Thursday, February 10, 2011

We Are Our Own Worst Enemy

We have met the enemy, and he is us."
- Walt Kelly

CBS Marketwatch has an article which describes research which indicates that we are our own worst enemies when it comes to saving for retirement.  Research by Olivia Mitchell and Justine Hastings point to two factors why people make poor financial choices:

1. Lack of financial literacy.
2. Short term thinking.

Fortunately, the first factor is easy to rectify.  There are plenty of sources where you can better equip yourself for making smarter money choices.  With the advent of the Internet, one can get a real financial education at the click of a mouse, literally.  For those who have an "old school" disposition, I recommend several of the books listed on this site as good starting points on your educational journey.

The second factor is harder to overcome.  According to the article, it is possible that humans have "present state bias", which means that we have a hard time planning for the future and overcoming our short-term thinking.  Obviously, this is a large generalization.  There are some people who are excellent long-term planners, and some who live day to day without any consideration for what will happen tomorrow.  However, as a generalization, I think it holds true.

The recent economic crisis is a perfect example of lack of long term thinking.  The crisis was caused by institutions looking to maximize this quarter's profits and this year's bonus without much concern for how this thinking might affect them long term.  At its worst point, people bailed out of stocks in droves at the market low thinking that the previous year's returns would continue in perpetuity.  On the flip side, think of all the people who piled into real estate, looking to "flip that house" based on the belief that the housing prices would continue to rise and rise and rise.  At its heart, the crisis was a microcosm of the failure of we humans to plan for the distant future.

The saddest part is that slow and steady truly wins the race when it comes to saving for the future.  It is a fact that the earlier you start saving, the better off you are.  Small amounts saved over a long period will grow larger than a larger amount saved over a short period.  If we can just overcome our short term thinking, we would be much better off.

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