I watched a programme last night on how we actually think and why we behave irrationally.
One particularly interesting part covered what psychologists term ‘Present Bias’; the principle that we prioritise immediate activities which may be less beneficial or even damaging over activities that have a benefit but will not be enjoyed until some point in the future.
Examples of present bias include choosing a cake over a piece of fruit, or checking our Facebook account rather than reading a good book.
We know in each case the latter is more beneficial than the former but most people choose the immediate gratification.
This is because the future reward of the more meaningful activity is less tangible; we may get the benefit but we reason to ourselves that something may change so we won’t get it or that because it is a long way off we can always start it tomorrow (diets and attending the gym being other classic examples).
Logic would say that there is no excuse for this because it should be easy to choose the more beneficial activity (why would we rationally sabotage ourselves?) but actually it is not entirely our fault.
In his excellent book, The Chimp Paradox, Dr Steve Peters explains how part of our brains are made up of an inner chimp which acts irrationally and emotively.
This chimp part of the brain acts five times as quickly as the human (logical) part and is why we often react to things emotionally and irrationally (choice of partners for example).
The chimp wants instant gratification and because it reacts faster it is more likely to get what is wants: cake instead of fruit, Facebook instead of a Penguin classic.
Planning for Retirement
Our attitude towards planning for our retirement is linked to these behaviours: we know we need to save for the future if we want to live the lifestyle we desire but because it is in the future our response is to leave it for another day.
The good news is that, although the desire for immediate gratification never goes away (your chimp is always there), we can employ strategies to avoid the temptation.
For dieters this would be avoiding having treats in the house, for gym members it would be to reward themselves for going.
When saving for your retirement this may be setting up a direct debit for a pension or investment contribution to coincide with pay day and treating yourself at the end of the month with whatever balance is left in your account.
It is also helpful to measure progress so that the future benefit can be made more tangible.
Taking an active interest in your money can help with this: as you see your pot grow you will feel wealthier and therefore your chimp will be appeased by the positive feelings.
There is another problem though
You may feel that because you have started something more wholesome you have done enough and can forget about it: “I’ve been to the gym so now I can have a big cake” but calories in may be more than calories burnt.
In the same way you may think that because you have started saving for your retirement you have done enough and are free to enjoy the here and now. But what if you are not saving enough?
Ignorance can be a dangerous thing and is where the recent Auto Enrolment legislation may fall down.
Just because you are making monthly contributions to a long term investment it doesn’t mean you are putting enough away.
If you fail to check whether your savings and investments are going to be sufficient you are likely to have a shock when retirement comes and you find that the pot you have accrued does not actually afford you the lifestyle you have come to enjoy.
Having a plan for your future can over come this risk.
By knowing how much income you need to have in retirement you can work back and calculate how much you need to invest each month to build up enough wealth to produce the required income, and the sooner you start the less you have to save each month such is the wonder of compound interest.
Having a plan will also satisfy your inner chimp because by seeing a plan taking effect makes the future more immediate and allows us to reward our chimps as we reach certain landmarks.
And, if we reward our chimps for certain behaviours they will want to repeat them.
So, if you want to give you and your chimp a happy retirement make sure you both have a strategy to get you there.
If you would like to know more about how we work with individuals and their chimps to plan for their retirements please do get in touch.
