People’s financial decision-making can be a head scratcher. Take savings, for example. It’s widely reported that more than half of Americans wouldn’t have enough emergency savings to cover an unexpected $1,000 bill.
Are we all irresponsible? Are the macro-economic obstacles so insuperable? Or are there other explanations for our failure to plan ahead?
“Economics is not a linear function of numbers; it’s a living discipline, because it incorporates emotions and instincts of people in the decision process,” says Dan Geller, CEO of Analyticom, a behavioral economics modeling firm.
The field of behavioral economics studies the cognitive biases and emotions that shape our decision‑making much more than we consciously realize. “Behavioral economics is simply a marriage between economics and psychology,” Geller explains.
In the area of savings, a phenomenon called temporal discounting helps explain why we sometimes don’t act in our own best interest.
“Research shows that when we think about ourselves in the future, our brain lights up like we’re thinking about a different person,” says Melina Palmer, CEO of The Brainy Business, which helps companies apply behavioral economics. “If a person is thinking about retirement or a car they’d like, it’s like asking somebody to care about their future self. But when the brain thinks, ‘That’s somebody else, not me,’ they are much less likely to take action.”
Goalsetter, a family and youth savings, investing and financial education platform, tackles temporal discounting in one of its videos. In the video, a young man packing for a spring break getaway is visited by his “future self,” complete with gray hair. Future self informs the present self that he’s still working because the present self didn’t save enough for retirement.
“Every time we show these videos, we hear, ‘Oh my gosh, that’s me,’” laughs Tanya Van Court, CEO and founder of Goalsetter. “Even the smartest consumers, if they are not given financial education, are on a path to making terrible financial decisions.”
