How Lack of Confidence Could Make You Rich

Over confidence and under confidence are both problems when it comes to saving for retirement. But a survey suggests the latter do better.

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By most measures, overconfidence trumps under confidence every time. But that may not be the case in the retirement saving game, according to a new study by the National Association of Retirement Plan Participants.

Interestingly, the two extremes come in roughly equal numbers: In a survey of defined contribution plan participants, NARPP found that 20% were overconfident and 23% were under confident about their ability to steer their financial future. Presumably, every one else either had a pretty good grasp or was getting help—a good number likely choosing the latter in view of the 44% who say their plan options are too complicated.

As at the office or a singles bar, those who are overconfident about investing appear to do well in the short run. They take more steps to determine what they’ll need in retirement. They check their accounts more often and use more of a plan’s investment options. They have no fear and they act decisively. You’ve seen them. They think they are right about everything—but aren’t.

Under confident savers, meanwhile, remain the same wallflowers on Wall Street that they are at work and on the dating scene. You’ve seen them too. They have little faith in their abilities even when they’ve got it going on. They don’t put themselves out there and generally take what they are given: in a savings context, that means accepting default contribution levels and plain-vanilla investment allocations.

But here’s the thing: Over confident savers tend to make bad decisions, especially as it relates to how much money they need to set aside each pay period, the survey found. In the long run, they end up with smaller account balances. That’s partly because features like automatic enrollment and auto escalation of contributions have become so common that simply taking what you are given—and not messing it up—may actually work better.

So while over-confident savers are engaged and always getting busy with their plans, they are more likely to end up hurt far down the road. Under confident savers could do better, for sure. But it appears it’s they who live more happily ever after.

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