So it always comes as a surprise to learn we're not. It shouldn't, given the steady parade of evidence for our irrationality - from the classic cases of popular madness to the current price of Google stock. But against what we know to be true, we continue to "think" the ordinary rules of the universe don't always apply to us. We think we can time the market, defy the odds, beat the system. We might even bet that George Mason will make it to the NCAA Final Four. (Oops, that one worked out.)
There's even a strain of scholarly research devoted to creating rational models for irrationality. When applied to investment, this effort is known as behavioral finance. But irrationality is a matter of more than academic interest. When it applies to 401(k) investing, it's a national crisis.
According to a recent report from The Center for Retirement Research at Boston College, the growth of 401(k) plans has created a potential disaster by shifting the risk and responsibility for retirement saving from the employer to the employee. The problem is that many employees make mistakes at almost every decision point: they fail to participate, contribute too little, diversify inadequately, invest too heavily in company stock, don't rebalance regularly - and the real killer, they tend to cash out when they change jobs.
None of this should surprise anyone who follows retirement plan issues. But why do so many people behave so irrationally - that is, against their own interests - about something so important? After all the investor education we've handed out, can employees really be unaware of what they're doing?
Perhaps not. As the saying goes, the only thing worse than ignorance is apathy. What about those who flat-out know they're in trouble - and do nothing? One disturbing example may be found in the disappointing sales of Lee Eisenberg's "The Number," a much-hyped book about retirement investing pitched mainly at Baby Boomers. According to a recent review in the Wall Street Journal, the book's dreadful sales provoked much speculation in the publishing community.
The consensus explanation is simply that people don't want to think about retirement. Boomers are (rightly) afraid they'll never have enough money for retirement, so they don't want to learn what that "magic number" might be. According to Lorraine Shanley, a principal with marketing consulting firm Market Partners International, "There could be an issue of denial here. It's like going to the doctor: When you should confront it and when you do confront it aren't necessarily simultaneous experiences." Given that we don't want to face the music, it's not hard to explain why an exploration of how "the average American's ignorance about money is a source of constant amazement" - even a smart and funny one - doesn't sell.
So perhaps the rabbit hole of irrational behavior goes even deeper. Maybe the typical under-invested employee isn't just clueless or careless. Maybe these folks are deeply, intractably irrational - not just in the financial decisions they make, but in the ones they refuse to make.
If you've been with us for more than a few issues of this newsletter, you can guess where I'm going this time. Education won't work. Advice won't work for those who won't take it. As the Boston College study pointed out, the light at the end of the tunnel is provided by automatic enrollment, default contribution increases, and long-term managed accounts.
If there's a lesson in all this, I think it's to realize just what we're up against. To use a public health metaphor, trying to reduce the "investment gap" in 401(k) is more like fighting an epidemic than rearranging the food groups. If all those involved don't act quickly and aggressively, the consequences could get a lot worse.