Cognitive biases that weaken the end of a career

Is retirement approaching? While it’s up to you to live it as you see fit, it’s important to realise that a large number of cognitive biases can disrupt its preparation. This is a period in your life when you face a lot of important decisions to make, especially in financial and social aspects. You need to see clearly! Don’t panic, myLIFE helps you recognize and tame the eight cognitive biases that could hinder a serene transition to retirement.*

Cognitive bias at every age

A few years before retirement, feelings can be ambivalent. On one hand, there is relief at the prospect of finally having more time for oneself, and on the other, apprehension about leaving the world of work where one has built most of their benchmarks over many years. Although these feelings are real, they are often set aside by those concerned, convinced that they have the knowledge and experience necessary to manage this transition well. Often wrongly!

Even if experience can help become more rational, young professionals are not the only ones influenced by different cognitive biases. Regardless of age, it is always difficult to set aside emotions when it comes to one’s personal situation and finances. That being said, cognitive biases are not necessarily the same depending on age and life period. A young worker may be more influenced by optimism bias or short-termism, favouring immediate benefits at the expense of retirement savings. They are also more inclined to take risks, thinking they have “time to recover.” Conversely, seniors are more sensitive to loss aversion, status quo bias, and endowment effect. They prioritize security, stability, and highly value what they already possess. As our relationship with risk, change and the future evolves profoundly over the course of our careers, it’s important to be able to identify the biases that take hold depending on the season of life we find ourselves in.

As our relationship with risk, change and the future evolves profoundly over the course of our careers, it’s important to be able to identify the biases that take hold depending on the season of life we find ourselves in.

Retirement and feeling of insecurity

As retirement approaches, many experience a dual feeling of financial and emotional insecurity. Justified or not, the fear of running out of money fuels an aversion to spending and a reluctance to make necessary asset decisions. It can even lead to withdrawal. Insecurity is heightened by the imminent disappearance of strong identity markers: social status, professional rhythm, relational ties. This can cause stress, anxiety, and hinder the ability to project positively.

A successful transition involves the ability to rethink one’s relationship with work, to consider new projects, and to allow oneself to mobilize capital to sustain or even improve quality of life. For this, it is essential to prepare, discuss with loved ones, and be accompanied by a financial advisor.

How to proceed? myLIFE suggests reviewing a list of eight major cognitive biases that influence your decision-making to help you recognize and tame them. This will maximize your chances of successfully navigating this transition phase!

1. The anchoring bias: Being trapped by old references

The anchoring bias leads individuals to make decisions based on an initial piece of information considered a reliable reference, even though it may have become obsolete. This discrepancy between belief and legal reality can result in inadequate financial preparation or even loss of income. Ignoring reforms or system changes can lead to poor estimations of one’s rights or premature departure decisions.

Example: The retirement age is often considered an immutable reference point – but the recent reform project in Luxembourg reminds us that this is not the case. According to it, while the legal age remains set at 65 years, the required contribution period for a full pension should gradually be extended from 40 to 43 years by 2040. Many workers nearing the end of their careers continue to rely on outdated or soon-to-be outdated standards. This is typical of anchoring bias.

Solution: It is crucial to update one’s references and follow ongoing legislative changes to better project the end of one’s career. If you feel overwhelmed by the amount of information to digest, why not seek assistance from a financial expert?

2. Status quo bias: Resisting change

The status quo bias refers to the tendency to prefer inaction or continuity over change, leading to the neglect of potentially beneficial alternatives, or even ignoring the inherent risks of inaction. It particularly prompts senior workers to maintain investment strategies or work modes that have become unsuitable for their situation.

Example: In a changing environment, rigidity prevents adjusting one’s retirement plan to new economic, fiscal, or social realities. Faced with new developments, some senior workers prefer to make no changes to their savings, investment, or work time management strategies. Thus, refusing to consider reducing work hours despite diminishing physical capacities may cause one to miss out on suitable opportunities like progressive early retirement.

In the face of resistance to change, one must compel oneself to objectively consider different scenarios for transitioning into retirement.

Solution: In the face of resistance to change, one must compel oneself to objectively consider different scenarios for transitioning into retirement.

