In praise of laziness
14 September 2018 | Garrett Harbron
Ever wonder why so many motivational speakers encourage hard work? Or why we even need motivational speakers? It’s because most of us are lazy. Yes, that’s a fact. We’re constantly putting off or avoiding difficult tasks and situations. That’s OK though, because contrary to what you probably heard in that TED talk, laziness isn’t always a bad thing.
In the jargon of behavioural finance, we call laziness the status quo bias. Status quo bias is the tendency of people to just allow things to remain the way they are, even if things aren’t all that great.
Take me, for example. I’m not terribly happy with my mobile provider (no, I’m not going to tell you who it is). They’re always trying to sell me something, and I never seem to have a good signal. Sometimes I feel like my phone is a tin can and someone’s taken my string . . . and my other can!
I could probably get better service through another provider, but it seems like an awful lot of trouble to switch. And would I really end up better off? What if I disliked my new provider even more? Then I would have gone to all that trouble just to be even less happy than I am now. Sometimes, the devil we know is preferable to the devil we don’t (I’m not saying mobile providers are the devil, but . . .).
That’s the status quo bias at work. And like politics, while status quo bias is often a source of evil in the world, used properly, it can also be a tremendous source of good.
A better retirement – thanks to status quo bias…
By the end of 2016, auto-enrolment had increased participation in occupational pension schemes by over five million members since it was introduced in late 2012.1 That could reach as high as ten million when auto-enrolment is fully implemented.2 Those members didn’t choose to enrol, but they didn’t bother opting out. That’s ten million people who will likely have a better retirement thanks to the status quo bias.
1Office for National Statistics, Occupational Pension Schemes Survey: UK, 2016,
2Department for Work and Pensions, Workplace pensions: Update of analysis on Automatic Enrolment 2016, 2016
Figure 1: Active membership of occupational pension schemes
Source: Vanguard, using data from the Office for National Statistics and Department for Work and Pensions.
…but don’t get caught out
Target date funds also make use of the status quo bias for good. Looking at occupational pension schemes in the US, we found that target date investors tend to trade in their accounts less than other investors – 98% of target date investors made no trades in their accounts during 2016 versus 88% of self-directed investors.3
Figure 2: US occupational pension members who did not trade in 2016
3 Vanguard, How America Saves 2018, Vanguard Group, Valley Forge (2018).
But 88%, that’s really good! Yes, 98% is better, but 88% is still pretty good, right? Well, it would be if it weren’t for one thing – rebalancing. When we say that 88% of self-directed investors didn’t make any trades, we mean they didn’t make any trades – at all.While target date funds rebalance internally with no trading necessary, self-directed investors must trade to rebalance. So what this really tells us is that 88% of self-directed investors don’t rebalance, while 100% of target date investors do (and 98% of them hold onto their target date funds).
Another, related, thing we found was that almost a third of self-directed members over the age of 55 had an equity allocation in excess of 80%. This compares to only 1% of those invested in target date funds. Some of this difference is due to the lack of rebalancing. Stocks tend to grow in value more quickly than bonds, so a portfolio that isn’t rebalanced will have an increasingly large equity allocation – until the next bear market rebalances it – rather abruptly and unpleasantly.
Figure 3: Proportion of US occupational pension members age 55+ with >80% equity
Fear the dark side…
There’s another reason for the high equity allocations among self-directed members. Members who have been in the scheme for a while probably started with a relatively aggressive asset allocation. They may know they should adopt a more conservative allocation as they near retirement but when should they start de-risking their portfolios? How quickly should they do it? What should they invest in? What if they get it wrong? With so many questions, the easiest thing for the member to do is nothing. And that’s exactly what many of them do. This results in members holding much more in equities than they should as they near retirement, potentially putting their retirement security at risk. This is the dark side of status quo bias.
…the bright side is nicer
But there’s a bright side, too. By defaulting members into target date funds, we can make status quo bias work for the member instead of against them. Target date funds automatically rebalance regularly, automatically de-risk over time, and once defaulted, members are unlikely to leave their target date funds. With target date funds as the scheme’s default, the majority of scheme members can be assured they always have an appropriate asset allocation, thanks to the status quo bias.
So, feel free to ignore all of those motivational speakers urging us all to industry and hard work. The status quo bias can get people to enrol in a pension scheme, make contributions, rebalance regularly and de-risk appropriately, all of which can lead to greater retirement security. See how wonderful laziness can be?
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