Life After Full-time Work Blog

Learn about preparing for life after full-time work through posts from Don's upcoming book.

#73 When The Time Comes To Make Decisions

This tale by a master story-teller is scary. It reminds us that we should think about potential disruptive things before they’re upon us. This post also explains why we prefer to postpone tough decisions. 


I had hoped to be able to tell you about my forthcoming book, Life Two. But I can’t — not just yet. I’ve finalized the text and got a beautiful cover design. But there are lots of finicky details involved in preparing for publication, and those aren’t done yet. And after that my friends at Out:think will re-design the website to be able to show how the posts (and many more items of writing) fit with the book.

So that’s still in the future — I hope it’s the near future. Meanwhile, let me entertain you in this post with a tale from a master story-teller, and then draw an important lesson from it.


We don’t want to outlive our pension pot. That requires decisions from us, some of them hard decisions. Sometimes we’re willing to make them; sometimes we tell ourselves that those decisions can wait for tomorrow. That’s what the story involves. My connection with it goes back a long way.

When you hold a hammer, as the saying goes, everything you see begins to look like a nail. That’s how I felt when I first became an actuarial student; everything I encountered took on an actuarial tinge. That’s when I first read “The Lotus Eater,” a short story by Somerset Maugham.[1]  At the time I considered it my very first actuarial story – you’ll see why in a moment. Today I recall it for its poignant ending – one I want to avoid personally. Enough commentary; let me relate the story, quickly. It starts a few years before the First World War.


Maugham visits a friend in Capri, and through the friend he meets Thomas Wilson, a perfectly ordinary person conducting what Maugham considers a bold experiment. Wilson tells of how he came to Capri for a summer holiday, and fell in love with everything – the place, the views, the sunsets, the people – and wondered why he should go back to life in London as a bank manager. But he did go back.

Yet he couldn’t get Capri out of his mind. He was an only child, and his wife and daughter had both died tragically. He was 34 years old. His lump sum gratuity from the bank after 17 years of working there (not a life pension: that required 30 years of service), combined with his savings and the proceeds from selling his house, weren’t enough to buy him a life annuity. But he could buy a 25-year annuity to provide the modest income he would need to live happily in Capri.

So he returned to Capri, ready for his 25 years of happiness. His philosophy was: “I wanted to live the perfect life while I still had the energy and the spirit to make the most of it.” The annuity would take him to age 60. “No man can be certain of living longer than that, a lot of men die in their fifties, and by the time a man’s sixty he’s had the best of life.” (My observation: How things have changed since those days! Thank goodness!)

Had Wilson ever regretted his decision? “Never. I’ve had my money’s worth already.” (This was 15 years into the planned 25, when Maugham met him.) “And I’ve got ten years more. Don’t you think after twenty-five years of perfect happiness one ought to be satisfied to call it a day?”

What would Wilson do after the 25 years were over? Maugham says cautiously: “He did not say in so many words what he would do then, but his intention was clear.” Maugham says that a shiver ran down his spine. “The odd thing about him was that he was so immensely commonplace. I should never have given him a second thought but for what I knew, that on a certain day, ten years from then, unless a chance illness cut the threads before, he must deliberately take leave of the world he loved so well.”

Move forward, not ten years, but thirteen. The First World War has taken place, life has changed, Maugham has forgotten about Wilson. Then Maugham returns to Capri. His old friend is still there – now living in a different house. It’s Wilson’s house. And so of course Maugham wants to know what has happened to Wilson.

No, he didn’t commit suicide. “It had never occurred to him that after twenty-five years of complete happiness, his character would gradually lose its strength.” Wilson had had no need to exercise discipline, and found that he had lost the ability to do so. He put off the contemplated deed from day to day. His landlord threw him out. He fell ill, had an accident (possibly a weak attempt to end it all, Maugham speculates) and slowly lost his mind. He found a ramshackle bed and survived on scraps of charity. It was six years later that he finally died.


Well, it’s obvious why I considered this a story with an actuarial basis. And that’s why I remembered it, years later when I started thinking about longevity from a personal perspective. But it also triggered a line of thought, which needed investigation. How would I behave, if I made a commitment to be carried out many years later (even if the commitment wasn’t quite as final as literally pulling a trigger!)? Would I be like Thomas Wilson? Or is that a trait everybody shares? Sure enough, there has been research on the matter. Not specifically about pulling a trigger, but about how much easier it is to make a future commitment than to actually keep it.

Let me take you quickly through some of the research. Today we know that Maugham didn’t have the explanation. Today we know that we all find it easier to make commitments that are to be carried out in the future than to make commitments that must be carried out today.

One study is called “Estimating discount functions with consumption choices over the lifecycle.”[2]  What a wonderfully academic title! But the idea is simple, and we can relate it to Thomas Wilson. Wilson made the so-called “consumption choice” to enjoy life today in preference to a deferred enjoyment of life in 25 years’ time. Of course, his was an extreme choice, because he needed to reduce his deferred enjoyment to precisely zero. All of us prefer immediate enjoyment to future enjoyment. In fact we demand compensation for deferring current consumption, in the form of some enhancement of our future ability to consume. Think of the enhancement as a rate of interest. We won’t postpone enjoyment unless we earn interest that enables us to consume even more in the future. (I use the words “consumption” and “enjoyment” interchangeably.)

One obvious question is: what is this rate of interest? Well, we have lots of observations in the investment field about how large a risk-free return society seeks, and how the expected return varies with risk. But another question is: do we have consistent time-preferences? In other words, if we require x% to postpone current consumption by a year today, would we require the same x% to postpone 25thyear consumption to year 26?

