In this guide
Have you ever wished you could do better with your super but don’t know where to turn? As the saying goes, it’s not what you know but who you know.
But what if that who is you?
It turns out self-knowledge is as powerful as investment knowledge when it comes to important decisions around superannuation and retirement.
That’s where the field of behavioural finance can help us understand some of the unconscious mental mistakes we tend to make when faced with complex information, and the regrettable actions that follow. Things like panic selling, overconfidence in our financial smarts and living below our means in fear of running out of money.
Good to know
While traditional economics assumes that people are rational and will always act in their best interests, behavioural finance accepts that we are all human and prone to common cognitive biases that affect our decision-making.
By recognising these biases in ourselves we are less likely to make common mistakes that can hinder our ability to reach our financial goals.
Decisions, decisions
Most people understand the importance of planning ahead to achieve a financially secure retirement, beginning with your choice of super fund and investment options.
As retirement approaches, more big decisions need to be made. How should we invest our nest egg? Pension or lump sum? Will we outlive our savings?
Thanks to the complexity of super and our retirement system, not to mention the uncertainty around investment markets and our own mortality, these are not easy decisions and mistakes can be costly.
Associate professor Andrew Grant, a behavioural finance researcher at University of Sydney Business School, says that unlike buying a car or choosing a mobile plan, retiring is something we generally only do once. We don’t get to learn from our mistakes and do better next time.
Cognitive overload
Unfortunately, government and the superannuation industry often point the finger at consumers and assume that more information will solve the problem.
“Information alone is not enough to get people to act,” says Dr Di Johnson, senior lecturer at Griffith Business School.
This is highlighted by the relatively low number of people who switch funds after the annual Australian Prudential Regulation Authority (APRA) performance tests. For example, fewer than one fifth of members of funds that failed the test in 2021 switched into new funds. As at June 2022, over 600,000 members were in underperforming MySuper products and 550,000 of those were in super products that failed the performance test twice.
Johnson suspects cognitive overload may be partly to blame. “People tend to become overwhelmed by large amounts of information, leading to delay or not taking action. Inertia kicks in hard, particularly with complex, high-stakes choices,” she says.
“Status quo bias – our tendency to favour the status quo particularly if change takes some effort or has an unknown pathway – is probably at play with people who aren’t switching from underperforming funds,” she says.
It’s also possible that the size of your super balance will influence your decision-making. If your balance is relatively low, Johnson says the opportunity cost of not acting on information – such as your fund failing APRA’s performance test – is lower than it would be if your balance were substantial.
6 common cognitive biases
Different cognitive biases tend to come to the fore at certain points in the economic and investment cycle. These days, investors are grappling with rising inflation, high interest rates, market volatility and possible recession. That’s enough to make anyone anxious, and anxiety can lead to poor decision-making.
The following are some common cognitive biases to guard against.
