What Must We Learn in Order to Retire?

During the first half of May François Gadenne stepped into my blogger role and contributed ten wonderful essays that offered a vision for future of retirement as well as RIIA’s role in helping to define that future. I’ve asked François to continue to contribute to this blog as his great insight benefits all who visit here. Today he presents the first in a multi-part series that asks, “What must we learn in order to retire?

Human Nature was forged in an environment that is not the environment we currently live in. Today we live in abundance when human nature was forged in scarcity. We live in a world where food can be preserved and stored in great quantity. We evolved in a world where the currency of the day, food, lost its value quickly as it spoiled.

The good news is that in addition to evolving slowly, humans are also fast learners. Learning improves adaptation when the environment moves faster than can be accommodated by the slow speed of evolution through natural selection. Learning is an effort to make sense of the realities of the past and of the possibilities of the future as they can be understood in the present.

Learning is what we do when we drive a new car. There are lessons that each one of us must learn and re-learn individually when we drive a new car. For instance, where and how large are the blind spots with this new car? It we learn where the blind spots are fast enough and systematically enough, we may have fewer accidents.

Since the financial environment changes, each generation will learn and remember different lessons. Some lessons may work well for a while and clearly become less valuable at other points in time. Might there be lessons that we need to learn or re-learn in order to retire?

For starters, we may want to learn about our Behavioral Finance blind-spots:

• We have limited self-control. We suffer from over-confidence and we over-react. Life is a succession of over-shooting and under-shooting the ideal behaviors.
• Not only do we lack self-control, we can be manipulated in ways that we do not perceive. We are subject to Framing Errors such as Contextual Norms, Mental Accounts, Statistical Errors, etc.
• We are also subject to Aversions such as Regret and Loss.

The good news is that forewarned is forearmed. Learning about Behavioral Finance can give us enough self-knowledge to be aware of some of our financial blind spots. We learn about blind spots quickly, one way or another, when driving a new car. When is the last time that your financial blind spots caused you to make a bad decision? Are you learning fast enough?

Each new generation must learn and re-learn some of the lessons of the past as well as some new lessons. The next few posts will explore what such lessons may be for those of us who plan to retire.

To be continued…

©Copyright 2007 David A. Macchia. All rights reserved.