The Relentless Now

In philosophy, presentism is the idea only the present exists. More loosely, it refers to a narrow focus on the conditions of the moment. Philosophy aside, anyone with even a bit of experience in the financial world will recognize presentism as an apt description of an affliction with which most humans suffer. We do not learn adequately from our past mistakes. We do not plan sufficiently for the future. Instead, we remain excessively fixated on the present and its incessant demands and distractions. Our focus, dangerous though it is, is understandable because, as Nobel laureate Daniel Kahneman has explained, “the long-term is not where life is lived.”

Because of a vicious circle involving tribalism, herding, excessive certainty, overconfidence, self-serving bias, our ideological nature, our propensity for confirming what we already believe as well as our general inability to see that which disconfirms it, and social proof, exacerbated by incessant noise (literal and figurative), this presentism is exceedingly hard to escape. In our lives and world, the relentless now may not be all that matters, but it matters far more than it should.

As Keri Russell’s character, Russian spy Elizabeth Jennings, in television’s best show, The Americans, told her teenaged daughter in the season three finale, after admitting that she had lied to her for her entire life, “Everybody lies, Paige — it’s a part of life. But we’re telling each other the truth now. That’s what’s important.” Elizabeth cannot dwell on her blood-soaked past or focus on the doomsday clock that counts down toward her future. She merely wants, as best she can, to get through today. Carpe diem indeed.

Among the places this presentism manifests itself is in our planning for the future. The problem begins with what Kahneman calls the “planning fallacy.” Our ability to control the future is extremely limited and is far more limited than we want to believe. It is our tendency to underestimate the time, costs, and risks of future actions and at the same time overestimate the benefits thereof. It is at least partly why we underestimate the likelihood of bad results. It is why we think it will not take us as long to accomplish something as it does. It is why projects tend to cost more than we expect. It is why the results we achieve are not as good as we expect. It is why I end up taking three separate trips to Home Depot on Saturdays and all day to finish household chores that “should” take 30 minutes.

As Adam Gopnik sagely pointed out in The New Yorker, “nothing works out as planned,” and “everything has unintentional consequences.” Indeed, “the best argument for reading history is not that it will show us the right thing to do in one case or the other, but rather that it will show us why even doing the right thing rarely works out.” In essence, then, what history generally “teaches” is how hard it is for anyone to control it, including the people who think they are making it.

There is much more to it than that, of course. Truly long-term thinking is difficult because the long-term feels light years away in the moment. To a greater or lesser extent, we all worship at the Church of What’s Happening Now, putting aside insufficient funds for future needs, kicking the can down a very short, dead end road.

With respect to our financial lives, we refuse to “dig deep.” Instead, as Flip Wilson recognizes, we are “fast on the lip and tight on the hip.” As with Reverend Leroy’s congregation, we need sufficient motivation and reasons to put more money into our “future” basket. We are all too ready to “Let it crawl.”

Many in our economy and in our world are dedicated to taking advantage of this broad tendency. Instant pleasures – both small and large, relatively innocent to catastrophic – surround us and are broadcast around us day and night.

It is remarkable how many of the problems we face in investing, financial planning and in life generally are attributable to our willingness, eagerness even, to think we have “got a good reason for taking the easy way out.” We pick what is easy, what is expedient, what pleases right now rather than what is best overall and for the long-term.

There are excellent bits of instruction available all around us, of course, that suggest – implore even – that we do things differently. It is simple common sense. There is Mr. Micawber’s famous, and oft-quoted, recipe for happiness from David Copperfield, by Charles Dickens: “Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” There is Blaise Pascal’s proclamation from his Pensées, a claim with solid empirical support: “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” The Book of Proverbs spells it out too: “Moderation is better than muscle, self-control better than political power” (Proverbs 16:32). Plato offered his own version: “the victory over self is of all victories the first and best while self-defeat is of all defeats at once the worst and the most shameful.” Even the Dalai Lama gets in on the act: “A disciplined mind leads to happiness, and an undisciplined mind leads to suffering.”

Despite all this good advice, as the Apostle Paul explains, we do not follow it very well. “I obviously need help! I realize that I don’t have what it takes. I can will it, but I can’t do it. I decide to do good, but I don’t really do it; I decide not to do bad, but then I do it anyway. My decisions, such as they are, don’t result in actions. Something has gone wrong deep within me and gets the better of me every time (Romans 7: 18-20). Or consider Dwight Howard, the prodigious basketball talent who has never come close to reaching his immense potential, and who recognizes that his failings are due to a lack of self-control. As he said recently, “one thing I’ve learned is that eventually, what you do off the court will affect what you do on the court.” As Paul implies and as Howard demonstrates, it is a deep and universal problem.

