Robert Cialdini, professor emeritus of psychology and marketing at Arizona State University, has pointed out that people prefer to be consistent before making a commitment -- and a written statement is a strong commitment. In his book, “Influence: The Psychology of Persuasion,” he notes, “Once we have made a choice or taken a stand, we will encounter personal and interpersonal pressures to behave consistently with that commitment.” Investors can take advantage of this desire for consistency to help guide their future behavior now.
4. Avoid the tyranny of too much choice: In his 2004 book “The Paradox of Choice,” Barry Schwartz notes that altough “modern Americans have more choice than any group of people ever has before, and thus, presumably, more freedom and autonomy, we don't seem to be benefiting from it psychologically.” Every stock-picking investor knows this by its Wall Street nickname, “paralysis by analysis.”
The solution, which works as well for 401(k) retirement-saving plans as it does for refrigerators, is to keep the number of options limited. For those of us who help create 401(k) plans for employers, it means not overwhelming participants with too many options. What works well are several distinct choices: Target-date funds, designed to shift asset allocation the closer the beneficiary gets to retirement; several broad index funds based on the U.S. stock market, developed markets excluding the U.S.; emerging markets and bond funds. And then a handful of choices for the do-it-yourselfer. But it should not supply so many choices as to overwhelm the participant.
5. Anticipate the shift from accumulation to distribution: One of the hardest things investors have to do is mentally make the shift from working and saving to retirement and spending. It’s the reversal of a lifetime of good economic habits.
Too many people in retirement who have substantial savings are fearful of running out of money. With longevity for many people increasing, it's a real concern. Use software or a financial adviser to create a plan that will calculate your lifetime needs and future spending requirements. Figure out exactly what is leftover, and don’t be afraid to spend it. Use your excess to travel, donate to charity, give money to grandkids, whatever brings you satisfaction.
That is the beauty of behavioral finance: using what we have learned to improve decision-making. Don't wait until the next Fourth of July to get started.
This column was provided by Bloomberg News.