FROM THE EMPLOYEE BENEFITS SYSTEM
Individuals face a multitude of choices but do not have a clear grasp of the interconnectedness and implications of these decisions.
Financial education is not the answer. Not when, as Olivia Mitchell and Steve Utkus pointed out, “an individual would have to have the computing capability to solve many interrelated decades-long, time-value of money problems with massive uncertainties about their future earnings, health, tax rates, family composition and time of death” – to say nothing about knowing what the market levels or cost of living will be – to get it right. When most individuals are faced with this reality, the natural human response to decision making under these conditions is inertia – in other words, do nothing.
New insights
Given this dilemma, we believe there are still some useful guidelines that we can apply:
- We need to identify which decisions individuals need to make and how many are best managed by defaults, which preserve an individual’s sovereignty but guide outcomes more carefully. 'The Journey on Autopilot' deals with this discussion extensively.
- Wherever decisions have significant long-term consequences, translating those consequences into present-day terms is vital to getting to the right decision. This means developing tools that show individuals the trade-offs each decision represents. We discuss these in detail in 'The journey: Not just the end game'.
- Financial stress undermines effective decision making and makes financial education even less effective. However, there is an alternative: simple 12-step programmes that reduce the stigma of financial difficulties and provide an ongoing support system, which we discuss in 'Failure to launch'.
