Is Cognitive Bias Affecting Your Retirement Planning?
June, 2023
At the time I was considering moving to Mexico, one of the thoughts that kept recurring to me was, if this is such a smart idea, why am I the only one I know considering it?
It seems to take a long time to learn, and many people never learn, that just because a particular lifestyle is a common one, doesn’t mean it’s the one for you.
In his book The Art of Clear Thinking,” Swiss entrepreneur Rolf Dobelli writes about 99 common cognitive biases that negatively affect our decision-making. Booklist called it a “well-considered treatise on avoiding self-induced unhappiness.”
Given that I was considering a life-altering choice. I read (and re-read) his work on biases while trying to shine a light on my decision-making process in considering Mexico.
Several of the biases he outlined struck me as easy ones to fall prey to in this juncture of life-decision-making we call pre-retirement planning.
1. Social Proof Bias
{Picture} Confirmation bias in action - Whether you already think Mexico is safe or not-safe will probably determine how you interpret this picture. My expat friends were amused (or just loved a man in uniform), my State-side friends alarmed, by this picture of me with a security guard outside a local bank
This holds that people will accept a flawed premise easily enough if it’s been repeated enough. There are hundreds of platitudes surrounding how people should live, work and retire. While not inherently foolish, some solutions that are repeated over and over as if it’s the only sane solution.
Just because a solution is popular doesn’t mean it’s best for you. This is a harder reality to accept than you may think. (I frequently envy my friends not for their choices, but for wanting those choices, the traditional choices no one’s likely to argue with.)
If your choice isn’t a popular one, you’ll get push-back. You’ll be more likely to second guess your instincts. Moving to Mexico will never be the most popular financial plan for folks, which makes it harder to justify but it doesn’t make it wrong.
2. Sunk-Cost Fallacy
Rational thinking, according to Dobelli, requires that you forget about the costs to date. He uses the example of sitting through a terrible movie because you paid for a ticket. In lifestyle planning, this would be translated into continuing to invest in a lifestyle that is failing to work for you, whether that means financially or emotionally. It means we’ve already got so much invested in it, we can’t change it even though it’s making us unhappy.
3. Omission Bias
This means that if action and inaction can both lead to negative outcomes as well as positive ones, we tend toward inaction. When things don’t end up as planned, we feel better having done nothing and ended up in a bad situation rather than if we had taken an active role in it. Omission bias is a reason why many people don't invest in the stock market.
A harmful action is more obvious than simple failure-to-take action. If you don’t earn $5,000 more in a year because you didn’t invest in the stock market, you don’t judge yourself as harshly as you would if you lost $5,000 betting on it.
Many people dream of moving to this-or-that country someday. By not taking any concrete action, it’s easier not be disappointed later having not done it. Many prefer unfulfilled dreams to failure, which is always possible.
4. Availability Bias
Likely the bias most related to moving to a country like Mexico is that we create a picture of our world according to what information is the most available.
This is the most relative to Mexico because bad news, cartels and violence, is so much more available than good news about Mexico, which isn’t as interesting to newspapers and magazine. Due to availability bias, according to Dobelli, we go through life with “an incorrect risk map in our heads.”
5. Human bias for negative information over positive
As social scientists have shown in research, threats and bad news have a stronger psychological impact than good news. Humans acquired this bias for negative news for evolutionary reasons. Open ground may be more comfortable than a tree but we ignore tigers at our peril.
6. Confirmation Bias
This is our tendency to filter all new information in such a way our prior conclusions can remain unchallenged. The big problem with Facebook, YouTube and is confirmation bias built into the algorithms, feeing us only information that supports what we already believe.
As Dobelli goes on to say, in making good decisions “Axing beliefs that seem like old friends is hard work but imperative.” This is especially true when considering how you want to live in your retirement.
Related Links:
Do you really care about the planet? How living in Mexico is easier on the planet.
"Things Not to Say to a Mexican" - A Mexican friend sets me straight on my American biases about Mexico - Ventanas Mexico
Come up with a few of your own beliefs and test them with "Eight Myths About Retiring to Mexico" - Ventanas Mexico
About the author, Kerry Baker
Hola - I'm a partner with Ventanas Mexico, which helps people explore living full or part-time in Mexico.
My book, “The Mexico Solution; Saving your money, sanity, and quality of life through living part-time in Mexico, shows you how. It instructs. It amuses. You won’t find that any any other book of its genre.
I also published the exciting "If I Only Had a Place" (but only exciting if you like living in an oceanfront condo for $850 a month.)
Most recently I published “The Lazy Expat: Healthy Recipes That Translate in Mexico" for travelers, snowbirds and expats who want to maintain a healthy diet in Mexico. (spoiler: You must cook.)