Patience and retirement savings

Last week we saw how patience may have been a key ingredient in the development of capitalism and the industrial revolution, lifting Western countries to previously unforeseen levels of wealth. On an individual level we know that patience is also a virtue since patient people tend to save more for retirement and are more successful in their careers, on average.

But what makes some people more patient and more likely to save for retirement than others? That is what is at the heart of a recently published study by Dianna Amasino and her colleagues. They tested how students at Duke University made choices between instant gratification and delayed gratification. For instance, they presented the choice between getting $8 today or $10 in a week’s time to the students and then registered, which option the students chose. However, they also tracked the eye movements of the students to infer what information they were focusing on.

Now economic theory tells us that a rational decision-maker would weigh both the amount of money and the time delay at the same time when deciding between getting a smaller amount sooner and a larger amount later. But as we all know, there is no such thing as a rational investor or a rational decision-maker. Instead we are what I call “normal”. We all use mental shortcuts (aka heuristics) to decide between different options.

The interesting result of the study by Amasino and her colleagues is that the decision to delay gratification and take a larger amount later depended on the mental shortcut people used to make the decision. More patient people focused predominantly on the comparison between the amount of money they would get today vs. the amount of money they would get later. This mental shortcut based on a comparison of money led them to prefer the larger, later payment and “discount” the time they had to wait for the larger amount. More impatient people, on the other hand, focused predominantly on the time difference between the two payouts. This focus on the time dimension seemingly increased “the agony of waiting” and made a smaller amount sooner look more attractive.

There are plenty of potential applications here that one could speculate about. We should caution readers that it is dangerous to infer causality from the study results, but one can hypothesise that one way to increase the propensity to save with investors is to teach them to focus on the larger amount received at a later time rather than the time needed to get there. Even more so, by presenting the amounts while “hiding” or relegating the time dimension to the fine print, one could potentially create a nudge to incentivise people to save more. This hypothesis would need to be tested, but it is an intriguing thought.