It Doesn’t Have To Hurt
Government should use the lessons of behavioral economics to get us to invest more for retirement.
Aging Americans are facing a perfect storm when it comes to retirement. Many have done little saving over the past two decades and have now seen what they have saved, either in their 401(k) or their home equity, decline sharply in value. Once they face these facts, Americans will have to relearn the saving habit.
To figure out how, we need more than standard economic thinking, which is based on an idealized conception of behavior. Instead we need to focus on how people actually behave—a sensibility that defines the new field called “behavioral economics.” Traditional economists bestow upon humans the mind of a computer and the willpower of a saint; I like to call these imaginary creatures Econs. These Econs have no difficulty saving because they rationally calculate how much wealth they need for retirement, reduce their consumption accordingly and then invest optimally. Econs never splurge or speculate. But the world is not populated by Econs—and if we understand how humans really behave, we can come up with ways to get them saving again.
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