Even a Lemming Wouldn't Buy An RRSP

Lemmings, a small rodent usually found in the Arctic, have become the subject of a widely popular misconception that they commit mass suicide. The reality is it is not a mass suicide, but the result of their migratory behavior even though this misconception of lemming "mass suicide" is long-standing and has been popularized by a number of factors including short stories, Disney Films and staged Documentaries. This same myth was also used in the Apple Computer 1985 Super Bowl commercial, in which players stop the lemmings from mindlessly marching over cliffs or into traps. Because of their association with this odd behavior, lemming "suicide" is a frequently used metaphor in reference to people who go along unquestioningly with popular opinion, with potentially dangerous or fatal consequences.

People often imitate those around them. Whether making trivial choices like what brand of coffee to buy or important decisions like saving for the future, people tend to conform to what others are doing. People imitate, in part, because others' choices provide information. Depending on the situation we generally do not know the right answer, and even if we have some sense of what to do, we are not entirely sure. So to help resolve our uncertainty, we often look to what other people are doing and follow that we assume that if other people are doing something, it must be a good idea. They probably know something we don't. Psychologists call this idea "social proof" or more commonly referred to as herd mentality. It has been said that when people are free to do as they please, they usually imitate one another. We look to others for information about what is right or good to do in a given situation, and this social proof shapes everything including the products we buy. The phrase 'Monkey See, Monkey do" captures more than just our tendency to follow others. Think about the last time you made a decision that required you to gather and sift through large amounts of information. You probably asked one or more people what you should do. And they probably either shared their opinion or sent you a link to a website that helped you out.

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Think about the last time you sat through a presentation maybe about retirement planning or equity diversification. At the end of the talk, the speaker probably asked the audience if anyone had any questions. The response... Silence! But not because everyone else understood the presentation. The others were probably just as confused as you were. But while they would have liked to raise their hands, they didn't because each one was worried that he or she is the only person who didn't understand, Why? Because no one else was asking questions. No one saw any public signal that others were confused so everyone kept their doubts to themselves. Behaviour is public and thoughts are private. In December 2002, Daniel Kahneman was awarded the Nobel Prize in Economics. But he wasn't an economist, he was a psychologist and he received the award for his work on what he called "prospect theory". His theory was simple, that the way people actually make decisions often violates standard economic assumptions about how they should make decisions. Judgements and decisions are not always rational or optimal. Instead they are based on psychological principles of how people perceive and process information. His research is some of the earliest studying in what is now referred to as "behavioural economics". One of the main aspects of prospect theory is that people do not evaluate things in absolute terms. They evaluate them relative to a comparison standard or a reference point. Another aspect is referred to as "diminishing sensitivity" which reflects the idea that the same event has a smaller impact the farther it is from the reference point. For example a person will be more excited for winning $20 in a lottery as compared to $10, but if the winnings were $1020 versus $1010, that same $10 difference does not make as much of a difference. When I was 16 I was terrible at investing. There were too many options, too much daily volatility and too much risk. I would rather keep my money under my bed that put it in some mutual fund that could lose money. Sound familiar? The first time I bought stocks I barely dipped my toe in. I picked two or three that seemed like a good investment based on being strong brands and tried to leave it at that. But my curiosity got the best of me. I frantically checked every day how each stock was doing. A dollar up today? Huge success! Thirty-five cents down the next day? Massive failure and wanted to cash out everything instantly. And then when I was 19 my banker recommended that I invest my money inside an RRSP. Why? Because that is what everyone else does and a contribution will allow me to receive a tax refund from the government when I submit my taxes in April. Not knowing any better, I took their advice and then when that refund cheque arrive from the government I told everyone about it unknowingly convincing others that they needed to do the same thing that I was doing. I perpetuated herd mentality. Lewis Schiff, an author in the area of behavioral entrepreneurship, has researched high net worth individuals and shares that they continually challenge the status quo through accepting that the way things have been done may no longer be sufficient to realize goals of financial security. The do not follow what everyone else is doing and instead blaze their own trail towards financial independence. An RRSP is one tool in the myriad of options for saving for the future. The social currency of getting a tax refund and then telling everyone what you are going to buy with that refund propagates the misconception that an RRSP is the best option. Ask a professional, challenge the status quo and don't be a lemming. Kevin Cahill, B.Sc.(Hons), CFP, CHS, CLU, EPC