Morningstar - Winter 2019 - 16

Dispatches

investing for tomorrow in favor of buying more
stuff today? Why don't we seem to care enough
about retirement savings until it's too late
to catch up? Why is the immediate so much more
important to us than the far off? Are we really
just irrational creatures?
I don't think so. I think we really try to do an
honest-to-goodness cost-benefit analysis.
The problem is in how we picture trade-offs.
It's All in Your Head

Anytime you decide between two things, you
create a model of the scenario in your mind.
You think about what will happen if you do A and
what would happen if you do B. You look at
outcomes A and B side by side, and you decide
which one you want the most. This is
all completely straightforward and rational.
But here's the booby trap: Unlike the physical
world, our mental models are built on
something called "psychological distance," and
that changes the game.
Physical distance is a measure of how far apart
things are in space. Psychological distance
is a measure of how far apart things feel according
to your mind's eye. It's how we measure the
"space" where ideas live.
Anytime you imagine an outcome, that outcome
takes place in psychological space, and it turns out
that psychological space operates by a few basic
rules. Those rules affect how we imagine trade-offs.
It sounds complicated, but it's not. In fact, it's so
intuitive that we talk about it all the time.
You have "close" friends and "distant" relations.
There are things in the "near term" and things
that are "far off" in time. We even speak of
"remote" possibilities, and we have laws requiring
judges and doctors to recuse themselves
from cases where they are "too close" to be
objective. That's psychological distance. It's at
the core of how we think.
"Spatial thinking is the foundation of thought. Not
the entire edifice, but the foundation."
Barbara Tversky, 2019

16

Morningstar Winter 2019

Barbara Tversky is a Stanford professor who
studies how our brains encode information.
I don't think it's a coincidence that her husband,
Amos, was one of the fathers of behavioral
economics. Her understanding of how the mind
maps ideas, combined with his work in
financial decision-making, would have made for
riveting dinner conversation (seriously).
Amos Tversky's work on measuring psychological
distances predates his work on prospect theory
(which won his collaborator Daniel Kahneman a
Nobel Prize), and I based a lot of my early research
on his work and the repeated studies that
came after, which supported it. Here's what
we know: We weigh trade-offs by imagining them,
and we imagine them in psychological space.

We discount things that we don't think are very
likely to happen:

How much you care about it...

how likely
you think
it is
to happen.

Guaranteed
We do the same thing with time:
How much you care about it...

As I said before, psychological space seems
to have some rules that govern how we "see"
things in our minds. One of the rules of
psychological space trips us up out here in the
physical world.

how far
in the future
it will
happen.

Size Matters

Right Now

The first rule of psychological space is this:
Things that are far away should look smaller than
things that are close up.

Where something happens:

Think about a landscape painting. In that picture,
every brush stroke is the same actual distance
from your eye, so how does the painter show what
is close and what is far off? Two ways: size
and clarity. Things in the foreground tend to be
larger and more clearly defined than things
in the background.
Research suggests we do the same with ideas.
The further away something feels to us, the
less mental space we give it. We don't bother with
fine detail when thinking about something that
might happen in 20 years, but something that we
expect to happen today will take up more
psychologial space. This tendency to mentally
shrink things that we imagine to be far off is called
"discounting." When the thing we are imagining
is far off in time, it's called "present bias."

100 Years

How much you care about it...

where
it
happens.

Right Here

10,000 miles away

And who it happens to:
How much you care about it...

who
it
happens
to.

The Physics of Thought

We discount things on (at least) four criteria.
For example:

Extremely Unlikely

Self

Stranger
Morningstar - Winter 2019

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