IEyeNews

iLocal News Archives

This cognitive bias explains why you keep putting off saving money

woman-cupcake-bakery-1By Libby Kane From Business Insider

Why is it so hard to save for retirement?

If you really don’t have a surplus cent, that’s one thing. But many of us do have money to spare, so our avoidance of this major financial tenet must be attributed to something else.

For instance, the cognitive bias of “time discounting.”

In non-psych speak, that’s simply the preference for immediate over future rewards — from choosing to eat a cupcake now over fitting in your jeans later to spending $500 on a new TV instead of saving that cash for future use.

When Olin Business School researchers Gubler and Pierce found that workers who contributed to their companies’ 401(k) plans tended to be the same ones who proactively improved their health, they suspected that time discounting might play a role. Perhaps the same employees who were better able to combat the discounting in regards to their financial future could do the same for their long-term health.

In another paper, “Time Discounting and Time Preference: A Critical Review,” Shane Frederick, George Loewenstein, and Ted O’Donoghue point out that time discounting may be common among people who “find it painful to delay gratification” — even more so when the thing they want most is right there in front of them. Anyone who has overturned their budget for a suite of Apple products will identify with that.

The tricky thing about time discounting is there isn’t really a way to keep yourself from doing it. Scary stats, like the fact that some experts predict a retiree will need $2 million in savings, and persuasive charts, like the ones that illustrate the power of compound interest, only go so far.

Luckily, you don’t need urgency to be an effective saver. Setting up a simple automatic contribution from your paycheck to your 401(k) or IRA — or both — will take the hard part out of your hands. You can keep buying whatever tempting gadgets cross your path while your money goes on working behind the scenes, preparing for whatever your future self needs.

IMAGE: Tony Marshall / Stringer / Getty Images

For more on this story go to: http://www.businessinsider.com/cognitive-bias-procrastinating-saving-money-2014-7#ixzz37GHYyUEl

 

Related story:

anchor-caribbean-ocean-1This psychological trick tempts you to spend more money

By Libby Kane From Business Insider

Once you see a price tag, you’re sunk.

It all has to do with a psychological principle called anchoring. Essentially, the first number you see colors any numbers that come after it.

Imagine: You see the perfect pair of jeans for $200, and it seems a bit steep. Later, you go online and find that same pair for $150 — $50 less! “What a great deal,” you think to yourself.

But is it?

It’s no secret that most products, including designer jeans, are produced for much less than they’re sold. So when you’re basking in the glow of saving $50, you’re still spending $150 … you’re just much happier about it than you would have been had you seen the same pair of jeans for $100 first. (“$150? What a ripoff!”)

The anchoring effect isn’t limited to pricing. It’s a cognitive bias also used in professional negotiations, where the first person to throw out a number has the advantage, because they provided the figure that will affect any others to follow.

How can you combat this subconscious influence? By creating your own anchor. For example, if you’re going shopping in person, set a mental limit for how much you’d be willing to pay for that must-have denim, and then check the tag. If it’s more than your limit, you’re out of luck (and you’ll probably be horrified at the price). If it’s less, you can sweep it into your shopping cart with a clear conscience, knowing your budget will thank you later.

Unfortunately, creating your own anchor isn’t a magic fix: If your mental anchors and existing prices don’t match up, you may want to make a point of doing your research. Once you’ve seen a dozen or so similar products, you’ll have an idea of the best prices available.

IMAGE: anchor caribbean oceanFlickr / David Blaikie

For more on this story go to: http://www.businessinsider.com/anchoring-bias-tempts-you-to-spend-2014-6#ixzz37GIHBCVg

 

LEAVE A RESPONSE

Your email address will not be published. Required fields are marked *