What Behavioral Science Solutions Overlook

The retirement plan industry has paid a lot of time and attention to behavioral finance in motivating worker savings behaviors – but in doing so, we may be overlooking a significant factor that affects their adoption.

Yes, we have for some time now championed the ability to counter inertia – the decision not to decide – with design elements like automatic enrollment. We also know that human beings can be stymied by too many choices, they fear loss more than they value gain, and they separate decisions that should be combined. The reality is that human beings, confronted with complex financial options, often act based on factors other than perfectly rational criteria.

And by human beings, I mean not only plan participants, but even those human beings called… plan sponsors.

Indeed, when it comes to implementing behavioral finance-focused alternatives, it’s ironic while we readily acknowledge the importance of those considerations in thoughtful plan designs – but almost never acknowledge their impact on those who make the complex financial decisions that affect the implementation of the designs that influence those participant decisions.

Behavioral finance is, simply stated, a field that seeks to find explanations for, and solutions to, the (seemingly) irrational financial decisions that people make. By now, we take it for granted that participants need the help of things like creative plan design to help them make better decisions. But what about the plan sponsors who:

  • Express concerns about retirement income, but don’t incorporate retirement income solutions or systemic withdrawal provisions in their plan document.
  • Won’t remove funds from the plan menu even though they’re no longer suitable because some participants have money in them.
  • Worry that participants won’t have enough to retire, but balk at designs like automatic enrollment as “too paternalistic.”
  • Gauge plan success on “incomes” like participation rate, rather than outcomes.

Behavioral finance biases have been documented with regard to plan committees as well. A number of years ago, Vanguard did a fascinating study of the impact of these behavioral biases and group decision-making on investment committee decisions. What kinds of biases? Well, the report cited things like “shared-information bias,” where groups tend to focus on things of common knowledge/interest, even if it isn’t the most pertinent/critical. My favorite is “group polarization,” which speaks to a group’s tendency to make more-extreme decisions – both in cautious and risky directions –than individuals. In essence, the group tends to reinforce its own prejudices – and then some.

Consider also that in a September 2010 Vanguard paper on manager hire/fire decisions, more than 80% of investment committee members surveyed rated their committees’ knowledge level as above average, and more than 60% said their committees seldom make mistakes. Wonder what their advisors would make of that?

Even the best committees and plan sponsors can make bad decisions, not because they aren’t well-intentioned, or even well-equipped to make complex financial decisions, but because they may make decisions based on dynamics of which they aren’t even aware.

And sometimes even when they are.

Add Your Comments


  1. url url'>Elmer Rich
    Posted July 26, 2016 at 1:30 pm | Permalink

    It is hard to know where to start, let alone briefly, on questioning current behavior and brain science as, mainly “mis-“, applied to retirement investing. Most simply, so-called neuro-economics is neither biologically valid neurology nor economics. Nothing in economics, nor finance nor portfolio management, let along retirement investing or plan design is evidence-based.

    Nothing in financial services meets the basic professional standards for evidence, facts and peer-reviewed data of other professions, say medicine and engineering. Retirement and financial services is sales-based, not evidence based, so is economics.

    I would argue, with evidence, that behavioral econ is bad faith, deeply wrong and often dishonest. For example, the so-called data on auto-enrollment is a mess and not supportive – but it sells. The whole idea of “nudges” is simplistic and silly – but it sells.

    There is a lot more to say but it is a technical subject and not for a “drive-by” posting. For example, as this author points out everyone, including portfolio managers, senior company leaders, allied professionals and policy makers are vulnerable to the mistakes that are endemic to any and all kinds of behavior and, so-called, “decision making.” We have posted on these studies.

    Basic to all animal behavior, and humans are just another animal, there is no conscious control of behavior. All behavior is instant, instinctual and automatic and happens in 140ms. Economic theories refuse to accept the basic medical physiology of behavior.

    Finally, brain and behavioral science is very good but little, if any of the best science makes it to any economic or financial services leaders and decision makers. Ome or two of us are trying to change that. More to come…

  2. Nevin E. Adams, JD
    Posted July 27, 2016 at 10:08 am | Permalink

    Elmer, an interesting response. I wouldn’t see it so much as “controlling” behaviors, as understanding and trying to frame the decisions we ask people to make so that they make optimal/better choices. Honestly, as an industry we have spent so much time scaring people (plan sponsors AND participants) it’s a wonder anyone sets up a plan or participates in it. Thank goodness they do.

  3. steff chalk
    Posted July 28, 2016 at 3:45 pm | Permalink

    We could argue at length whether BeFi is “bad faith, deeply wrong or dishonest.” Whether-or-not the idea of ‘nudges’ is silly – it does seem to encourage individuals (both plan sponsors and plan participants) to behave in a style that makes them better prepared (funded) at a normal retirement age. Silly? Perhaps. Dishonest? This charge skirts the topics of intent and fraud.

    There are repeatable experiments where “too many choices” stymie action. There are demonstrable differences in organ donation when opting-in versus defaulting-in. Bad faith? Deeply wrong? I doubt it. There is science behind how people behave.

    The real question is not, What neurons are firing or chemically charging in the brain, or What path the thought travels when navigating regions of the brain; but, What occurs within the mind to stimulate a highly predictable behavior when given too-many-choices? Or, calculating the damage-done when being defaulted into a long-term investment strategy.

    What we deliver as an industry, to a workforce who can benefit from a nudge, may not be perfect; however, it is far superior to what the masses have historically constructed for themselves.

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