Data & Research
Biases May Lead to Savings Procrastination
People with present bias may delay saving for the future, while those with exponential-growth bias may underestimate the returns on savings, a study finds.
Reported by Corie Hengst
Present bias is the tendency to focus on the present rather than the future; and exponential-growth bias is the tendency to neglect compounding investment returns. People who have present bias may intend to save more for the future but never do, or they may procrastinate enrolling in a tax-deferred savings plan. A person with exponential-growth bias tends to underestimate the returns on savings and the costs of having debt. Those who are unaware of these biases tend to save less money for retirement, the study found.
If biases are eliminated, however, it can result in a retirement savings increase anywhere from 12% to 70%.
The researchers from Stanford University, the London School of Economics and Political Science, the University of Minnesota and Claremont Graduate University tested the association between a direct measure of self-awareness about these biases and the economic outcomes of them.
As part of the study, they asked respondents questions including whether (and when) they would be willing to complete an hour of paperwork to change their retirement plan based on their company’s new matching contribution (they would also get a $50 bonus for completing the paperwork).
Researchers found that if they gave a deadline for completing the paperwork, it increased the chances that respondents would change their contributions by 8.3 percentage points. If they didn’t give a deadline and just provided a cash incentive, the chances only increased by 4.3 percentage points.
The survey also asked questions about the value of an asset. For example, what would the value of an asset be after 20 periods if it experienced growth at an interest rate of 10% each period? The study found that overconfidence regarding exponential estimation has an additional negative effect on retirement savings.
Present bias and exponential-growth bias therefore have a profound effect on an individual’s retirement savings, the study concluded.
The full study report can be downloaded here.