When making a decision, do you take ALL facts into account – including your “future self?”
When most people make a decision it’s hard for them to see the impact of their decision on their “future self” – but this is a critical piece of information to take into account.
Professor Hal Hershfield, Associate Professor Marketing and Behavioral Decision Making at UCLA Anderson School of Management, breaks down the reasons why people make poor financial decisions. As a behavioral decision making specialist, his research covers if, and how, better decision making skills can be taught.
He cites his findings that people can make better financial choices if they keep in mind their “future self” – the person you will be later on in life.
Unfortunately, when the majority of investors are planning their portfolios, they very seldom consider their future self’s needs. Professor Hershfield has some insight on why it is difficult to think about the future. He also has some advice on how to make better financial decisions.
Understand why your brokerage firm sent you a “Dear John” letter
If you moved out of America, but still keep your assets in an American brokerage firm, there’s a good chance that your brokerage firm will send you a letter asking you to close your account.
Doug explains why many U.S. brokerage firms are reluctant to keep accounts with international addresses. He gives action steps you can take if receive a “Dear John” letter.
If you really want to travel through time… financially, that is, check out Doug’s interview with the Financial Time Traveler himself, Nyle Bayer.
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Interview with Hal Hershfield
Hal Hershfield, an associate professor of marketing and behavioral decision making, is well known for his studies on how thinking about time transforms the emotions and decisions that people make. In this interview, he talks about your future self and finances.
Douglas Goldstein: I’m very excited to have on The Goldstein on Gelt Show, Hal Hershfield.
He’s an associate professor of marketing and behavioral decision making at UCLA’s Anderson School of Management.
I like the topic of behavioral decision making, Hal, because in my day job as a financial advisor, I talk to people about logical things like proper ways of investing, and then all of a sudden, they come up with these new ideas.
I think it’s all because their behavioral finance messed up their way of looking at things.
Why is it that people tend to do the wrong thing, even when they know the right thing to do?
Why People Do the Wrong Thing, Even When They Know the Right Thing to Do
Hal Hershfield: That’s a great question. First off, thanks so much for having me, Doug. You’ve just hit on the $1 million question there.
I would say that there’s a variety of influences or factors there, some of which have to do with the person, some of which have to do with the structure of financial decisions, and the fact that it’s really hard to make these decisions in an easy environment, where information is readily available.
If we just look at the decision makers themselves, which is, of course, what I am most interested in from my standpoint as an academic, I think the influences are vast.
Not the least of which is the fact that people have a hard time saying “no” to things that they want in the present.
My favorite quote about this is actually from a colleague of mine, Liz Dan. She said, "The present acts as a magnifying glass for our emotions."
I just love that idea that we might know that the best move right now is to not buy that 4K super high def extra-large TV and instead save that extra money, but the TV is here now.
Money for later - well that’s later…
Douglas Goldstein: You talk about this concept of your future self, which you’ve talked about it in your Ted Talk. Why are people so against helping out that guy in the future?
Why Do People Ignore Their Future Selves?
Hal Hershfield: I don’t think it’s that they’re against it. I think most people, if you ask them, would say, "Oh I’d love to help him," just like they’d love to diet, or they’d love to start exercising.
The reality is that that future version of you often gets a smaller chair at the negotiation table and has less of a voice, and it’s easy to ignore what he or she has to say.
Douglas Goldstein: Do you think it’s cultural, because I think some people are better at imagining themselves in the future, and some people aren’t. Is it just human nature that the here and now always trumps the then and not now?
Is Thinking about Your Future Self a Cultural Thing?
Hal Hershfield: I think it’s a little bit of both. I think that there are some cultures that value and incentivize future-oriented thinking, especially ones, and this is anecdotal, that value older people and the elderly, since these are after all, essentially proxies for our future selves.
I think in conjunction with that, innately, we have a difficult time thinking about the distant future because we’ve never been rewarded for doing so.
If we think back to our distant past, why should we think way into the future? We need to focus on getting food right now.
Douglas Goldstein: Okay, help me out here. In real life, when I do financial planning with people, I occasionally run into someone, maybe in his 40s or 50s, who has received a big inheritance.
Sometimes people come in, and they’re going to say something like, "Doug, I’m going to pretend this money is not even here. Let’s invest it for the long term." That’s great. Those are perfect clients.
Then I get people who tell me that, but months later they’re like, "Let’s put it all aside, but I just need $50,000 now and then I won’t call you again for 20 years."
Then four months later, they’re like, just give me another 50, and I have literally seen people burn through millions of dollars.
What can I say as an advisor, to guide them to see the future a little better?
