The Moral Molecule

Neuroscience and economic behavior

How to Use Your Brain to Save More

Use the science and take a quiz

Stable, rich, free, but not saving enough. It is not only the United States. Latin America's wealthiest and most well-run country, Chile, doesn't save enough either. Reporter Fernanda Derosas of the newspaper La Tercera de Chile asked me recently if findings in neuroeconomics could help increase savings rates in Chile. This is what I told her.


First, a quick neuroscience lesson: The brain balances the desire for shiny new things with their cost. Observing something to buy activates the brain's "wanting system" that makes getting things feel good. But, the Rolling Stones reminded us that we can't always get what we want. The brain reacts to prices by activating brain regions that make us feel pain. The information from the wanting and pain systems are relayed to the prefrontal cortex where a cost-benefit calculation is made to determine if you should but that new pair of Valentino slide sandals for $675 or keep your cash for some other use.

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One way that you can save more is by accentuating the salience of prices. This increases the pain you will feel when considering buying something. There are a number of ways to do this. First, the pain of prices is felt more when using cash compared to credit cards. Action: withdraw a fixed amount of cash per week for expenses and do not spend more than this except in a (real) emergency. Second, use social support. Action: do not purchase any item for more than some amount, perhaps $50, until a friend says you can. You can do the same for him or her to help your friend stay on a budget, too. Third, slow down decisions so the brain's deliberative prefrontal cortex can evaluate the wanting and pain signals effectively. Action: For any major purchase, delay your decision until the next day and think about whether you really need this item. Sleeping helps consolidate information in the brain and leads to improved decisions.


Another approach to increasing saving is to make savings itself rewarding. You can set a monthly savings goal and "pay yourself first" (i.e. save) before you shop. When the month ends and you've maintained your saving goal, go celebrate to provide positive feedback to your brain. You might, for example, go out for some fancy gelato or to a favorite restaurant for dinner.


Another way to make savings rewarding is to make it tangible. When you buy new shoes, you can see them and show your friends. Do the same with your savings. There are a number of software programs and phone apps that will track your savings and show you that you are reaching your goals, for example, manageME and You Need a Budget. You can set up these programs so that every day when you turn on your computer or phone you'll see how much money you are making from compounding interest on your savings. Or, if you are creative, make a display in your house representing your savings. Maybe this is a clear plastic tube with savings deposit slips in them with your goal clearly marked so your family and friends can enjoy your hard work and encourage you to continue. The websites stickk.com and goalsontrack.com are places to set up a challenge your friends can help you with.


In fact, using social support is an effective way to meet all kinds of goals, including savings goals. Engage your social network so your friends and family see how important savings is to you. You could even set up a savings plan with a friend so you both save and support each other to continue doing so. In Vietnam, many villagers and city-dwellers alike participate in a system called hui where they contribute monthly to a common pool among their friends with one person per month paying interest to others in a game-like setting. The national savings rate in Viet-Nam? Thirty percent.


Now the bad news. People vary greatly in their ability to be patient and watch their savings grow over time. For those of us who struggle to be patient, make saving a game that is fun, tangible, and use social support to help your brain find savings rewarding. If it is fun, you will do it. It takes take some practice to watch your savings grow, but the good news is that patience gets easier with practice. "Paying yourself first" means putting your long-term needs into the present so you control where you are going. Because of compounding, savings grows faster over time, so the time to start savings is now.


Won't you try?

Are you a spender or a saver? Take this test.

 

Paul J. Zak is a neuroeconomist at Claremont Graduate University in Claremont, CA.  His book The Moral Molecule will be published in 2012.

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