Influenced by cognitive and emotional biases, the attitude of the French towards this crucial stage of their lives rarely matches the significance of the challenge (source: Cercle des épargnants-Ipsos study). Yet, solutions do exist.
An article by Stéphane DOTHÉE, CEO of Odonatech and Co-founder of IFFEC - Institut Français de Finance et d'Économie Comportementales - featured in issue No. 881 of Revue Banque (June 2023).
The problem is primarily behavioral and is characterized by:
– A lack of knowledge. Many French people have not yet fully grasped the range of choices available to them for their retirement. They may underestimate the importance of saving regularly or diversifying their investments;
– Procrastination. This is quite common: many people delay setting up a retirement plan, believing they will have plenty of time later. However, it is essential to start saving early to benefit from the power of compound interest and to build a solid financial foundation;
– Excessive caution. The French save a lot (putting aside an average of 15% of their gross disposable income) but are conservative and tend to overlook long-term investment opportunities.
For a behavioral problem, there is a behavioral solution. Science offers solutions to the financial industry through behavioral finance. This discipline, situated between psychology and economics, helps to understand how individuals make financial decisions and outlines solutions to improve their behaviors. et économie, aide à comprendre comment les individus prennent des décisions financières et esquisse des solutions pour améliorer leurs comportements.
Some approaches could make all the difference. First and foremost, increasing awareness is crucial. By understanding the cognitive and emotional biases influencing individuals' decisions, we can tailor messages and information campaigns to make them more effective. We can also implement support strategies and risk management tools that are better suited to their needs.
Next, it is important to apply the principles of nudging to encourage behaviors that are beneficial for retirement planning. For example, increasing participation rates can be achieved by simplifying the process of enrolling in a supplementary retirement plan or by implementing opt-out systems rather than opt-in systems.
It is also essential to personalize financial advice. Each individual has unique preferences, goals, constraints, and motivations. A tailored approach is necessary. By using behavioral profiling techniques, we can provide customized advice and solutions.
Envisioning the Future thanks to an effective retirement planning
People need help envisioning their future. For example, have you ever tried to describe your "future self"? Studies show that interacting with this "future self" can lead to a better imagination of the future and more informed financial decisions to prepare for it, as demonstrated by a 2014 study conducted by the University of Melbourne*.
In the study, participants were divided into two groups. One group interacted with software that altered their photos to make them appear 70 years old, thereby visualizing a version of their "future self." The other group interacted with the software without any photo modifications. The group that saw an image of their "future self" tended to save more than the group that did not. Proof positive!
By integrating the financial and psychological aspects of decision-making, behavioral finance can help better understand and support savers in their retirement planning. It provides tools and strategies to overcome behavioral obstacles and encourage more suitable and effective financial behaviors, enabling advisors to help their clients better prepare for their future.
*« The Effects of Aging Imagery on Saving Behavior », Proceedings of the National Academy of Sciences, 2014.
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