Why Humans Don’t Want to Save

| March 10, 2011 | 0 Comments

Research (1) shows that humans are just not programmed to make sound financial decisions. The poor financial decision-making ability of humans can be boiled down to two basic causes:

  • We do not understand basic economics
  • We cannot resist immediate gratification

As a result, human saving and retirement accounts will continue to flounder despite the growing volumes of financial literature published each year.


The Geico Caveman has wasted his savings on a pool and ipod speakers

Resisting Temptation

Certainly these traits are not exhibited by everyone. If that were the case, we would not have successful investors or thriving retirees. There are many among us who have a terrific grasp of economics and others who always avoid immediate gratification. What is different about them? These people have are able to ignore their innate human impulses through education and practice.

We use the same concept of resisting natural urges in many other areas of our life. The wise person has learned to use judgment and moderation to avoid many natural urges:

  1. Avoid physical altercation during a disagreement (despite how satisfying a punch would be)
  2. Avoid eating when your stomach feels full (despite how satisfying another steak would be)
  3. Avoid another cocktail when you have had a few (despite how enjoyable they are)

There may be a time when you should throw a punch or when you decide to celebrate and buy the 32 ounce steak. The important part is these occasions are few and far between. The wise person minimizes this behavior because of the poor long-term effects. The person who fights every time they have a disagreement will end up lonely and injured. Likewise, the person who eats a 32 ounce steak at every meal will probably die young because their arteries clog and the have a heart attack.

Long-Term Humans Need Long-Term Finances

Donald Trump Steaks

The Donald is a "long-term human." Doesn't eat the steaks; just points and smiles

Unless you plan on being a “short-term human” like our fighter and steak-loving friends above, you need to learn about economics and resist immediate gratification. This goes beyond common impulses of buying new clothes or the morning latte. There are much more strategic investment decisions that we are avoiding or getting wrong due to human nature.

Employers continue to pass financial responsibility to the employees, meaning we have to make financial decisions in our own best interest. Far too many people are accepting the urge of immediate satisfaction and avoid saving money. These people accept the default retirement options established by their employers and do not consider the opportunity cost of the money they’re wasting.

Employees need to know how to determine which health plan offers the right coverage without wasting money an unnecessarily high premium or “use it or lose it” flexible spending account. Employees also need to understand how much they should be putting away and how to structure investments in the 401(k) plan offered by their employer.

The Modern Saver offers educational financial articles and other online resources to help manage the increasing burden of financial decisions. Watch for future posts to cover methods to analyze health care plans, retirement account options and much more. Until then, keep reading!



1. http://www.nber.org/papers/w16740

Related Posts:

Tags: , , , ,

Category: Saving

Comments (0)

Trackback URL | Comments RSS Feed

There are no comments yet. Why not be the first to speak your mind.

Leave a Reply