Love Your Stranger
One of the common human conditions that bind us together is a desire for a better future, one in which we are independent, able to provide for our family's needs, help others, and leave a financial legacy to the next generation.
The way to this life is fairly simple, and not a secret to most. By living within our means and investing the rest, the future described above is within reach of most people.
However, just like eating less and exercising more is a well-known recipe for better health, the trick to a secure financial future is more about the doing than the knowing.
The Affliction of Humans
Economic theory in the 20th century concerned itself with what a rational person unafflicted by the human condition would do. This person (or "econ" as behavioural economists now refer to them) understood the tradeoffs inherent in every decision and made a decision that both their current and future selves would be proud of.
If only "econs" existed. When real people make decisions under conditions of uncertainty, we take mental shortcuts to help us. In financial decisions, this often leads to sub-optimal decisions, often ending in regret.
These biases have been documented extensively, and we actively try to identify them in our own, and our clients', decision-making.
The loss-aversion and recency biases would have been difficult to resist by any investor during the height of the 2020 market correction precipitated by the Covid-19 lockdowns. While these, and other, biases will continue to plague all investors on their journey towards financial independence, there is another challenge we face that needs to be addressed.
The Present Bias
The tendency to favour the present over the future is something everyone can relate to. Prepare for next week's meeting? That can wait, TV sounds better now. Save for the future? No thanks, YOLO. In a world of shortening attention spans and more assaults on our senses than ever before, the allure of instant gratification is all around us.
While your future self does not exist yet, there will come a time when you will become responsible for the impact your current decisions will have on that person. For this reason, the ease of prioritising the present over the future is a significant challenge for anyone wanting to achieve the financial security we all crave.
There's a reason why this is difficult. Studies have shown that when you imagine your future self, your brain does something weird: It stops acting as if you’re thinking about yourself. Instead, it starts acting as if you’re thinking about a completely different person.
Your brain acts as if your future self is someone you don’t know very well and, frankly, someone you don’t care about.
The Solution
In a world where most of the financial decisions we make have multi-decade implications, the inability to relate to our future selves is a big problem.
Knowing this problem exists is half the battle. Research has also found that people who interacted with virtual future selves exhibited an increased tendency to accept later monetary rewards over immediate ones. As augmented and virtual-reality technology continues to develop, perhaps an elegant implementation of this will become available to us.
Until then, a two-step process of understanding what our future (based on our current trajectory) is likely to look like, and imagining how we will feel about this outcome, is a useful test of our actions. Any discomfort with this reality should provide the motivation needed to overcome the inertia to making better financial decisions.
Your future self is watching, there's no time like the present to make a change.