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Human beings are not naturally smart when it comes to money.  

As much as I’d like to exclude you and I from that statement, statistically-speaking, most of us are lumped in together. We have a really hard time making wise choices when it comes to managing our finances.  One area in which we’re particularly terrible, is saving money for retirement.

Now it’s not that we don’t have an excuse for why we suck so badly at this.  We all, as members of the human race, suffer from a terrible psychological disease.  

It’s name?

Present bias.

What is Present Bias?

Present bias is our natural inclination to over-value present benefits and rewards at the expense of benefits further into the future.

In essence, we over-value the here and now at the expense of the future.

A classic test beautifully demonstrates present bias in action.

Which would you rather:  $150 in 52 weeks or $130 in 48 weeks?  

Most people asked this question have no problem answering that they’d wait the extra 4 weeks to get the additional $20.

But what about this?  Would you rather have $130 today or $150 in 4 weeks?  

Now it’s not so clear cut.  In fact, many people opt for taking the IMMEDIATE benefits of the $130 TODAY as opposed to waiting 4 weeks for the extra $20.

The basic parameters for both scenarios, though, are the same.  

In both instances, participants are being asked if they value $130 sooner or $150 4 weeks later.  If you prefer to wait the 4 weeks in the first scenario, you should prefer to wait the 4 weeks in the second.

But many don’t.  The draw for IMMEDIATE rewards overwhelms logic.

This is present bias.

Your Brain on Present Bias

Save money by going back to the futureAs present bias-suffering members of the human race, we have a very difficult time delaying gratification.  This can make it brutally hard for us to make wise decisions for our long term benefits, whether with fast food or our finances.

In his best-selling book Thinking: Fast and Slow, Nobel-prize winning author Daniel Kahneman describes human thinking as being composed of two systems. Unoriginally, they are referred to

System 1 and System 2.

System 1 functions automatically, quickly and is emotional. There is very little effort involved, and we do not have voluntary control over it. It includes things like impulses and intuitions which can protect us from sudden dangers. This is the system that tells us $130 NOW is better than waiting 4 weeks for $150.

System 2, on the other hand, is logical and involves mental activities that do require effort, such as calculations. It is typically associated with things like making choices and concentrating on different tasks. It can help us to make good decisions while taking a longer view of situations.  It’s the system that encourages us to wait the 4 weeks to cash in on a bigger reward.

Two Selves

Imagine your whole self as being composed of two individual selves.  Think about it as the good angel and the bad devil.

There is your present self, which mostly uses System 1 to make decisions.  Your present self can’t see past the end of its nose. It is constantly looking to satisfy its immediate needs and desires.  It pays little or no attention to the future. It takes in data from its environment and makes quick, intuitive (it thinks) decisions.

The other self is your future self.  Your future self is logical, and thinks before it acts or speaks.  It is constantly weighing the pros and cons of different decisions, as it methodically moves towards doing what is best in the long term.

Every time you have to make a choice, a battle ensues between these two selves. It’s the old angel on one shoulder and devil on the other scenario.

The problem is, your present self seems more “real” and is much more persuasive.  You know this person intimately. You are this person. I mean, heck, you brushed its teeth this morning.

Your future self, on the other hand, is like a stranger.  You in 30 years? You don’t know that person. They’re just a distant, undefined figment of your imagination.

So when you go to make a decision, your present self’s best interests almost always win out.

For example, when we are faced with a decision like, “Should I save more money for my retirement or should I spend that money now on something that brings immediate benefits?” our brains are literally hijacked by System 1 and our present selves shove our future selves out of the picture.  

This often causes us to forgo saving for our future selves (the Stranger) so we can make our present selves (Awesome us!) happy.

It causes us to make really dumb, illogical decisions, like we looked at before, such as choosing to wait the 4 weeks for the extra cash when the gap is a year long, but opting for less money now when you get the rewards immediately.

Go Back to the Future

So we’re dumb.  All of us. When it comes to money.

But it’s not all bad news.

Science has provided some simple, yet effective ways to overcome present-bias.  All of these techniques involve you building your very own time-machine, ala Back to the Future, and getting in touch with your future self.

And it’s easier than you may think

    Get In Touch With Your Old Self

When we have an accurate and clear picture of our future selves, we’re more likely to save for them!  Research has shown that when people are shown age-enhanced images of themselves in the future, they save more money for retirement than those who don’t have as clear a picture of their future selves.

One way to get a high definition picture of yourself in the future is to use aging software to see yourself in 10, 20, or even 50 years.

While some of these are either CRAZY high tech and expensive, or kind of cheesy, you can find several that will give you a somewhat accurate look at what you may look like in the future.

I used HourFace 3D and Makeovr.com to generate a few images of myself as I move towards adult incontinence products, and this is what I look like.  

Silver fox?  Silver hyena maybe.

(as a side note, when my wife saw the “future me” she remarked that I needed to start using anti-aging cream. Mission accomplished.)

2) Write Your present self a letter from your future self

FutureMe is a free online program that allows you to write yourself a letter, and then it emails it to you at a time of your choosing in the future.  You can send it to yourself in 1, 3, or 5 years, or choose any date you want.

Bring the Future to You

The more deeply that you connect with your future self, the more real that “stranger” feels. And the more you realize that they aren’t in fact a stranger but they ARE you, the more inclined you feel to make wise decisions in your future self’s best interest.

Sit down and and take 5 minutes (as if you haven’t already done it!) and use a photo of yourself that you’re going to age.

After you’ve aged yourself, stare at the picture for a few minutes and ponder the following questions:

What do I want this person to be doing in x years?  What do I NOT want to be doing? What will this person be doing that has an impact on those around them?  How is this person going to be living? Where will this person be living? How will this person be paying for all this? And how much should I be saving now to make this happen?

Give yourself time to just sit and think and imagine what your future could be like.

After you’ve taken some time to do this, write your present self a letter from your future self.  Imagine that you are writing from the future (ala Marty McFly in Back to the Future) and giving your present self advice on what to do to make sure you crush your life and money in the future.  Be sure to be as specific as possible and to deeply describe all the things you want your present self to know.

Even though you’re writing to your present self, you’ll find writing from the point of view of your future self will help you to connect deeply with the you of the future.   As you do, you’ll be much more likely to save more money for your future and well on the road to making better choices today to rock your money down the road!

Husband and Dad, Teacher and Assistant Principal by day, after his half-pints are tucked in, Matt transforms into a personal finance blogger who writes in between fielding requests for lost stuffed animals and sips of water. He writes all about methods and mindsets to crush your finances at methodtoyourmoney.ca.

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