75% Amount of current income most
people estimate they will need in retirement
135% Amount they would actually need to
live the kind of retirement they’re planning
we point out the danger of having a
large portion of assets tied up in one
stock, they’ll often respond, ‘I work
here, I see what they’re doing, and I
think this stock is going up forever,’ ”
Dahm says. “I watched one client do
that—and he rode the stock from $60
a share all the way down to $3.”
One way to combat overconfidence
is by avoiding the temptation to use
your stock-picking skills to invest in
individual companies. Instead, select
a handful of highly rated mutual
funds—no more than half a dozen—
that invest in diverse companies in
different parts of the world.
Question #3
INCOME ILLUSTRATION BY DAVID COWLES; SOURCE: DAN ARIELY, JAMES B. DUKE PROFESSOR OF BEHAVIORAL ECONOMICS, DUKE UNIVERSITY.
ENVELOPE PHOTOGRAPH BY TED MORRISON; ILLUS TRATION B Y STEVE SANFORD; ADAP TED FROM THINKING, FAST AND SLOW B Y DANIEL
KAHNEMAN (PUBLISHED B Y FARRAR, STRAUS AND GIROUX, LLC. COP YRIGH T © 2011 B Y DANIEL KAHNEMAN. ALL RIGH TS RESERVED.)
You’re picking out a movie to watch
tonight. Lowbrow comedy or highbrow art film? Now imagine you’re
picking a movie to see in two weeks.
Which type will you want then?
Back of the Envelope
In a 1999 study published in the
Journal of Behavioral Decision
Making, researchers found that 56
percent chose the popcorn flick for
tonight and 44 percent went for the
more intellectual option. But wait:
Move the date forward by a couple
of weeks and 71 percent picked the
art film. Blame “hyperbolic discounting,” which is a wonky way
of saying that we prefer immediate
rewards and postpone things we
think will be good for us.
This sort of choice pits two dif-
ferent decision-making processes
in the brain against each other. One
side—Thaler calls it Mr. Spock—is
extremely rational and deliberate;
the other—Homer Simpson—is im-
pulsive and emotional. And when
the two of them fight, Homer tends
to win: It can be hard for your Spock
side to save for retirement when
your inner Homer is drooling over
big-screen TVs and other expensive
distractions. The solution? Elimi-
nate Homer by automating your
savings. Your 401(k) plan does this
brilliantly, spiriting your money
away before you see it. Do the same
with your IRA or emergency fund
by setting up automatic transfers
from your bank account. “Automatic
savings plans are incredibly power-
ful, because they keep the part of
your brain that’s interested only in
immediate rewards from participat-
ing in the decision,” says Russell
James, an associate professor in the
department of personal financial
planning at Texas Tech University.
“That’s a great way to get yourself
to set aside more money for your
retirement.” ;
Michaela Cavallaro writes about
personal finance and works on her self-control issues in South Portland, Maine.
