Morningstar - Winter 2019 - 17

This explains why we care so very much more
about something that is definitely happening,
right here, right now, to us personally (close on all
four measures) than we do if the same thing
might happen, on the other side of the world, 100
years from now, to a stranger (distant on all
four measures).
Back to the Trade-Offs

This is why it's so hard to do things we know are
good for us in the long run, but don't have
an immediate benefit-or worse, have a cost in
the here and now. If going to the gym means
drudgery today so that Future You can be in shape,
the way you picture that future matters. The
further away that payoff feels, the less chance it
has of outweighing how much you'll dislike
working out right now. That means that your
comparison of their respective values is going to
be weighted all wrong.
It's the same with saving and waiting years for
long-term investments to bear their fruits.
The more you discount the value of having that
money in the future, the more you will prefer
spending it today.

UCLA professor Hal Hershfield and his
colleagues have been studying the effects of
psychological distance on savings. They
have run experiments using MRIs, augmented
reality, and age-progression software to
study how thinking about our future self can affect
behavior. Evidence is piling up that suggests
that the closer you feel to your future self, the
more likely you are to make good long-term
financial decisions.

For example, students who interacted with an
age-progressed avatar of themselves had
stronger saving intentions afterward than those
who saw an avatar of their current self. I
believe this experiment worked because seeing
your own face aged in great detail shrinks
the psychological distance between who you are
today and who you imagine you will be in the
future. When the picture of your future is close up,
detailed, and clear, you can't wave it away
as easily as you can a far-off, vague image of an
abstract idea like "retirement" or "old age."
By forcing a close, detailed view of your future,
you impose a low-level construal, which your brain
interprets as real, likely, and important.

"Sarah is hopping mad and thinks she's justified
in telling her colleague off." That shift in
perspective from first to third person puts a sliver
of psychological distance between you and
your angry self, allowing for a bit more objectivity
on the situation.
What Does This Have to Do With Investing?

Everything. Investing is emotional. There are the
highs of great returns, the lows of losing,
and all the emotions that go along with trying
to choose where to put your money. We
try to make it more rational, but we can't escape
the fact that what happens to our money
happens to us.
So, whether you or your clients are antsy to get
in on bitcoin or a long-awaited IPO, reeling
from a serious loss that set you back a year, or
impatient to see returns faster than those
boring (but smart) exchange-traded funds will give
you, psychological distance is playing a part in
your mental cost-benefit analysis, and you
would be wise to use it to your advantage rather
than let it lead you into a trap.
The Bottom Line

That's the effect of present bias: It magnifies
things that are already close and shrinks
things that are far off. We can't really stop our
brains from going down this path, but we
can counter some of its effects.
The Good News

Researchers have found that the relationship
between psychological distance and construal
level is bidirectional, meaning that if you
change one, the other changes as well. In other
words, if you add detail to your mental picture of
something, it will feel closer, psychologically.
Likewise, if you blur or shrink your mental picture,
it will feel further off.
Adding details to your picture of the future
can make that future feel closer, more
likely, and more important than it did when it
was a blur on the distant horizon. That can
offset some of the effect of present bias. There's
a case to be made for doing the opposite,
too: mentally conjuring closer outcomes as if
they were far off.

Here's another trick: Imagine your future through
the eyes of your future self, rather than from the
outside looking in. This trick of perspective
helps reduce psychological distance, too. See it up
close, in detail, and through your own eyes,
and it will likely feel closer, more important, and
you will naturally care about it more. This can
offset the effects of present bias.
An opposite tack can help, too. You likely know
what it's like to be "too close" to something
to be objective. Putting distance between
ourselves and a difficult problem can lend a better
perspective. When emotions run high, we
tend to make decisions with a "hot head" instead
of calmly considering our options. There's a
simple but effective mental trick to get perspective
quickly: Talk to yourself in the third person.
Suppose I'm upset with a colleague. He
has stepped on my toes for the last time. I'm hot
around the collar and ready to have it out.
Instead of thinking, "I am hopping mad and totally
justified in telling him off," I would say to myself,

Present bias magnifies the importance of the
immediate when compared with the future,
and it leads plenty of brilliant folks unwittingly
down the wrong path. Learning to see the
close-up through a third-person perspective can
help you and your clients respond more
coolly to otherwise emotionally heated situations.
Likewise, bringing the far off closer in your
mind's eye, adding detail and seeing it through
a first-person perspective can help you weigh
the future more accurately.
Our brains are amazing computing machines,
but the physics of psychological space warps our
ability to correctly view alternatives if they
take place at different times. Training our mind's
eye is not easy, but it is a simple way to make
much better decisions for the long run. Our future
selves will thank us.
Sarah Newcomb, Ph.D., is a behavioral economist for
Morningstar and author of Loaded: Money, Psychology, and
How to Get Ahead without Leaving Your Values Behind.

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Morningstar - Winter 2019

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