3. The endowment effect: Overvaluing what we already have

The endowment effect leads to overvaluing what one already possesses and hinders asset optimization. The consequences of this bias can be very serious: lack of diversification, unexploited potential for returns, insufficient cash flow to support an active retirement.

Example: As retirement approaches, existing assets (housing, portfolio, stocks…) become an identity marker. To the extent that it can foster a form of paralysis. Thus, many senior workers refuse to sell a property that has become far too large or an unprofitable investment, simply because they are attached to it. Even if a reorganization of assets at the end of a career might be wise, emotions often outweigh reason.

Solution: To avoid the endowment effect, consider your assets as if they were not your own. Would you make the same financial decisions if you had to manage this wealth on behalf of someone else?

To avoid the endowment effect, consider your assets as if they were not your own. Would you make the same financial decisions if you had to manage this wealth on behalf of someone else?

4. The overconfidence bias: Relying on erroneous knowledge

The overconfidence bias leads an individual to overestimate their abilities in various areas and to systematically attribute their success to their own skills rather than to external or random factors.

Example: With age and experience, some workers overestimate their financial management skills. They neglect external advice or changes in tax and social regulations. This can lead to poor anticipation of taxation, pension rights, or health coverage needs. Believing oneself to be too autonomous can lead to overlooking a lesser-known opportunity or mismanaging the transition to retirement.

Solution: The best way of dealing with this bias is to seek qualified external advice (advisor, accountant, official simulator) before really considering the alternatives on offer.

5. The loss aversion bias: Confusing prudence with paralysis

The loss aversion bias describes the tendency of individuals to prefer avoiding losses rather than acquiring gains of equivalent value. Indeed, the anticipated pain of a loss is more impactful than the anticipated pleasure of a gain.

Example: Despite having little interest in their work or fragile health, some senior workers delay their retirement for fear of losing their standard of living. Others, haunted by the fear of scarcity, excessively accumulate savings without ever using their capital.

Solution: Consider different possible scenarios and treat the “immobility” scenario as one among others. This forces you to actively and knowingly make your future choices, rather than endure them due to loss aversion.

6. The illusion of control: Thinking that everything depends on oneself

The illusion of control is manifested by the belief that one can control external events: financial markets, health, social laws. This bias results in rigid strategies, overly optimistic projections, or a lack of contingency plans. Relying solely on one’s own achievements can, however, lead to disappointments due to lack of preparation for the unpredictable.

Solution: Recognizing this bias allows for the construction of more realistic scenarios, including the possibility of uncertainties or changes in direction beyond our control. Acknowledging that certain factors are completely beyond one’s control encourages diversifying income sources.

7. The intertemporal myopia bias: Misjudging one’s time

Intertemporal myopia prevents reconciling present and future needs and leads to choices that are not in the best long-term interest.

Example: Some seniors spend too quickly in the early years of retirement and later have to tighten their belts, while others, on the contrary, do not dare to touch their savings even though they could afford some extras from time to time. Retirement is a full-fledged stage of life during which one must know how to balance health, leisure, social engagement, and uncertainties.

The balance between the short and the long term lies in dynamic planning that juggles regular flows, adjustments to the stages of retirement and life projects, and the state of health.

Solution: The balance between the short and the long term lies in dynamic planning that juggles regular flows, adjustments to the stages of retirement and life projects, and the state of health.

8. The conformity bias: Following like a sheep

The conformity bias pushes an individual to model their decisions on those of their surroundings, without considering their personal situation. This tendency can mask a lack of understanding or even a form of blindness to one’s own needs. Financial reality, expectations regarding quality of life or health differ from one individual to another.

Example: As retirement approaches, this bias translates into mimetic behaviors: “everyone retires at 65, so I will too,” or “my colleagues are all investing in this product, I should do the same.”

Solution: Defining a clear, personalized retirement plan aligned with one’s resources prevents making choices dictated by the social environment. Several years before retirement, take the time to list your desires for a happy and serene retirement. Avoid making default choices and always evaluate your options in light of your life goals, not those of others.

Preparing for retirement is not just a matter of numbers. It involves our perceptions, fears, and mental habits. Identifying the associated cognitive biases gives us the chance to retire better, more serenely, and with the right tools to fully enjoy this new stage of life.

* Content translated from French by the BIL GPT AI tool.