City Research Online

Mental Time Travel and Retirement Savings

Blake, D. ORCID: 0000-0002-2453-2090 and Pickles, J. (2021). Mental Time Travel and Retirement Savings. Journal of Risk and Financial Management, 14, 581. doi: 10.3390/jrfm14120581

Abstract

We portray the valuation of retirement savings in terms of a mental time travel journey in which a proposed contribution to a pension plan is projected forward to the plan member’s retirement date and this projected value is then discounted back to today, thereby giving a present or personal value. We set this within a broader framework of pension planning, which seeks to smooth consumption over the lifecycle. We explain how two psychological biases—exponential growth bias and present bias—can lead to a difference between the initial value of a pension contribution and its present value, such a difference reflecting an asymmetry between projection and discounting, and how such a difference might lead to inadequate retirement savings and hence to a lower than desired standard of living in retirement. We consider how the two biases might be mitigated.

Publication Type: Article
Additional Information: © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/).
Publisher Keywords: retirement savings; lifecycle model; financial investment valuation; mental time travel; time perception; projecting; exponential growth bias; discounting; present bias; symmetric; asymmetric; valuation
Subjects: B Philosophy. Psychology. Religion > BF Psychology
H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
Date available in CRO: 03 Dec 2021 14:29
Date deposited: 3 December 2021
Date of acceptance: 30 November 2021
Date of first online publication: 3 December 2021
URI: https://openaccess.city.ac.uk/id/eprint/27205
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