The science of saving


The article below by Dan Martin from Prudential’s US business, Jackson, is a thought-provoking piece on the psychology of saving and the behaviours that can sometimes hinder us from putting money away for our retirement.

Your excuse for not saving just got “scienced”

By Dan Martin, Center for Financial Insight, Jackson

Now, as I love to do, let's start this guy off with a few stats. According to a 2015 study from the Employee Benefit Research Institute (EBRI), only 67 percent of U.S. respondents reported having saved money for retirement, with 61 percent of respondents reporting they are currently saving (at the time of the survey) for their golden years. Of all workers surveyed, almost two-thirds (64 percent) feel they are behind schedule when it comes to planning and saving for retirement.1

You've probably seen this data before, and while it's disappointing and discouraging, is it really that surprising? Maybe not, and here's why: It turns out that, in some ways, it's actually against our nature to save. And that, my friends, is according to good old-fashioned science.

Saving for retirement

The more we know, the more we can at least attempt to promote positive change.

Now, if you're a "glass half empty" or "glass completely empty" type, you might think behavioural findings discussing why humans have difficulty saving just proves your theory: "It's impossible to save money, so I don't even try." However, for the Glass Half Full crew, understanding the reasons behind why we make our excuses to avoid saving may be just the thing to help us overcome these challenges.

A wise Mortal Kombat arcade game once told me (right after Sub-Zero finished freezing my character's body into a block of ice, then punching it into a million pieces) that "Knowledge is Power," and I have to agree. The more we know, the more we can at least attempt to promote positive change.

Excuse 1 – I don’t have enough money to save

Let me be clear – for some of us, this is a valid excuse. If the money's not there, it's not there. For others, however, it may be the type of Catch-22 situation that we can attempt to reverse simply by understanding our behavioural tendencies. In other words, the old adage telling us that "the more we make, the more we spend," is actually deeply rooted in behavioural science.

One of the more useful qualities we have as human beings is our ability to quickly adapt to changing circumstances. For example, the early man (or woman) who came up with the idea to check out what was on the other side of the Bering Land Bridge near the end of the Ice Age is a great example of our resourcefulness (and it worked out pretty well for H. Sapiens over the long run).2

However, some experts like James Roberts, Professor of Marketing at Baylor University, believe that our adaptability may hinder us in terms of saving and spending.

He uses the example of a college student who wants to get out of his or her dorm, then moves into a rental house but gets tired of having roommates, then dreams of a small house, then a bigger house (and on and on from there) to show that our minds very quickly move on to the next step when we attain a goal or desire.3

The next big purchase

As this is likely an ancient evolutionary response, it would be extremely difficult to avoid feeling this way, but the impulse may be easier to control if you can understand the ‘why’ behind focusing on the 'next big purchase'.

Another reason behind our penchant to overspend and under-save is simply that we may have been seeing it (i.e. our parents) and doing it ourselves for an extended period of time. In other words, over time, we have fostered and intensified these bad habits which, as we all know, can be extremely difficult to break. However, some researchers believe that we have the ability to change almost any habit through repetition via a series of mental processes.

While you can be the judge of whether or not this might work for you, I would recommend picking up "The Power of Habit" by Charles Duhigg if you have a chance, as the book takes a serious look at habit formation and the science behind why we do what we do.

Besides the interesting case studies and frameworks, the heart of Duhigg's theory centres on the importance of simply understanding that habits can be broken:

"Once you understand that habits can change, you have the freedom – and the responsibility – to remake them. Once you understand that habits can be rebuilt, the power becomes easier to grasp, and the only option left is to get to work."4

The point? The negative habits and behaviours that keep you from saving money are not totally your fault (thanks a lot, science), but that doesn't mean you can't fight to overcome them!

Excuse 2 – Retirement (or other goals) is/are just too far in the future to focus on today

I was recently meeting friends at the National Western Stock Show in Denver, and when I arrived, I realised that I hadn't purchased tickets (and as a result, probably could have reached up and touched the roof from the nose-bleed seats I had to grab on-site). You may ask yourself, as I did:

"How did you not think to do the one thing you needed to do prior to attending that event?"

According to a recent study, the answer may be that I made the plans too far in advance (three months, which may actually be a personal record) for my brain to plan for that contingency. This story dovetails well with one of the most common excuses for retirement – investors just don't have the wherewithal to plan that far ahead. If three months seems like a lot, try 30 or 40 years on for size. Once again, however, it may not be productive to completely blame a lack of self-control or willpower, as this difficulty in looking forward can also potentially be explained by modern behavioural science.

Temporal construal

According to Dale Griffin, Associate Dean and Professor of Marketing at the Sauder School of Business at the University of British Columbia, we can look at "temporal construal" and "loss aversion" as potential behavioural biases that make it difficult to make good decisions about our future.

Griffin explains "temporal construal" as the tendency for far-off events to be mentally experienced differently than closer events:

"Events or ideas far off in time are thought of in abstract and general terms, with an unavoidable overlay of optimism; so thinking about yourself (or your children) in 40 or 50 years creates a mental image that is akin to pondering a vague, general, overly rosy idea rather than a detailed individual with real problems."5

In the same vein, studies on the theory of "temporal discounting," or the idea that individuals prefer more modest immediate rewards to larger potential future rewards,6 have shown that, in addition to having trouble seeing future events in clear focus, we have great difficulty in even attempting to imagine what our future selves will look and act like.

Temporal discounting

We are programmed to be more worried about future debt than what we might ‘gain’ for saving for retirement, which may result in attempting to pay off our mortgages or student loans more quickly, at the expense of building a retirement account.

