Psychological is explained by the fact that individuals

Topic: CultureStudy of Cultural Differences
Sample donated:
Last updated: September 11, 2019

Psychological vulnerability leadspeople to procrastinate. Procrastination is a psychological state that makespeople desist from carrying out tasks or making decisions by systematicallypostponing deadlines. To make matters worse, the greater the task or thedecision, the more they procrastinate. When they have no alternative left butto tackle the problem, it is too late to solve it adequately.  Although people realize that postponingretirement-related decisions carries future costs (to pension income), theimmediate cost to be incurred in terms of time and effort encouragesindividuals to avoid the planning.  Thetemporal distance between retirement and more immediate tasks lead people towhat is known as temporal discounting (Raaij). This refers to people’s tendencyto prefer immediate rewards to rewards more distant in time.

Temporaldiscounting is explained by the fact that individuals attribute more value to areward obtained immediately than to a greater reward obtained later. Currentpleasures prevail over future benefits. For example, a consumer will usuallyprefer $500 now to $520 in a month’s time. Waiting a month for $20 more is notperceived as a sufficient trade-off. The satisfaction derived from theimmediate reward is overweighed. People’s preference for immediate rewards declines and eventuallyreverses as the time horizon lengthens. The further a reward lies in thefuture, the less value is attributed to it.

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If the person is offered $500 insix months or $520 in seven months, they will choose the second option.  People would rather have some money to spendnow (in restaurants, the movies, long-weekend holidays, etc.) than postponeconsumption in favor of a better pension income (a reward obtained in twenty-or thirty-year time).

The tendency to prefer a modest reward now rather than anticipatinga more significant return in the future can be disastrous for saving towardretirement.

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