Self-Control Bias: Why You Spend Today Instead of Saving for Retirement

So here is what happened: I read this chapter about self-control bias and immediately thought about every time I bought something I did not really need instead of putting that money into savings. This one hits close to home for pretty much everyone.

Self-control bias is different from the other biases we have covered so far. It is not really about making bad investment decisions with your existing money. It is about never having enough money to invest in the first place because you keep spending it.

The Basic Problem

Put simply, self-control bias is when you fail to pursue your long-term goals because you lack discipline. You want to save for retirement. You know you should save for retirement. But that new phone, that vacation, that fancy car… they are right here, right now. And retirement is decades away.

Pompian gives a good example with taxes. Imagine you know you will owe an extra $3,600 in taxes next year. You could save $300 per month in a savings account (and earn interest on it). Or you could just increase your tax withholding by $300 per month (and not earn interest). Rationally, the savings account is better. But many people choose the withholding option because they know themselves well enough to admit: “If that money is in my savings account, I will probably spend it on something else.”

That is self-awareness about self-control bias. And honestly, choosing withholding might be the smarter move even though it is technically irrational. Sometimes you need to protect yourself from yourself.

The Life-Cycle Hypothesis

Pompian explains self-control through the lens of what economists call the “life-cycle hypothesis.” The basic idea is pretty intuitive:

You earn little when you are young. Your income grows and peaks before retirement. Then income drops significantly during retirement. To avoid a massive lifestyle crash when you retire, you need to save during your working years. The rational plan is a smooth consumption path over your lifetime.

But here’s the problem. Two competing desires make this hard:

1. You want to consume as much as possible right now (higher standard of living)
2. You want to maintain a stable standard of living over time (no dramatic drops)

These two goals are in constant conflict. And self-control bias tilts the balance toward “spend now.”

Mental Accounting and the Behavioral Life Cycle

Richard Thaler and Hersh Shefrin introduced a behavioral version of the life-cycle hypothesis that accounts for how people actually behave. The key insight is that people treat different types of money differently, even though rationally, a dollar is a dollar.

They identified three “mental accounts”:

• Current income (your paycheck this month)
• Current assets (your savings and investments)
• Future income (money you expect to earn later)

The temptation to spend is highest for current income and lowest for future income. This makes sense intuitively. You are much more likely to spend your monthly paycheck than to raid your retirement account. And you certainly are not going to borrow against money you have not earned yet (well, most of the time).

This is why 401(k) plans, mortgage payments, and automatic savings programs work so well. They take money out of the “current income” bucket and put it into “current assets” or “future income” buckets where you are less tempted to spend it.

The Save More Tomorrow Program

One of the most interesting parts of this chapter is about the “Save More Tomorrow Program” (SMTP) designed by Richard Thaler and Shlomo Benartzi. The program is clever because it works with human nature instead of against it.

Here is how it works: employees agree to increase their savings contributions automatically every time they get a pay raise. The key features are:

1. You are asked to commit well before the pay raise happens (so it feels abstract)
2. The increases only start with your next raise (so your take-home pay never actually goes down)
3. The increases keep happening automatically until you hit a maximum
4. You can opt out any time

They tested this at a manufacturing company. An investment consultant met with 286 employees. Only 79 (28%) were willing to accept the consultant’s recommended savings rate. But of the remaining 207 who said no to that advice, 162 (78%) agreed to join the Save More Tomorrow program.

And the best part? 80% of participants stayed in the program through three pay raises. Only 4 people dropped out before the second raise. Even those who eventually opted out did not reduce their contributions back to the original level. They just stopped the automatic increases.

This is a beautiful example of designing a system that accounts for self-control bias. Instead of telling people “save more right now” (which triggers the pain of reduced spending), it says “save more later” (which feels painless because it is in the future).

The Research on Planning

Professor Annamaria Lusardi from Dartmouth studied why so many households do not save. Her findings are pretty stark:

• Households that plan for retirement have significantly more savings than those that do not
• More than 54% of people who had not thought about retirement rated their retirement experience as poor compared to their working years
• Among people who thought “a lot” about retirement, 79% said their retirement was as good or better than their working years
• People who do not plan for retirement are also less likely to invest in stocks

That last point is interesting. Not planning does not just mean less saving. It means worse asset allocation too. People without plans tend to avoid stocks, which means their savings (what little they have) grow more slowly because they are not keeping up with inflation.

The Four Mistakes Self-Control Causes

Pompian lists four key problems:

1. Spending too much today. This is the obvious one. You spend instead of save. Then retirement arrives too quickly, and you try to make up for lost time by taking on too much risk. Which can make things even worse.

2. Not planning at all. Many people simply avoid thinking about retirement because it is unpleasant or overwhelming. But as the research shows, people who do not plan end up in dramatically worse financial shape.

3. Portfolio imbalance. Some people with a “spend today” mentality gravitate toward income-producing assets because they want cash flow now. This can lead to too much allocation in bonds and not enough in growth assets. Others might over-allocate to risky assets because they enjoy the thrill.

4. Ignoring basic financial principles. Things like compound interest and dollar cost averaging sound boring. But over decades, even a 1-2% difference in returns (the kind you get from disciplined investing) can mean the difference between a comfortable retirement and a difficult one.

What To Do About It

Pay yourself first. Set up automatic savings before you even see the money. 401(k) contributions, automatic transfers to investment accounts, whatever works. The key is to make saving the default and spending the thing that requires effort.

Make a plan and write it down. “Investing without planning is like building without a blueprint.” People who write down their financial plans are far more likely to actually follow through.

Understand compounding. Even small differences in returns, compounded over 20 or 30 years, result in enormous differences in wealth. A 1% difference does not sound like much. But on $100,000 over 30 years, it is the difference between about $430,000 and $574,000. That extra $144,000 came from just 1% more per year.

Get external discipline. If you cannot trust yourself to save (and most of us cannot), use tools that impose discipline from outside. Automatic contributions. Lock-up periods. Programs like Save More Tomorrow. There is no shame in needing help with self-control. Most people do.

My Take

Growing up in a post-Soviet country, the concept of “retirement savings” was practically non-existent. The government was supposed to take care of that. When that system collapsed, a lot of older people suddenly found themselves with nothing. The lesson I took from that: do not rely on anyone else for your financial future.

But even knowing this, self-control is still hard. The desire to enjoy life now is real and legitimate. The trick, as Pompian and the researchers show, is to set up systems that work with your nature rather than against it. Automate everything you can. Make the right choice the easy choice. And start early, because compounding is your best friend if you give it time.

People do not plan to fail. They just fail to plan.

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This is part of a series retelling “Behavioral Finance and Wealth Management” by Michael M. Pompian. Start from the beginning.