18 Jun Behavioral Finance and Your Future
Can you predict the future? I suspect most of you reading this would say no. For those that would say yes, perhaps you need some therapy (humor intended).
What if I asked you: “do you feel connected to your financial future?” Behavioral finance, like any young science or field of knowledge, is a work in progress. It is now moving into its second generation and attracting bright young minds furthering our collective cause in this space. Two such individuals at Kansas State University have just published a study that suggests we might be able to predict our financial future or at least impact it depending on our ability to visualize our future financial self. The more vividly we can imagine our future financial self or the more connected we are to that mental model, and the related details of financial goals, the more we influence behavioral changes that will make it more likely we will accomplish those goals.
The “future self-continuity framework” is a new psychological framework used to investigate intertemporal choices – the process by which people make decisions about what and how much to do at various points in time when choices at one time influence the possibilities available at other points in time.
In other words, let’s say you are 20 years from retirement and your financial advisor says you are spending too much and will not have enough assets to produce retirement income so you may live at the lifestyle of your choice. This study shows a correlation to suggest that when you hear this, most of you will change your evil ways (obscure reference to Santana) to be more likely to produce the intended outcomes in retirement, while some of you will say: “damn the torpedoes!” and continue to live it up now, as long as your vision of the future financial self is compatible.
Some people view their future self as a completely different person. However, we happen to think that visualizing exercises are very productive and necessary. The more you can do this, the greater the likelihood you can produce those results. If you can see it, you can make it happen.