One way to get around mental roadblocks preventing us from smart financial decisions is to imagine ourselves as old. Thanks to technology, we now can actually see digitally aged images of ourselves.
Cognitive shortcomings vex us in our daily and professional lives every time we make a purchase at the grocery store, study the stock market or save money for some future event. We are irrational, emotional beings, and the decisions we make reflect that.
For example, most adults understand compounding interest and realize that the earlier you save, the more you profit in the future. Still, it’s difficult for folks to visualize the benefits because the future self is a complete stranger. Our brains are wired better for quick responses to immediate threats than long-term thinking.
Jeremy Bailenson, head of Stanford University’s virtual reality lab found that viewing digital avatars of our aged selves can help encourage better behavior. His research found that if you see your avatar getting fat, you are more motivated to get fit. If you see a car accident, you drive safer.
They discovered that our avatars can also encourage us to put away money for retirement. The Stanford team found that seeing a digitally aged picture dissolves all hesitation to save. In one study, seeing the avatars increased contributions to imaginary retirement accounts by 30%.
Based on this research, one asset management company, Allianz, plans to offer the age-morphed photos to 401(k) enrollees, introducing them to their future selves to encourage better saving habits.
You can try it yourself. Take a profile picture saved on your computer and visit the University of St. Andrew’s Face Transformer. Upload your picture and adjust the settings as necessary. Take a moment to look at yourself in the future. Do you feel more motivated to save for the benefit of your aged self?
Using digital avatars to get your brain in gear for good financial behavior is an example of what former White House regulatory czar Cass R. Sunstein and economist Richard H. Thaler call a “nudge” – a little push that helps us make better decisions.
Sunstein and Thaler say that a nudge can be as simple as a cafeteria line putting the healthy foods at the front. Another example they use is the “Save More Tomorrow” program, which automatically increases employees’ retirement savings when they get a raise. Their book, Nudge: Improving Decisions About Health, Wealth, and Happiness is an interesting take on how public policy makers and employers can help us make better, more rational choices.
The problem the authors address is our sometimes-dumb decision-making and inability to act in our own interests. They argue that behavioral economists should “highlight the best option, while still leaving all the bad ones open.”
You can nudge yourself toward more rational behavior by addressing some of the various cognitive biases that behavioral economists find in humans. Here are a few:
- Automatically deduct portions of your paycheck into savings, retirement or 401(k) plans. This way, you don’t have to trust yourself to make the right decision every month. If your money gets deducted automatically, just like taxes, you don’t miss it as much.
- Review your risk tolerance with your financial advisor. Don’t stick to the same investment decisions and allocations. When you change, so should your investments. In doing this, you overcome status quo bias, the tendency to leave things as they are even if it isn’t the best for you.
- Don’t make emotional decisions about normal market fluctuations. Investors are often thrown off by anchoring bias, or the tendency to value the first piece of information (in this case the price that you bought a security at) rather than using sober research to value assets.
- Don’t overestimate how strongly a news event, political announcement or market shift affects you in the future. Impact bias often makes immediate changes seem like they last forever. If you sold out of fear in early 2009 and missed out on the subsequent rally, you know what this means.
It’s time to be a more aware decision-maker. Think about how fallacies and biases affect the choices you make. Make your brain work for you, not against you.
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Nima Tolooi is a digital marketing specialist for Hewins Financial Advisors in San Mateo, Calif.
Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC (“Hewins”) is an investment advisor registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli, LLP. Information pertaining to Hewins’ advisory operations, services, and fees is set forth in Hewins’ current ADV Part 2A, copies of which are available upon request or at www.adviserinfo.sec.gov.
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