Watch the kids in the following video. They are part of a re-creation of psychologist Walter Mischel’s famous 1972 marshmallow experiment, which was designed to study children’s ability to defer gratification. In the actual experiment, the researchers analyzed how long each child resisted the temptation to eat a marshmallow placed in front of them in order to obtain a second marshmallow later and whether or not doing so was correlated with future success.

The kids’ struggles to hold out for the extra marshmallow are poignant and should hit home with each of us.

Over 600 children took part in the original experiment. A small minority ate the marshmallow immediately. Of those who attempted to wait, less than one-third deferred gratification long enough to get the second marshmallow. The others struggled to resist temptation and held out for an average of less than three minutes. Any of us struggling to lose weight or just to eat right will surely relate.¹ For most of us, most of the time, a bird in the hand is deemed better than two in the bush, no matter how likely we are to acquire the two later.²

Not surprisingly, having self-control is a big benefit. The children who waited and got the second marshmallow did better later in life. A follow-up study conducted years later showed that “preschool children who delayed gratification longer in the self-imposed delay paradigm, were described more than 10 years later by their parents as adolescents who were significantly more competent.” A second follow-up study showed that the ability to delay gratification also correlated with higher SAT scores (over two hundred points higher, on average). Overall, those children that were more able to delay gratification with greater self-control tended to have life outcomes that were better, as measured by SAT scores, educational achievement, BMI values, substance abuse, social skills and more.

Obviously, the ability to delay gratification is an adult concern too. Retirement planning may be our supreme test in this regard. Adults are asked to put money aside for decades instead of spending it for (seemingly?) important or fun stuff now in order to fund an unknown, uncertain and often far-off future. We are not very good at this hyperbolic discounting.

We who focus on retirement planning spend a lot of time and energy considering such things as asset allocation plans, decumulation strategies and needs analysis. But we spend far too little time and energy on the most important factor of all — how much money is saved and how to save it. As my friend Wade Pfau succinctly points out in his seminal paper, Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle, “[t]he focus of retirement planning should be on the savings rate rather than the withdrawal rate.” Put another way, “someone saving at her ‘safe savings rate’ will likely be able to finance her intended [retirement] expenditures regardless of her actual wealth accumulation and withdrawal rate.” Using Wade’s analysis, these “safe savings rates” generally range from 9.3 percent to 16.6 percent over 30 years under various sets of market conditions. Simply put, we should all be maxing-out out our defined contribution plans (usually a 401(k)) every year of our working lives and leaving the money untouched until retirement.

Unfortunately, few of us are able to delay gratification sufficiently to save at anything like those rates. The 2017 Retirement Confidence Survey from EBRI once again shows just how poorly we are doing.

• Nearly 40 percent of workers have not saved at all for retirement.
• Only 56 percent of workers are currently saving for retirement.
• Nearly 50 percent of workers have less than $25,000 in savings and investments (24 percent have less than $1,000).
• Four in ten workers report they have not done a retirement needs calculation.
• Workers dramatically underestimate how much money they will need for a comfortable retirement.
• Only 18 percent of workers are “very confident” of their ability to accumulate the savings needed for retirement.
• Just 24 percent report that they have obtained investment advice from a financial advisor professional.

For decades, psychologists focused on raw intelligence as the most important variable when it comes to predicting success in life. However, the marshmallow experiment shows that intelligence is largely at the mercy of self-control. Even the smartest kids still need to do their homework. The most talented athletes need to train.

But whether we’re talking about our kids or about retirement saving, what can we do about the I want to eat the marshmallow now problem?

Mischel’s conclusion was that the crucial skill is the “strategic allocation of attention.” Instead of getting obsessed with the marshmallow — the “hot stimulus” — the patient children distracted themselves by covering their eyes, pretending to play hide-and-seek underneath the desk, or singing songs from Sesame Street. Their desire was not defeated — it was merely displaced. If you are on a diet, do not keep potato chips in the house.³

Mischel and his colleagues later taught children a simple set of mental tricks to deal with the problem, such as pretending that the candy is only a picture, surrounded by an imaginary frame. These techniques dramatically improved their self-control. The kids who had not been able to wait sixty seconds could now wait fifteen minutes. “All I’ve done is given them some tips from their mental user manual,” Mischel said. “Once you realize that will power is just a matter of learning how to control your attention and thoughts, you can really begin to increase it.”

University of Pennsylvania psychologist Angela Lee Duckworth looked at the relationship between self-control and grade point average among eighth graders who were given a choice between a dollar right away or two dollars the following week. She discovered that the ability to delay gratification was a far better predictor of academic performance than IQ. She said that her study shows that “intelligence is really important, but it’s still not as important as self-control.”

So if we are talking about retirement planning, how do we avoid “thinking about the marshmallow” and thus save more?

