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CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals

A 35-year-old client has a retirement plan that requires saving 15% of income. He spends heavily on current consumption and saves only 4%, saying he will "catch up later." Which bias is most likely affecting him, and which approach is most appropriate for an adviser?

The client most likely shows self-control bias, a lack of discipline that favors present consumption over long-term goals. The most appropriate remedy is to automate saving contributions and use a budget, which reduces dependence on willpower and helps him reach the required saving rate.

  1. AStatus quo bias; present the full set of alternatives at each review
  2. BSelf-control bias; set up automatic contributions to a retirement accountCorrect
  3. CRegret aversion; recommend diversification across many asset classes

Explanation

Favoring current consumption over long-term saving goals is self-control bias. Automatic payroll or standing-order contributions and clear budgeting reduce reliance on willpower. The status quo and regret aversion answers misidentify the bias, so their remedies do not address the underspending.

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