optimism bias
‘Overestimating the probability of positive events and underestimating the probability of negative events’
‘Hyperbolic discounting’ explains why people may be tempted to take too much income. This bias may lead them to believe that their actions are justified! Maybe they anticipate higher than average investment returns or benign market conditions? Perhaps they’re underestimating how long they may live or the impact of inflation?
action
Clients need to be presented with the facts:
- Nearly 40% of Australians have exhausted their pension pot by 75. In the US pension savings typically last 17 years.
- A 65 year old man has a 75% probability of living to 83 and a 50% probability of living to 90. For a woman, the figures are 86 and 93.
- A £10,000 income 25 years ago would almost have to double in value to maintain the same purchasing value today. That’s during a period where inflation has been low by historic standards.