Happily, more information about self-control and our difficulties in exercising it can help to a significant degree. However, awareness and education are not nearly good enough. Employers should get serious about an Investment Policy Statement and a formal Investment Policy Committee. The goals should be (a) better (often fewer) investment options; and (b) better education among the Committee members then transmitted intentionally to the workforce as a whole. A competent professional should also be brought on-site regularly to provide education on company time. Doing so will increase success, knowledge and participation and will meet the employer’s fiduciary obligation to boot.

Odysseus, wishing to hear the singing of the Sirens but fearing their powers, bound himself to his ship’s mast to prevent being seduced by them to steer it into the dangerous shoals. Like Odysseus, we may prospectively adopt strategies to reduce the likelihood of confronting temptation and to decrease the likelihood of indulging in temptation when it is encountered. For example, people deposit money into “Christmas club accounts” that pay no interest yet charge early withdrawal fees. As Tim Ferriss explains, “creating systems that make it next to impossible to misbehave is more reliable than self-control.”

Accordingly, since many workers decline to enroll in their defined contribution plans and since many fewer people will opt-out than will choose not to opt-in — doing nothing is a crucial default (see here, for example) – Congress enacted the Pension Protection Act of 2006 in part to permit employers automatically to enroll workers in 401(k) savings plans. Employers should do so. In that scenario, inertia works in favor of savings. Moreover, many of us do not fret much about this type of withholding — out of sight, out of mind — making it easier for us to stick with it.

Employers might also consider higher default withholding percentages and using contribution matches (or better yet, increased contribution matches) as employee incentives and rewards to get even better results. As Duke’s Dan Ariely (author of the best-selling Predictably Irrational, among others) told me, “we know that if we relied on our mediocre cognitive ability and thinking and demanded that every month we make this decision, the odds are we will never make this decision. Or at least we’ll make it very infrequently. So by creating a system that takes this decision out of our hands we actually do much better.”

One obvious possibility is simply to spend less while making and keeping to a budget. Some other related suggestions from Dr. Ariely are here. Unfortunately, once we start spending at a given rate, it can be hard to consume less. Thus, the idea that workers should just decide to contribute more is not all that realistic overall, even for those who understand the value of doing so. One technique for increasing contributions is to do so when one’s salary increases via a raise or a promotion. If one gets a four percent raise, increasing one’s DC plan withholding by two percent would be a meaningful improvement to retirement planning while still providing the feeling of a raise since take-home pay would still increase. The impact of even relatively minimal increased withholding can be dramatic. For example, a worker who earns $50,000 per year with four percent annual raises, a six percent employer match and an annual return on investments of seven percent, by reducing his or her weekly paycheck by a mere $16 and appropriating that money to a 401(k), would set aside about $250,000 more for retirement over 30 years. Compound interest is a wonder.

“If you’re thinking about the marshmallow and how delicious it is, then you’re going to eat it,” Mischel says. “The key is to avoid thinking about it in the first place.” Indeed, “[i]f you can deal with hot emotions, then you can study for the SAT instead of watching television,” Mischel says. “And you can save more money for retirement. It’s not just about marshmallows.”

 

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¹ More than 700 million people, including more than 100 million children, are obese worldwide, and obesity has doubled since 1980. Today, roughly two out of three Americans is obese. In this respect, Meat Loaf is dead wrong – two out of three is really, really bad. Moreover, within five years of having lost weight, 95 percent of dieters will regain all the weight they lost, and most will gain a few extra pounds as well. We are not any better at exercise either. According to the Centers for Disease Control and Prevention, only 1 in 5 American adults meets recommended physical activity levels. Many of us want to do better. Accordingly, we buy elliptical machines, sign up for yoga classes, and join the gym.

However, like Chandler, many of us are gym members who plan to go four times a week but have missed the last 1200 times. The sad truth is that, for many, even gym members cannot be paid to work out. Before the study began, participants said they planned to visit the gym an average of three times each week. Reality looked a bit different. People in the control group started out fine, going 1.5 times per week, but by the end of the study they were down to once a week. The folks in the incentive groups did not fare much better. They averaged 1.73 weekly visits during their second week, but tapered to a single weekly workout by the end of the study period. After the six weeks ended, all four groups’ attendance declined even further.

² There is broad research support for the idea that people prefer smaller immediate rewards over larger delayed rewards to their economic disadvantage. Moreover, the more abstract the future reward (e.g., a “better retirement’), the harder it is to delay gratification, and the greater the cognitive load, the harder it is to resist temptation.

³  Most mainstream behavior change programs follow this approach, but it can be hard to maintain over the long haul, which is why even successful dieters often end up gaining the weight back. Acceptance and Commitment Therapy is very promising in this regard. The idea is that one having a craving should say aloud, “I am noticing I am having the thought that I have a craving to smoke right now.” This mindfulness approach helps the subject acknowledge and prioritize the available choices. Commitment contracts and accountability partners can also help.