Investors Tend To Do What Is Easy
September 10, 2008 – 5:49 am
According to the National Bureau of Economic Research, investors tend to do what is easy. Researchers at NBER aptly described this behavior as “follow[ing] the path of least resistance.” I think we also tend to give in to inertia and proceed to do what we’ve always done. We’re mindless, especially when it comes to things that we would prefer not do. Some of us are finance geeks, but most people would rather get a root canal than balance a checkbook or spend the day in a family financial planning session. 
This is also the reason why “making it automatic” works when it comes to saving. We setup our automatic investment or withdrawal programs, inevitably get busy, and we forget about all that cash that is piling up outside of our checking account.
This is also why some employers have changed how they deal with new employees and retirement account options. Just a few years ago most new employees had to actively decide to participate in their 401k or 403b. They actually had 2 other choices: one to say “no, I do not want to participate”, and the other to say “I’m not sure, so I’ll make the decision later”. By abstaining from a decision, these new employees were effectively saying “no”.
Recently employers have been changing these default options and have been enrolling new employees in the company retirement plans by default if no choice is made. Then inertia kicks in, and the new employees are better off financially because they are saving automatically, in this case without even making an active decision to do so.
Likewise with investment options, employers are now making default investment choices for employees. My company for example enrolls people in a “lifestyle” mutual fund choice with an age-based asset allocation from our plan by default. Although it may not be perfect for everyone, it’s probably better than the other two clear choices: a stable value fund or company stock.
Other areas where inertia take over include:
- automatically being cashed out of your retirement account if you leave a company. This frequently occurs on accounts that have low balances ($5000 according to the article).
- committing to increasing the percent invested each year. some companies, for example, “pre-commit” employees to add say 1% to their investments each year until they hit some pre-determined maximum.
Image Credit: Jason Gulledge
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2 Responses to “Investors Tend To Do What Is Easy”
It is amazing to me that people would spend more time shopping for a DVD than spend time organizing their finances.
By doubleourmoney on Sep 10, 2008