We all want to spend less, save more and plan for the future. We don’t always do that, but why? In our Ask a Behavioural Economist series, we talk to Raj Sandhu, a behavioural economist.
Behavioural Economics is the scientific study of decision-making that examines the psychology behind an economic outcome, basically why we do what we do with our money. If we can understand the reasons behind our spending and saving habits, we can set ourselves up to make better decisions for better outcomes.
For this edition, the behaviours we are looking at are future discounting and present-focus bias. Raj breaks down how they impact us.
What is it?
Present-focus bias highlights how we tend to put an overly high value on rewards that we get in the here and now. Future discounting is how we tend to put an overly low value on rewards that we’ll get in the future.
Give me an example of how this works.
We aren’t that good at thinking about the future in general, even thinking about our future selves. A really interesting example of this is research that has demonstrated that when people describe themselves 10 years in the future, their neural patterns are more similar to when they describe strangers compared to when they describe their current self!*
How does that affect me?
As you can imagine, giving up money or time to a stranger is harder than giving those things to yourself. That we think about future selves more as strangers, often means we struggle to make choices that are good for us (like exercising or saving for retirement), and instead prefer to reward our current self (like enjoying junk food and shopping).
How do I help change my thinking?
Spend some time thinking about what you want for the future and trying to actually visualize what that would look like. You might have checked out one of the aging apps that have been making the rounds on social media. There is research that shows those sorts of apps can prompt you to save for the future by helping you think about your future self more concretely. In a study, participants shown a photo of their 70-year-old self ended up allocating $172 of a $1,000 prize toward retirement, compared to only $80 for those who were not shown the aged photo.**
Taking the time to connect to your future self, will allow you to make decisions now that better set you up for the future you want in concrete ways, like contributing to an RRSP.
* Hershfield, 2013
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