Adarsh Gopalakrishnan

What hurts retirement savings?

Adarsh Gopalakrishnan | Updated on November 17, 2011


With complex financial products, being patient and asking whether the numbers and performance being touted make sense, will help yield better returns.

As an investor, do you have an urge to check on your portfolio every day? Are you glued to the stock market ticker on television? If so, watch out! Your retirement savings may suffer! In a paper titled “How financial literacy and impatience shape retirement wealth and investment behaviours” (Working Paper 16740,, the authors Justine Hastings and Olivia Mitchell take a good look at two abstract factors which are often blamed for bad financial decisions — impatience and lack of financial literacy.

Both factors have lent themselves to some pithy aphorisms and catchy phrases. In the academic sphere, they are relegated for study to behavioural economists. The authors of this paper utilise data from the Chilean Social Protection Survey to find out how seeking quick financial gratification or being financially illiterate can impact your investment decisions.

Patience and literacy

To cut to the chase, the authors' results basically state that “our measure of impatience is a strong predictor of retirement saving and investment in health. Simply put, the more antsy you are in seeing your investment choices give you a pot of gold today, the smaller your pot of gold is likely to be when you call it a day.

As for financial literacy, the authors say it is “correlated with accumulated retirement saving though it appears to be a weaker predictor of sensitivity to framing in investment decisions.” Basically, how little you know about investment products will affect your investment results.

How it was done

A simple questionnaire was given to around 14,000 participants to gauge their understanding of basic financial concepts such as simple division, compounding interest, inflation and risk diversification. The authors constructed a simple financial literacy index from these results to gauge how well-placed the participants were to make simple financial decisions.

The results were not too earth-shaking. Younger people and men scored better on the tests. The more educated one is, the more likely they were to give the right answers. The more one earned, the more likely they were to give right answers. Those who understood the concept of compound interest were likely to be richer and healthier than the averages. On a depressing note, only 154 out of 8,000 people got the answer right on the compounding interest question.

Long story short, brush up on some basic math, it could mean better investment results and a raise in your current job. At the very least, you could better question and derail some of those number-spouting financial advisors touting ULIP or MF performance over six months as a reason to buy!

A slightly more complicated exercise involved asking participants to rank pension funds based on the information on their returns and costs over a ten-year period. This was to gauge if participants with good scores on the financial literacy index would also be really good at ranking pension funds.

To test how malleable investors are to presentation, they were presented with the potential profits to be made from choosing the better performer or the losses from choosing the underperformer. Presenting the gain potential helped more people choose a profitable pension fund manager.

This spread narrows when it comes to choosing the least expensive pension fund. And just to show how agnostic profits can be, the authors note that ‘quantitatively, showing participants a Gain worksheet has an impact as large as the impact of having a post-secondary education.'

Patience works

The experiment for determining how impatient the participant was for enjoying the fruits of an investment were rather simple and elegant. In exchange for filling out a gift card, participants were given a gift card which could redeemed for 5,000 pesos immediately or for a value between 6000 and 8000 pesos when mailed back over the next four weeks. “For many people, then, behaviour in the Game is related to successful outcomes in retirement saving accumulations, as well as in health behaviours and health investments. This suggests that the Game discriminates who is efficaciously patient — those who can make forward-looking financial plans and follow through.”

The authors present oodles of data and inference for how education levels, age, sex, knowledge of basic financial concepts and temperament come together to determine how effective you are at building an investment corpus. From a regulatory standpoint, the authors note that “that participant awareness of higher net-return funds can be greatly enhanced when information on fees is simplified in terms of likely gains from selecting higher net return funds.”

In a nutshell, with increasingly complex financial products and mushrooming asset classes, being patient and asking whether the numbers and performance being touted make sense, will help in yielding better investment returns in the long run.

Published on February 13, 2011

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