And the answer is: no. We are grossly inconsistent. We hugely favor the present. We hate putting off consumption until next year. But we think it’ll be easy to put off consumption from year 25 to year 26. Well, that’s exactly what Thomas Wilson thought! He loved immediate enjoyment, and made an apparently easy decision to cut short – literally cut short – future enjoyment in 25 years’ time. When the 25 years passed, and the future became the present, he found he had grossly underestimated the psychological cost of forgoing future enjoyment.

Behavioral economists call this “time-inconsistent preferences.” Maugham thought of it as a decay of self-discipline. It turns out Maugham was wrong in thinking that Wilson’s character had decayed and lost its strength because for 25 years he hadn’t needed to exercise self-discipline. It wasn’t Wilson. It was all of us. But also, it wasn’t a character deficiency, rectifiable by the constant exercise of normal self-discipline. It was something that we all suffer from, a common tendency to think sacrifices will be easier to make in the future than today. (We’ve seen this in the context of current versus deferred consumption, and the fact that we’re hard-wired to prefer the present to the future.) Of course Maugham was a master story-teller rather than a behavioral economist, and I have no doubt he gave more pleasure to millions by writing his story than the behavioral economists do in saying that we’re all prey to Wilson’s shortcoming. But we should all be aware that we too easily make commitments about the future which, when the time comes, will prove to be much more difficult to keep than we imagine today.


As an aside, how do economists measure these tendencies? The authors of the study I mentioned begin by observing that Americans simultaneously act patiently and impatiently. Households accumulate substantial illiquid retirement wealth at real interest rates of about 5% (the data relate to the late 1990s), yet the very same households also borrow regularly on credit cards at real interest rates of about 12%. Is there a single lifetime-constant interest rate that is consistent both with the data and with a life-cycle “buffer stock” spending and investment model? In a word, no. Then the authors test a model in which households have both a short-run and a long-run interest rate, the short-run rate gradually giving way to the long-run rate as the distance of the decision horizon expands. Now they find they can explain the data, if the short-run interest rate is about 40% per annum and the long-run rate about 4%.

In other words, when they look forward, let’s say, 40 years, Americans will save rather than consume if they can earn 4% for postponing consumption by a year. But to settle for a reward tomorrow rather than today, they are much more impatient and demand compensation at an annualized interest rate of 40%.

(And by the way, it’s not just Americans who behave this way. We all do. It’s just that American data got studied.)

That’s an examination of time-preferences for treats. How about time-preferences for chores?Suppose we have something unpleasant to do today but can postpone it by a day if we can pay for the postponement. Will we be willing to make the same payment to put off the chore from day 14 to day 15? No, we wouldn’t; we wouldn’t pay nearly as much to buy a day’s respite in two weeks’ time. So the same principle applies to chores as to treats. We substantially favor gratification today over gratification later. Yet when that “later” day arrives, it becomes “today” and we find we’ve substantially underpriced our future preference.


Thomas Schelling shared the 2005 Nobel Prize for Economics for his work on related aspects. He is famous for his work on conflicts between nations, particularly where nuclear weapons are involved. He analyzes pre-commitment, in which a nation makes a commitment that reduces or even eliminates its future flexibility, because it realizes that it is much easier to make a future commitment today than to trigger it when the need arises in the future. An example is an army burning its bridges to make retreat impossible. Or a country passing a law that binds it to defend another country if the second country is attacked. This reduces future flexibility, but the existence of the law also reduces the threat to the second country.

Schelling’s famous work is actually based on earlier work in which he examined individuals’ behavior. He described what he called an “intimate contest for self-control,” in which people act as if two different selves take turns to run the show. We all seem to suffer from split personalities. One part of us desperately wants to lose weight or stop smoking or rise early to work. Another part of us wants dessert or a cigarette or sleep. The noble self tries to make long-term plans, but the self-indulgent one tries to take over short-term planning.

Of course these behavioral economists are interested in solutions, but before we get to the solutions, let’s remind ourselves that they’re describing Maugham’s subject Thomas Wilson. In fact they’re describing the Thomas Wilson in all of us. And so my recollection of Maugham’s story started a line of thought that has been well worth pursuing.



If you push crucial decisions into the future, you may well find it very difficult to face them when the time comes.

[1] Maugham, W. Somerset (1940). The Mixture as Before (New York: Doubleday, 1940; reprinted, Arno Press, 1977).

[2] Laibson, David, Andrea Repetto and Jeremy Tobacman (2004). “Estimating discount functions with consumption choices over the lifecycle”. Journal of Economic Literature, January 2004.


I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.

4 Responses to “#73 When The Time Comes To Make Decisions”

  1. Pension Industry Participant says:

    I really liked the story and analysis. It highlights the challenge between consumption today and saving for tomorrow. I see it every day where plan members will do everything to get a lump sum commuted value today (and preferably in unlocked cash due to small amount, shortened life expectancy or financial hardship unlocking) than a secure annuity payable at age 65.
    I doubt all the actuaries, regulators and economists will ever be able to change human nature.

    • Don Ezra says:

      How true! We’re hard-wired to be emotional and think short term — even financial education (which isn’t common) has a tough time overcoming that. Thanks for the wisdom.

  2. Zack Kelly says:

    Thanks for sharing this Don. It is great to see the parallels in behavior with respect to finance and my field of work, health coaching. I think I will use this example as a lesson to my clients to not put off their health decisions .

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