(The Economist 2015). Yet people who voice creative solutions are
viewed as having lower levels of leadership potential, signaling that
those who aspire to the top levels should keep their creativity in
check (Goncalo 2011):
The mere expression of creative solutions may actually introduce
ambiguity or uncertainty, in part, because by definition, novel
ideas involve deviations from the status quo and are not proven.
People who express creative ideas are often viewed as unpredictable, rebellious, unorthodox, and unconventional—traits which
run contrary to deeply rooted expectations that prototypical leaders diminish uncertainty and provide normative order. So, it is no
surprise then that creative people are filtered out on the way to
the top. We claim we want creativity but end up favoring, hiring
and electing people who uphold the status quo.
It is likely that some of the most creative never become employees
because organizations often recruit employees who look and act like
those already at the firm and “there is nothing that kills innovation
like everyone speaking in the same voice, even if it is a well-trained
voice” (Staw 1995). Mueller et al. (2010) attribute the tendency of
organizations to routinely reject creative ideas when espousing creativity to a bias against creativity that stems from uncertainty associated with new ideas and the fact that uncertainty is an aversive
state that people are strongly motivated to avoid. People more readily associated creative ideas with negative words such as “vomit,”
“poison,” and “agony” than with practical ideas (Goncalo 2011).
Similarly regret favors inaction over action, and feelings of regret
may be more intense if resulting from the failure of an action that
is novel rather than “standard procedure” (Kahneman and Tversky
1982). Whether money, emotion, or time, the more you have
invested in something the harder it is to give it up, and companies
that have committed resources to solutions may be reluctant to
embrace new ideas due to a sunk costs bias (Kahneman 2011a).
Finally, loss aversion may make the people who run organizations
more likely to back the sure thing. Management consultant Gary
Hamel6 estimates incremental investment has about a 90-percent
chance of earning a solid return versus a 25-percent probability for
basic innovation (Denning 2012). Hamel also argues that compa-
nies can be blind and that “blindness can even affect an entire
industry because most companies in an industry are blind in the
same way” (Kurtzman 1997).
Probably most people are capable of incremental creativity, but the
cognitive deck is stacked against the type of transformational creativity that replaces existing paradigms with new thinking, and that is
precisely what retirement income demands. That is why the industry
has struggled to develop innovative retirement-income solutions.
The result is that most current retirement-income approaches reflect
habitual modes of thought and fail to challenge assumptions.
The Efficient Frontier Is Inefficient for Retirees
Modern portfolio theory (MPT) is the mathematical formulation
of diversification and has been the predominant portfolio and risk-management tool for more than fifty years. Its goal is to maximize
a portfolio’s expected return with a given level of risk or minimize
risk with a given return.
A set of portfolios that achieves the optimal balance between
different combinations of risk and return make up an efficient
frontier, as shown by the line in figure 6, with return on one axis
and volatility (risk) on the other. The upward slope of the line
illustrates the axiom that one must take on more risk to earn a
higher return, and most investors assume a higher return will
translate into greater wealth long-term. In the context of MPT,
risk is measured by standard deviation, which is the mathematical
formulation of volatility.
But neither volatility nor expected return is a predictor of success
for retirement income, as shown in figure 7. The line shows the
year-by-year account value for a 60/40 portfolio with a 5-percent
initial withdrawal and 3-percent annual increases beginning in
1950 and running through 1974. It shows that the account never
fell below the original investment and ended with $1,631,323,
substantially more than it began with.
Figure 6: The Efficient Frontier of Accumulation Figure 7: Timing of Returns
Year-by-Year Account Values
$1m Investments (50/50), 5% Withdrawals Increased 3% Annually
0 2 4 6 8 10 12 14 16
Line and bars both averaged 8.1%