Let’s say a friend offers you a $20 bill, but with a caveat: You can either take the $20 now or wait and receive $25 in a month. Most would vote for taking the money now — you’ve probably already made plans on how to spend your $20 windfall.
That very human tendency to take things now, rather than wait for later is literally all in our heads; behavioral psychologists call it temporal discounting. It helps explain why so many people have a hard time saving and making good financial decisions. (According to the Pew Charitable Trust, one in three American families don’t have any savings.)
So why do we act against our best interests, spending in the present rather than saving for our futures? In collaboration with Marcus by Goldman Sachs™, we looked at the biological factors that impact our financial well-being, and the science is telling: human nature isn’t doing us any favors.
A No-Win Discount
The term “temporal discounting” describes our tendency to favor actions that enhance our current mood over those that might lead to long-term gains. When we do something that feels good, the hormone dopamine floods the regions of our brain that process emotions and experiences, making us more inclined to keep doing the things that feel good now over what’s beneficial for us later.
Smarter financial choices like saving for retirement are “decisions in which the good outcomes — e.g., being able to retire — are far off in time,” says Peter Sokol-Hessner, assistant professor in the department of psychology at University of Denver. That distance may keep us from making choices in our long-term self-interest, because those outcomes don’t look as good next to the “right now” options, like buying something we want in that moment.
Face The Future
“Some keys to managing decisions like these are to make those far-off outcomes feel closer,” Sokol-Hessner says, “to imagine how you’ll feel when you can use those retirement funds, how grateful you’ll be that your younger self sent this gift into the future.”
Hal Hershfield, an assistant professor of marketing at the UCLA Anderson School of Management, demonstrated this in a 2011 study that had participants come face-to-face with their future selves through an immersive virtual reality program that showed a realistic digital version of themselves. When looking into a mirror in this virtual space, one group saw their digital selves reflected back at them, and another group saw a 70-year-old version of themselves.
“Participants were told to imagine that they had just unexpectedly received $1,000 and were asked to allocate it among four options,” the study says. “‘Use it to buy something nice for someone special,’ ‘Invest it in a retirement fund,’ ‘Plan a fun and extravagant occasion,’ and ‘Put it into a checking account.’” Those who saw their future selves put more money — more than twice as much — toward retirement savings than those who only saw their current selves. Making the connection between your present and future self can help you to act in your self-interest for the long term.
Think Big And Slow
A study conducted by Sokol-Hessner found that participants were less loss-averse in making risky financial choices after they were prompted to consider their choices not in isolation but as part of a bigger set of decisions. “We showed people the exact same gambles, and when they just took a different perspective, they made consistently different decisions. Their bodies and brains suggested to us that they literally were able to change how they felt about losing.” Framed by this shift in perspective, the study participants’ losses “hurt less.”
Sokol-Hessner adds that, “We’re not strictly at the mercy of our emotions or, for that matter, our options ... We literally have the ability to change how much losing hurts.” You can also tap into that more mature, deliberative part of your brain by taking a step back and letting yourself process decisions before you make them.
Work With Your Brain
We know that the mind responds well to rewards. So find a way to reward yourself for making good financial choices. To help bring your present and future selves closer together, plan how you’re going to use your savings, say, by pinning to a Pinterest board of travel plans. This can help train your brain to make new connections between fiscal responsibility and dopamine-laden rewards; you’ll be more likely to follow through with choices that don’t appear to benefit you in the near term.
To Manage Money Is To Manage Your Health
There’s more at stake than your bottom line when you approach financial decisions with a clearer head and tap into your more “mature” mind. Economic instability causes psychological stress, and the stress hormone cortisol has been linked to countless health problems such as heart disease and weight gain.
Stress also affects our ability to be happy. Depending on your savings and income, having your car break down or experiencing a leap in child care costs can set you back financially and emotionally. According to a 2015 Federal Reserve survey, 46 percent of households “could not cover an emergency expense costing $400,” or would have to borrow or sell something to cover the unexpected cost. Practicing smart financial habits can help reduce stress and make you a happier person in the present — and for the long run.
Marcus by Goldman Sachs offers a fixed-rate, no-fee personal loan that helps you manage credit card debt. Learn more at marcus.com
This article was produced by the Huffington Post Partner Studio and sponsored by Marcus by Goldman Sachs.