Among the tactics introduced by behavioral finance is the notion of “framing.” For individuals, however, it’s much easier to understand things if they are reframed into “buckets” representing specific individual goals.
Tag "Daniel Kahneman"
If it is true the fear of loss motivates people more than the offer of a gain, then the traditional 401k company match framework is designed improperly. Currently, employees are promised a reward for contributing in their 401k plan. Think of this as the carrot urging people to save for their retirement. What if, instead of using a carrot, plan sponsors reframe the “match” in terms of a stick?
With the introduction of the concept of anchoring, Tversky and Kahneman opened the door to a new way of thinking about and addressing the financial decision-making process. For more than four decades, subsequent research has expanded upon their idea. Yet, plan sponsors and participants continue to remain uninformed of the dangers of anchoring.
It’s clear behavioral finance and economics studies will continue to define the leading edge of 401k design and implementation.
