Markets in Mind

A sideways look at behavioral finance, neuroeconomics, and the human side of investing

Picture Yourself With More Money Tomorrow

Using A Visual Nudge To Promote Retirement Saving

In principle, we all want to save money for a comfortable retirement. It can be difficult, however, to “put your money where your mouth is”, sacrificing present spending in favor of a saving for the future. Researchers recently identified a simple, clever, visual tool to nudge people toward planning for future financial security, and financial institutions are already rolling out its use to help their clients.

The premise underlying the research is that people fail to save adequately for the future in part because they are somewhat disconnected from themselves in the future. It’s as though we think of our future self as a different person. By exploiting virtual reality to approximate one’s future appearance, the connection to one’s future self can be fortified, encouraging more disciplined saving behavior.

This finding comes from a study in which the researchers showed college-age participants a photograph that had been digitally altered to depict their appearance as a 70-year old. The researchers’ intention was to focus participants’ attention on the person who would be depending on the future fruits of today’s saving efforts, namely their “future self”. In one exercise in this study, individuals who viewed a photo of their future self allocated twice as much money to a retirement savings account than a control group who viewed only a photo of their present self. This suggests individuals can be encouraged to plan better for the future by way of a simple visual cue. (As detailed in the published article, the researchers operationalized different versions of their study to rule out alternate explanations for the finding and to consider more general contexts, the results of which support the original conclusions.)

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Merrill Lynch has incorporated this research finding in a Web application they call “Face Retirement”. Anyone with a web camera and an internet connection can transform a photo of their present self into photos at various points in the future up to the age of 107. In case you are daunted by the prospect of seeing yourself under such conditions, I tried it myself. Here I am today and in 2076. (I am relieved to see I will still have plenty of hair as a centenarian. Oh, and wrinkles, here I come!) 

Present self / future self

Lisa today and in 2076

There exist other future-centric tools to encourage prudent spending today in order to maximize retirement saving behavior. One technique commonly recommended by financial advisors is as follows. When considering a large purchase today, instead of thinking about the cost in terms of today’s dollars, think instead about the amount being foregone in the future. For instance, a 20-year old could purchase a fancy pair of shoes for $200 today, but thinking in terms of the future, spending the $200 today means almost $1200 less money in her retirement account when she reaches the age of 65 years (assuming a fairly modest 4% compounded rate of return). The thought of $1200 less money in retirement can be a compelling deterrent.

In this age of reduction of built-in retirement safety nets, individuals are wise to think about our natural tendency to procrastinate, and the harm human nature can inflict on saving. By exploiting simple yet effective tools, folks can take concrete steps toward planning for a safe and sound retirement.

Lisa Kramer, Ph.D., is an expert on behavioral finance, drawing on human psychology to shed light on financial markets in unconventional ways.

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