Recently, when I sat down with Ajit Menon, the CEO of PGIM India Mutual Fund, something he said about retirement nudged me to think more deeply about the inevitable milestone. “Sagneet, we don’t get a conventional loan for retirement. Saving for it from the day we start earning is crucial,” he said. This one sentence, I believe, would prod every single reader.
In the list of many crucial decisions we take each day, around our finances, most of us forget or defer the thought around retirement and how to plan it. This is present bias, a behavioural tendency we all humans have and also known as the inclination to excessively fixate on the ‘here and now,’ and don’t think about what will happen in the long term.
Two German researchers, Alejandro Moreno-Okuno and Natividad Aguilera Navarrete described ‘psychological distance’ as a central concept explaining present bias, which means how near or far things feel in our minds. Plans for the near future, such as an upcoming vacation, are vividly detailed and occupy a significant portion of our thoughts. In contrast, plans for the distant future, like retirement, often lack clarity, existing as mere outlines. We tend to ‘discount’ things that seem psychologically distant and far off in time, thus diminishing their importance in our minds, so we delay taking decisions around them.
Another significant contributor to present bias is ‘instant gratification’, first quoted by Sigmund Freud, the Austrian neurologist and founder of psychoanalysis. He explained it as the pleasure principle,-a desire for and pursuit of immediate rewards or pleasures, often at the expense of long-term goals, even when they offer greater benefits. We all see ourselves gratified instantly, from choosing to eat a tasty but unhealthy snack instead of maintaining a balanced diet to opting for immediate spending on non-essential items rather than saving for our future financial security.
Many might feel their thinking is flawed, but experiencing present bias is a widespread aspect of human cognition. In a 2020 study, I led at Morningstar, we investigated how behavioural biases impact financial decision making. Our findings showed that 97% of over 1,200 US participants exhibited significant signs of present bias, affecting their financial stability. This tendency cut across professions, education levels, and income brackets, leading to overspending, inadequate savings, increased debt and a lack of inclination to save, invest or plan for the future compared to those with lesser present bias tendencies. A similar study with Indian participants is expected to yield comparable results.
Thus, present bias oriented mindset can tempt even the most decerning investors to forsake established long term strategies in favour of immediate gratification by short term emotions and desires.
Are Indians Ready For Retirement?
A recent survey done by PGIM India Mutual Fund with Nielsen IQ found that 67% of Indians compared to 49% in their 2020 survey, considered themselves ready for retirement, with a plan in place. The numbers are undeniably motivating.
The pandemic and economic challenges have increased retirement planning awareness among Indians due to harsh personal experiences or witnessing close ones facing sudden financial challenges. This has prompted individuals to consider their own financial security more seriously.
Today, Indians are seeking control over their finances without compromising their aspirations. Furthermore, retirement has evolved beyond fulfilling family obligations to encompass personal growth and wellbeing, with people now viewing it as an opportunity to nurture their identity, explore their interests and enjoy a better quality of life.
However, Indians seem to need a bit more footing to help them plan for their retirement as many Indians rely on fixed deposits and insurance for retirement planning, often seeing advice from insurance agents as sufficient. About two thirds consult these agents, while only 16% with a written plan vetted their plan with a registered financial advisor.
The upsurge in retirement planning among Indians mirrors a growing appreciation for sustained financial security. Yet, unlocking greater momentum hinges on confronting present bias. Acknowledging the state of readiness, employing behavioural nudges, seeking expert financial advice can triumph over this obstacle.
Sagneet Kaur is senior vice president, behavioural finance & consumer insights, PGIM India Mutual Fund.
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Updated: 30 Nov 2023, 10:27 PM IST