Rational Inertia

It can sometimes be reasonable when people neglect the investment of their savings / Those who are principally reluctant to spend time on investment issues should consider a financial advisor

Most people tend to suppress thoughts about the investment of their savings. The variety of financial products and investment options is becoming ever broader and more complex so that many shy away from the effort to dig into the issue and stay regularly informed. A number of recent studies has shown that up to three third of private investors do not change a once taken investment decision for years.

Why are most people so surprisingly idle although they know how important private provisions are to maintain their standard of living in old age? Raimond Maurer (Goethe University), Hugh Hoikwang Kim (University of Seoul) and Olivia Mitchell (University of Pennsylvania) have dealt with this question in a recent publication, forthcoming in the Journal of Financial Economics. They show that, depending on age and life situation, it can be rational to neglect investment issues.

According to their findings, younger people, who usually have only little savings, should better spend their time on advancing their career. Also, it can be reasonable not to actively engage in trading one’s financial assets later in retirement when decision making efficiency decreases. These results are consistent with empirical evidence: while middle-aged and newly-retired individuals spend the most time on managing their portfolios, young and old people take care of these issues the least. However, even a large share of middle-agers exhibit investment inertia although increasing savings and lower opportunity costs suggest a more intensive dealing with financial investments in these periods of life.

People who generally prefer not to spend their time on financial decisions would benefit from contracting a professional investment advisor, Raimond Maurer states. According to his calculations, every investor could increase her yearly consumption options by one percent when doing so. “Good investment advice enables people of every age to optimally deal with their savings and, at the same time, to save their scarcest resource – time – for their job, family or leisure activities,” the economist says. As a consequence, it could be economically reasonable to reduce hurdles, such as too high minimum fees, that especially keep people with little savings from consulting an advisor. Also, suitable standard products for the savings and payment phase could help to not only overcome the definitely rational inertia of many individuals but also to use it for a wider distribution of fully-funded old-age provision, Maurer says.