How to Best Guide People into Thinking about Their Future Self
Hal Hershfield: It’s a great question. I think there’s a couple of ways to go about this. One is to ask them to think about an earlier version of themselves, say from ten years ago, that did something they now regret and say, "Look, let’s project that same feeling forward. If you burn through this money now, how is future Doug, or future whoever it is going to be, going to feel?"
I think what happens sometimes, in these situations, is that people get it from a rough level, that eventually they’re going to have to own up to these decisions.
In the moment, they don’t really fully process the fact that there’s a future version of them who will either benefit or suffer from the things that they’ve done today, and they need reminding of that.
You have a duty and responsibility to essentially make life decent for the future you. I think I can help at least frame it for them a little differently than they might be thinking.
Douglas Goldstein: I guess my job as an advisor is to use guilt, which is probably the best tool I have, to make you feel bad about what they’re going to do to themselves in the future.
Tell me, Hal, are there studies or academics who bring people into a lab and try and figure this out, so we can ultimately teach people to be better planners or better decision makers?
Hal Hershfield: It’s a body of work that I’ve been working on, and my students and colleagues have been working on as well.
We’ve looked at a variety of things, ranging from what sort of relationship do people have with their future selves?
How close, in other words, and connected, and emotionally bonded do people feel with that distant self, and whether or not those feelings are predictive of things like; the amount of assets they’ve accrued over time, whether they’ve started saving for retirement, etc.
We’ve spent a lot of time documenting that relationship and then we’ve looked at other things like, do we even see this sort of relationship show up on a brain level? Beyond that, what can we do?
Can we essentially try to help people? I’m always fond of saying, bridge the gap, but some say close the loop between who they’re now and who they’ll be in 5, 10, 15, 20, or 40 years down the road, depending on how old they are now.
Douglas Goldstein: Hal, I need help from guys like you because you study this. How to take the questions you’re raising, or the questions you’re trying to answer; and apply them to the guy who comes in and says, "Doug, you know I want to plan for my retirement, but I’ve got to pay for my kids’ college or, I’ve got to help my parents out."
I’m not even talking about someone who is blowing money like the people I’ve seen.
I’m talking about normal people who have to put long-term planning onto the priority list because if they don’t do it when they’re 20 or 30 and they start when they’re 40, or 50, or 60, they’re doomed financially.
There Are Multiple Selves along the Way
Hal Hershfield: I think you have to acknowledge that having these different signposts along the way is ultimately a good thing.
You need to save for these other aspects of things, as well the distant future, but I think it’s important to remind people that there are multiple selves along the way.
There’s the self who will retire, the self who has to pay for your kids’ college, and the self who is going to pay for your parents.
Those are all selves who you need to pay attention to.
The way that I like to think about it is having that conversation. Reminding people that there is another self is a big step towards changing the conversation.
But more concretely, I think there are ways to have exercises that are not cheesy but meaningful.
Literally sitting down and writing a letter to that distant future self, that retirement age self.
What do you have to do today? What do you think he or she will be up to? Or, if we want to get a little bit more technological about it, there are programs now that very easily and cheaply create age-progressed versions of your face.
Douglas Goldstein: Yes, I’ve seen these. Does that work?
Hal Hershfield: They’re great, and I think it helps to make it vivid and say, "Look, here’s you in 40 years."
There’s plenty of them you can download on your iPhone or your Android or whatever, and I think they at least help start that conversation and say, "This is you and the future. This is future you, and you need to make some decisions that will help take care of that person."
Douglas Goldstein: What a fantastic idea! I like that idea; someone comes into the office, I take his picture, and then we show him a picture of himself 40 years down the line. Has anyone tested this to see if people like that actually become better at saving or investing?
How Using Apps for Age Progression Helps with Making Decisions about the Future
Hal Hershfield: My colleagues and I wrote a paper about this a couple of years ago when we age-progressed people’s faces.
We put them in a virtual reality environment, and they stared at themselves getting older in a virtual mirror. We’re sure that that helped them make better long-term decisions.
They’re more patient on the laboratory tasks, and we’ve tested in a variety of contexts, showing that they tend to make people more patient.
We’re still trying to get it off the ground. I want to test this on a field setting. I think real decisions are something we’re still working on, although I know a lot of people have started implementing it in their practices.
It’s something that I’d like to continue the conversation on.
Douglas Goldstein: Hal, we’re just about out of time, but in the last few seconds, tell me how people can follow you and follow your work.
How to Follow Hal Hershfield
Douglas Goldstein: Hal Hershfield, thanks so much for taking the time.
Hal Hershfield: Thank you.