#330 - Oh, Behave! Behavioral Finance and Retirement: Retirement Planning

We all have cognitive biases that we have to account for when retirement planning. Although we can never shed ourselves of these biases we can manage them. In this episode of Retirement Answer Man, we continue to explore behavioral finance and how it affects retirement planning. Our minds like to play tricks on us and prevent us from making rational decisions. Listen to this episode to learn how to be aware of those tricks and overcome them so that you can rock retirement.

“Listen to this episode to learn how to be aware of those tricks and overcome them so that you can rock retirement.”

What does bias mean?

Before we further explore the subject of the cognitive bias we need to have a clear understanding of the term. Bias means that we prefer one side over the other. We all have our preferences for certain things, sometimes we aren’t even aware of them. Cognitive bias is a systematic error in thinking when people are processing or interpreting information. Cognitive bias can affect our judgment. It is especially important in finance to be aware of these errors in thinking. The biggest obstacle to rocking retirement is a cognitive bias.

“The biggest obstacle to rocking retirement is cognitive bias.”

These 7 types of cognitive bias can impact your retirement planning

There are several different types of cognitive biases that can affect our decision making and impede our judgment.

Confirmation bias is when we look for information to support our conclusions rather than looking at all the arguments in an objective way. Our minds are often overloaded with information and use confirmation bias to make decisions easier. Confirmation bias provides the mind with a quick shortcut to come to an answer that you already ‘know’ to be true.
Loss aversion explains people’s tendency to avoid loss rather than seek a gain. Psychologically the pain we feel when we lose outweighs the joy we feel when we gain.
Oversimplification tendency helps us to find simple explanations for complex matters. Retirement planning is one of those complex problems. It takes a lot of energy to think out complex solutions to complicated issues. We love those rules of thumb to help us simplify matters, but the truth is we need to seek to understand the complexity. Only then can we discover the elegant simplicity of our own unique retirement plan.
Memory bias impairs us from understanding past lessons. Instead of looking back in the long-term, we look to more recent decisions to guide our plans.
Recency bias is similar to memory bias. Recency bias is the reason most people buy high and sell low even though they ‘know better’. When the markets are up we become more optimistic about life.
Information bias brings out our tendency to continually seek out information even when it doesn’t affect the action. It becomes a way of procrastinating to delay making decisions.
Parkinson’s law of triviality means that we spend more time focusing on trivial details rather than the important issues at hand.

Good investments plus good behavioral habits will help you rock retirement

The worst part about these biases is we don’t even realize that we have them. The first step in overcoming a problem is to realize that the problem exists. None of us have this retirement thing all figured out. But if you can create good behavioral habits and pair those with good investments you will rock retirement. Be sure to tune in next week to learn how to create a framework to manage your cognitive biases and become a better critical thinker.

“Be sure to tune in next week to learn how to create a framework to manage your cognitive biases and become a better critical thinker.”

OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN

HOT TOPIC SEGMENT

[1:52] Check out the Grandpad to stay in touch with elderly family members

WHAT DOES THAT MEAN SEGMENT

[4:35] What does bias mean?

PRACTICAL PLANNING SEGMENT

[6:40] You have so much information coming to you
[13:43] The goal of retirement planning is to find the elegant simplicity
[16:48] We become optimistic when the markets is doing well
[21:21] Good investments plus good behavioral habits can help you rock retirement

Q&A SEGMENT

[23:44] What can you expect to pay as an individual for Medicare?
[26:55] The number of publicly traded companies has declined over the past few years
[34:10] Be cautious of booking travel due to the potential of travel company bankruptcies