatic payroll deduction from your paycheck (versus you manually transferring $200 every month from your checking account into an investment account)? Or do you think that you would save the same amount even without an automatic payroll deduction (you just have to check a few boxes in your online banking accounts)? Support your answer with a brief explanation of your reasoning (i.e., don’t just answer yes or no).
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