Ever wonder how much money in lost interest this morning’s latte will cost you in retirement savings? If not, you are far from alone.
Most people don’t pull out a calculator to weigh the future financial consequences of today’s latte, and behavioral scientists are producing ever-mounting evidence that people are not wired to consider financial decisions in such a systematic, rational way. Even when the future consequences are clear, people often advance short-term interests at the expense of long-term well-being, thinking about these trade-offs in more personal, situational terms: It’s just a few dollars, and I need a pick me up. In the end, it’s all about “me.”
More precisely, it’s all about the “me” of the present and how much a person thinks he or she will change in the future, says Professor Dan Bartels, whose research often explores the psychology behind intertemporal trade-offs — how people weigh smaller, immediate rewards against larger, long-term rewards. Working with Oleg Urminsky of the University of Chicago, Bartels conducted a series of experiments, manipulating the degree to which subjects felt connected to their future selves. The researchers hypothesized that people who believe they will change significantly in the future — people who feel less connected to their future selves — will not think about their future self as fully themselves in the same way people with high connectedness think about their future selves, and expected low-connected people to be more likely to make impatient, short-term decisions.
College graduation is the kind of milestone likely to prompt significant life changes. The researchers used a simple but very effective method of fostering a feeling of future connectedness (or disconnectedness), asking a group of college seniors — three weeks before graduation — to read a passage that described college graduation either as an event that would prompt a major change in their identities or as an event that would prompt only a relatively trivial change. Compared to students who read the passage describing graduation as small change, those who read a description of the event as a major change were much more likely to make more impatient choices, choosing to receive a gift certificate worth $120 in the next week rather than wait a year for up to $240.
But couldn’t this mean that the soon-to-be-grads simply expected their preferences to change? Probably not, because unlike taste in clothing or music, preference for cash rarely goes out of style. To be sure, though, the researchers set up a variation on the graduation experiment, presenting subjects with messages to promote or diminish future-connectedness, but with more flexible options: students made a hypothetical choice between receiving a smaller value gift certificate in one week’s time or receiving a larger gift certificate in one year, and designating which retailer they’d prefer to use the certificate at. But subjects were told that if they won the drawing (and would therefore receive a gift certificate in the time frame and amount they had chosen) it could be used anywhere, not only at the selected retailer. The future-connected subjects were still more likely to choose to receive larger amounts in a year, while the less-connected subjects were more likely to choose smaller amounts sooner.
While other factors clearly play a role in decision making, Bartels notes, this research shows that having a diminished sense of connectedness to one’s own future self can cause an unwillingness to defer benefits to a future self who is evaluated to be substantially different — what they call intertemporal selfishness. This tendency is unique among other factors that influence now-versus-later trade-offs. For example, some purchase decisions — a college student spending their last dollar of their monthly budget to buy ramen — are made out of necessity. Yet in another of the experiments, people who said they needed a new laptop right away — because theirs was too old and slow — and who were primed to feel more connected to their future selves chose to wait about a month longer than would have been expected, in order to get a lower price. And, people who had the same need for a new laptop who were primed to feel disconnected from their future selves bought about a month sooner than would otherwise be expected.
“Our work suggests that you can motivate people to hold onto their money, or make other, more prudent decisions by increasing their sense of connectedness to their future selves,” Bartels says.
But he cautions against viewing every impatient choice as a mistake. “Rather than trying to guilt ourselves into making prudent financial choices or creating complicated incentive schemes that force our current and future selves to face off against each other, we could instead look for simple, straightforward ways to foster our sense that what matters most will be preserved in our future selves, so that we can achieve goals that are important.”
Dan Bartels is assistant professor of marketing at Columbia Business School.