One can see how these types of mental blocks can affect our ability to take saving for the future seriously in the present.

"Loss aversion," according to Griffin, is essentially the idea that humans are more likely to think about potential "losses" than potential "gains" in the long term. In other words, we are programmed to be more worried about future debt than what we might "gain" by saving for retirement, which may result in attempting to pay off our mortgages or student loans more quickly, at the expense of building a retirement account.5

However, the idea that repetitious activities in the present, such as monthly mortgage or student loan payments, can help our minds focus on making decisions to solve long-term challenges in the present, can offer a glimmer of hope from a savings perspective. Specifically, the idea that providing ourselves with short-term rewards or benchmarks (instead of trying to visualise a single "number" or long term goal), may be helpful in building a saving habit for the long-term, and can at least provide a place to start (or something to hang our collective hat on).

Specifically, the idea that providing ourselves with short-term rewards or benchmarks may be helpful in building a saving habit for the long term and can at least provide a place to start.

In addition, these findings may help us look at our tendency to not save enough (or save too much – yes, that's also a real thing) with a fresh perspective, and to consider fresh solutions. For example, instead of beating ourselves up because we fail to meet our saving goal for the third straight month, it might be time to try something new, such as the Merrill Edge® Face Retirement app that allows users to see a visual representation of themselves at different ages, along with information about how much cost of living and other consumer metrics will have increased by each age.

We're all different, but maybe seeing our faces at age 100 will allow us to break through the "temporal discounting" barrier and make the idea of ageing more real. In fact, according to Bank of America, 60 percent of the nearly 1 million people who have already used the app have chosen to learn more about retirement and are beginning to plan for the future.7

Or, because the causes we have discussed have roots in behaviour, perhaps grabbing a few articles on behavioural science will help provide some useful insights that you didn't have before. As with anything, what works for someone else might not work for you, so you may want to try a few different avenues to find out which behaviour-altering idea best fits your unique personality.

If you're looking for additional motivation, apparently male orangutans have shown the ability to make travel plans, and communicate these plans to others of their species.8 In addition, robots in Cornell's Personal Robotics Lab can now be programmed to refill coffee mugs when they begin to get low, representing an ability to foresee human action and adjust their behaviour accordingly.9 If they can do it, we can do it.

Excuse 3 – I can’t save money because I lost too much in 2008

As with excuse #1, there are certainly situations where this might be true, and if that's the case, it might make sense to craft your investment portfolio with the help of an advisor. All investing involves risk, and it's very easy to get yourself into an even worse situation than you may have been in before, especially if you are chasing high returns (the potential for which inherently come with additional risks).

For many others, and especially individuals in younger generations, the statement above is a prime example of the "sunk cost fallacy,"10 the very same behaviour that kept me sitting in the theater during the poorly-animated movie version of Beowulf instead of walking out after the first 20 minutes.

A "sunk cost" can be defined as any cost (not just monetary, but also time and effort) that has been paid already and cannot be recovered. The "sunk cost fallacy" is an extension of the human behaviour of "loss aversion" mentioned above, in that we are programmed to focus more on the costs we have already accrued (and that we can never get back) than the future experience we are putting our time, money or effort toward.10

The sunk cost fallacy

Thus, the more we invest in something, the harder it may be to let it go (even if it turns out to be a terrible investment). I'm sure that you can think of a time where you continued to stick with something for the sole reason that you had already put a lot of money or effort toward its completion – we all have. And to be clear, sometimes that can be a good thing (i.e. finishing your degree, climbing a difficult peak, etc.).

However, the "sunk cost fallacy" can become an issue with saving money, because subconsciously, our minds may be thinking about the money we have lost in the past and urging us to try to get that investment back.


It's going to take some effort.

The human brain is a powerful tool, and as such, each of the behaviours I mentioned will not be easy to counteract. Learning how these behaviours may affect you in a saving capacity is only the first step – the next is making sure to put in the effort on a daily basis to overcome these obstacles. However, because these behaviours are all propagated by the mind, simply understanding the "why" behind what we do is an important place to start. I believe in you, and know you can succeed.

1 Copeland, C., Helman, R. and VanDerhei, J. (2015). April 2015 Issue Brief – The 2015 Retirement Confidence Survey: Having a Retirement Savings Plan a Key Factor in Americans' Retirement Confidence. Employee Benefit Research Institute and Mathew Greenwald & Associates. Retrieved from

2 Elias, S. (March 4, 2014). First Americans Lived on Bering Land Bridge for Thousands of Years. Scientific American. Retrieved from

3 Williams, G. (October 21, 2013). Why Can't We Just Save More and Spend Less. MSN Money. Retrieved from

4 n.a. (2016). The Power of Habit: Charles Duhigg. Retrieved from

5 Griffin, D. (2016). Planning for the Future: On the Behavioral Economics of Living Longer. Prudential Challenge Lab. Retrieved from

6 n.a. (2015). Temporal Discounting. Psychlopedia. Retrieved from

7 Brandon, E. (February 26, 2014). New Merrill Edge® Mobile App Uses 3D Technology to Put Retirement Planning in Your Hands. U.S. Bank of America Newsroom. Retrieved from

8 n.a. (September 12, 2013). Orangutans Make Future Plans, A Behavior Once Thought Only Human. UPI. Retrieved from

9 Steele, B. (January 24, 2014). Think Ahead: Robots Anticipate Human Actions. Cornell Chronicle. Retrieved from

10 n.a. (2015). Behavioral Concepts: The Sunk Cost Fallacy. Behavioral Economics. Retrieved from

Investing involves risk including possible loss of principal.

The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.