Squared Away Blog

August 30, 2011

Financial Decisions Wear Us Down

Are Americans suffering from financial-decision fatigue?

After the relative calm of rising financial markets though the 1980s and 1990s, Americans have lived through a series of booms and busts. First came the Internet boom of the late 1990s, which busted. Then the real estate market took off just as “emerging markets” plummeted. That was only a prelude to the worst financial-market collapse since the Great Depression. The stock market is now bouncing around like a bungee jumper.

Roiling markets in recent years have spurred decision after decision – about retirement, home buying, downsizing, mortgage refinancing, spending on large purchases such as a car, and where to find a good job.

Investors are advised to stick with a long-term plan and not react to every market fluctuation. In reality, there’s a history of research showing that dramatic gains and losses do cause people to change their behavior. Many Americans decided to abandon the stock market after the 2008-2009 decline, which pummeled 401(k) balances.

Researchers at Boston College’s Center for Retirement Research (CRR), which hosts this blog, identified a related set of decisions. The Center surveyed people who had lost 10 percent or more of their retirement savings: 57 percent decided to delay retirement, save more money, or both.

Decision fatigue is a daily occurrence for the millions of unemployed, under-employed, and Americans earning low incomes trying to make ends meet.

Researchers traditionally have seen “decision fatigue” when people must make many decisions within minutes or hours, depleting their mental energy. In one experiment, described in last week’s New York Times Magazine, researchers went into a mall and asked people to detail their shopping decisions that day and then asked them to solve some math problems.

Shoppers who had made more decisions gave up more quickly on the math problems. In another situation, a fiancée was asked to look through fabric swatches, buttons, and trimmings for his wedding suit.

“By the time I got through the third pile of swatches, I wanted to kill myself,” the Times quoted the man as saying.

Financial decisions are exhausting because they are far more complex. They also entail monumental emotional shifts that require us to give up on some options or head down a new path. Yet we have only a limited capacity to make decisions.

It could be that Americans, more than at any time in recent history, are suffering from financial decision fatigue.

To learn more about decision fatigue in everyday life, read the Times’ article.