Why do we plan since war plans, economic plans, business plans as well as retirement plans typically fail when exposed to reality? What can a retirement management professional do to mitigate the impact of pervasive planning failures?
Being foreign-born and therefore "outside looking in," I could see something exceptionally American: a deeply rooted inclination towards the practical "middle-muddle" in contrast to the utopian and theoretical ideologies of my onetime daily experience.
In other words, striving for personal and collective success is more about plodding along to keep the daily under-shooting or over-shooting in the survivable range rather than about finding the newest magic ideological bullet. Crowding the extremes has a record of spectacular failures. Managing the middle-muddle has a record of solid successes.
Indeed, many -- and perhaps most -- economic problems, including retirement planning, are best solved incrementally because failures cannot be avoided and must therefore be kept small and frequent. Avoiding small personal or institutional failures turns them from tolerable learning costs and into terminal systemic bankruptcies.
I grew up in France in the 1960s and '70s where I learned about the limits of radical extremes that despise the practical middle-muddle. The confrontations, demonstrations and arguments were the stuff of daily life: witnessing demonstrations in the street while going to school, putting up with constant disruptions in the classroom and remaking the world -- on a daily basis -- in the caf?-culture discussions.
First, I learned that politics is the brokering of claims of power over a people. I learned that the accounts of politics are kept in units of rules and regulation, that the currency of power is coercion and that power, once turned into coercive laws, rules and regulations, stays on the books far past its expiration date.
However, I also learned that business is the creation of claims on the production and productivity of a people. I learned that the accounts of business are kept in units of wealth, that the currency of business is money and that wealth, unlike power, if it is not to be lost must be reaffirmed daily through productive work.
When doing business becomes too much like central planning, the currency of business becomes corrupted by the currency of power: Coercion replaces money as the engine of daily life. Forced actions and rationing rather than contractual prices and options become dominant features of business transactions. Forced actions and rationing on top of previous forced actions and rationing become necessary because things get messy as they will not go according to plan.
This divergence from plan is not an accident. It is not a measure of ill will. It is not a measure of intentional sabotage or incompetence. It is structural. It cannot go away, no matter how careful or forceful the planner becomes. The fact that plans fail in the face of reality is known as the "knowledge problem."
America taught this immigrant that success is not found in the theoretical perfection of utopian flights of ideology but in daily, practical habits and behaviors. I remember how weird it felt to recognize the validity of motivational books and tapes. The content was uncomfortable and easy to deride. And yet, I could not ignore the results that I saw around me.
Success is indeed related to the habit of practical behaviors even if the explanatory link between the two feels more like folksy recipes than urbanized logic. Practical and incremental behaviors deliver results because of the knowledge problem that plagues urbanized logic.
The knowledge problem is associated with the work of an Austrian economist -- the Nobel Prize----winner Friedrich Hayek -- who pointed out that not one place, not one planner, not one person can know all relevant data about supply and demand, abundance and scarcity, needs and wants for all players in the economy. The economy is too large and it changes too fast to gather, let alone use, such information in one place.
Central planning will of necessity be about blunt coercion. It will also always be a day late and a dollar short. These late, penurious and rough actions will also create a compounding set of backlash and feedback problems that will require their own late, penurious and rough actions until the system pushes past the breaking point.
Market prices work better than central planning because prices incorporate more relevant data about supply and demand, abundance and scarcity as well as needs and wants. Market prices that reflect free decisions represent a truth that coerced behaviors and constrained choices do not. Market prices tell important information about the here-and-now as well as about future trends. Market prices permit smaller and more frequent adaptations to change.
Tied in with all this is the possibility of failure. Market prices are a narrative of small and frequent failures. Market prices are also a narrative of personal and institutional adaptation because success goes where the cost of failure is low. To succeed we must fail, early and often -- and cheaply.
Build a Floor
Retirement income advisory processes should work like market prices rather than like central planning because, once we move beyond didactic examples, central planning cannot be smart enough or large enough or coercive enough to overcome the knowledge problem in the real world. "Too big to fail" does not apply to retirement plans. Rather than making large and speculative gambles about the future, retirement income advisory processes should "first build a floor"; they should build "funded floors" and such measures should be reviewed at least annually.
Frequent course correction, coupled with the incremental building of funded income flooring, will provide more resilience and therefore better results for all involved. In the end, we may all realize that we have not become utopian, radical and theoretical retirement income planners but instead practical retirement income managers who provide value dealing with the daily middle-muddle.
Our business, in other words, is best described not as retirement income planning but instead as professional retirement income management.
Fran?ois Gadenne is chairman and executive director of the Retirement Income Industry Association (RIIA). He is a graduate of the Ecole Superieure de Commerce de Paris and he earned an MBA degree from the J. L. Kellogg Graduate School of Management at Northwestern University. For more information about RIIA, visit http://riia-usa.org.