How the 401k Fiduciary Can Help Retirement Savers Make Better Decisions (Part I)
Have you ever found yourself in the grocery store checkout line and, while patiently waiting, innocently turn to those shelves of candy bars only to hear them calling out to you? How many times have you decided – on the spur of the moment – to answer that call and buy that candy bar?
Now, recall your thoughts in the vegetable aisle. You probably never heard the carrots calling for you. Or maybe your invoice voice told you they were calling but you refused to hear them. Most likely, though, you probably felt a tinge of guilt as you passed those healthy snacks.
You answered immediately your desire – your want – for the candy. But you bypassed the food you knew you should have bought. It happens all the time, and not just at the grocery store. You know you should be reading that informative book sitting idly on the coffee table, but you want to watch this episode of reality TV “just to see how it ends.” You know you should make that extra sales call, but you want to believe the prospect has everything they need. You know you should spend a half hour exercising, but you want to get a little more work done. (Guilty as charged on that last one.)
Life is full of tiny decisions. These decisions add up to amass a heavy influence on your life. Will the influence represent an overwhelming burden of thousands of small bad decisions (let’s call it “death by a thousand cuts”) or will that influence amount to a movement towards a healthy, successful, rewarding life? Which call shall we answer? The “should” angel on our right shoulder or the “want” devil on our left shoulder?
The paper “Harnessing Our Inner Angels and Demons: What We Have Learned About Want/Should Conflicts and How That Knowledge Can Help Us Reduce Short-Sighted Decision Making,” (Katherine L. Milkman, Todd Rogers, and Max H. Bazerman, Perspectives on Psychological Science, July 2008 vol. 3 no. 4, 324-338) discusses the never-ending battles between “want” and “should” decision making. It defines human behavior as the regular “struggle with internal conflict when deciding whether to behave responsibly or indulge in impulsivity.”
Over the last two decades, psychologists and behavioral economists have researched this “want/should” conflict. Milkman et al wrote the paper as a review of the published literature on the subject. They attempted to assimilate previous research in a way to shed light on the primary influencers that drive people to make “want” instead of “should” decisions and vice-versa.
Before we get into the meat of the results, let’s review our definitions. It’s easy to see a “want” decision as something stemming from our passion. It’s more than an emotional-based decision, though. It also represents the attraction to the short-term. It’s the hamburger today that would gladly pay for on Tuesday. The “should” decision, on the other hand, is the logical counterpart, the Spock to the “want’s” McCoy, if you will. Again, it represents something far greater than that. The “should” decision reflects the fruits of a longer-term goal. It’s the saving today for the promise of a comfortable retirement in the long-term.
It’s that last example which represents why understanding the want/should decision making conflict is essentially for 401k plan sponsors and their fiduciary advisers. The want/should dichotomy addresses headed on the conflict between the instantaneous gratification derived from buying something today and the delayed gratification inherent in saving more for retirement. Understanding what environments and situations drive people towards want decisions will help 401k plan fiduciaries craft plan designs, education programs, and overall plan infrastructure in such a way as to help guide employees towards making a should decision rather than a want decision. In other words, they’ll do the things they should be doing to insure they retire in comfort rather than doing things they want to do merely because it satisfies some near-term desire.
Milkman et al identified five different situations which make it more likely for people to make a want decision instead of the more beneficial should decision:
1. “Intertemporal Choice” – If you make a choice that will be acted upon immediately, you’re more likely to make a want choice. Alternatively, if you make a choice that will be acted upon sometime in the future, you’re more likely to make a should choice. For example, one study showed people are more likely to buy “want” groceries (e.g., unhealthy snacks they can consume almost immediately) if they are physically at the store buying right now. If they are ordering on-line with an expected delivery date some time in the future, they are more likely to by “should” groceries (i.e., things they need, not those unhealthy snack they want right not).
2. “Joint Versus Separate Decision Making” – When presented an option in solitude, people are more likely to make a want decision. When presented an array of options, people are more likely to make a should decision. For example one study gave different respondents choices between accepting two different job opportunities. Option one paid that same salary as coworkers. Option two paid a higher salary than Option One, but was less than what coworkers were paid. Viewed together, most people compared only the salaries and picked the higher paying salary (the should decision). When viewed separately, respondents compared the salary with that of their workers and overwhelming chose the lower salary (the want decision).
3. “Extreme Cognitive Load” – The more you have on your mind, the more likely you’ll make a want decision. A study showed, when given the choice, people are more likely to select eating a chocolate cake (the want choice) when they had to memorize a 7 digit number. When asked to memorize only a 2 digit number, they were more likely to choose a fruit cup (the should choice).
4. “Whether an Individual Views a Choice as Isolated or as the First in a Sequence of Related Choices” – When people know they’re going to make a series of decisions, they’re more likely to make a want decision first, figuring they can balance it with should decisions later. When given the same choice but without the knowledge they can make future offsetting decisions, people are more likely to make a should decision. An experiment offered people the option to select a “virtue” good (should decision) or a “vice” good (want decision). People tended to pick the vice good when they were told they could make other picks later. When the choice was in isolation (i.e., they did not believe they had future picks), they tended to pick the virtue good.
5. “Whether an Individual Feels Licensed to Make Want Choices as a Result of Recent Should Behaviors” – If people voluntary make a should decision, they reward themselves by making a want decision later. In a series of thought experiments, researchers found that people, after imaging they had just completed three hours of voluntary work, were more likely to buy designer jeans (the want choice) instead of a vacuum cleaner (the should choice).
These are the five basic circumstances researchers have found that influence people want/should decision making behavior. With this background knowledge, what specific actions can be taken to encourage people to make should decisions? We’ll discuss this in next week’s conclusion: How the 401k Fiduciary Can Help Retirement Savers Make Better Decisions (Part II)
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