The Impact of Cognitive Biases on Retirement Planning Behaviour: Evidence from Pakistan

Abstract

One of the most crucial financial choices that individuals make is retirement saving, and in most cases, it is determined by psychological bias and not proper planning. The research focuses on the impact of two popular biases that are risk aversion and overconfidence on retirement saving behaviour of working people in Pakistan. Risk-averse individuals will avoid risk and choose low-risk and safe options, which constrain their capacity to accumulate sufficient future savings. On the contrary, overconfident people have a tendency of thinking they are more knowledgeable or will earn more in the future and thus save less than they should. These prejudices are of diverse types, but all lead to insufficient retirement readiness. Through these two biases, the study contributes to the body of existing research on behavioural finance and shows the necessity of taking practical measures, such as designing retirement plans better and running awareness campaigns, to guide people to overcome under-saving as a result of bias.

Keywords: Risk aversion; Overconfidence bias; Retirement saving behaviour; Behavioural finance; Prospect theory; Pakistan; Investment decisions; Financial planning