- What would you do if you spotted a wild animal in your proximity?
- If you know that inflation forecasts were one per cent lower than actuals and commodity bundles would cost two per cent more than expected, how much more should you save every year so that your retirement quality of life is not compromised?
If you had quick answers to the first question but were not sure about the second, you are not alone! Several years ago, when our ancestors lived in rudimentary dwellings and had a barter economy, their decision-making primarily focused on questions like the first.
As our society has evolved and our economy has become more complex, we have to deal increasingly with questions about debt repayments, retirement savings, budgeting, mortgages and lines of credit.
And yet, the human brain has evolved over hundreds of years with the goal of survival. The more civilized and developed we have become, the more we are asking our brains and its associated apparatus to do what it was simply not designed to do.
Finance is non-intuitive for humans
Financial capability is one domain in which the inadequacies of humans are particularly stark. Changes in the financial landscape over the past 20 years have taxed our cognitive capabilities to new levels.
In the United States and elsewhere, the move to defined contribution pension plans rather than defined benefits has put citizens in the driver’s seat for making contribution and investment choices.