During every show, Clark tells listeners that he wants them to save more, spend less, and avoid getting ripped off. It sounds like common sense, and maxims that we should easily be able to live by. Yet, every day, Clark is able to fill hours on the radio, write articles, sell books, and appear on television because people want his help in doing what, on the surface, should be a pretty simple concept.
Why aren’t we able to do this all on our own? Spend less than you earn, put away some for a rainy day, and save for tomorrow all seem like reasonable goals without any rocket science or brain surgery involved. Instead, though, we look at our bills and our accounts and keep asking ourselves the same question:
We didn’t spend less than we made. We didn’t put aside money for a rainy day. We didn’t save some for the future. Instead, we bought things that, later, we wondered what we were thinking when we pulled out the wallet to buy them. We look at a closet full of clothes or a shed full of tools and think to ourselves “Do I really need all of this?”
Then, the next month, it’s lather, rinse, repeat, even though we know better.
There’s a two word psychological principle that explains what’s driving us to make poor short-term decisions with our money. It’s called hyperbolic discounting. Simply put, hyperbolic discounting means that we put a much greater value on the present than we do on the future.
DOING THE $101 EXPERIMENT
Let’s do a simple exercise to show the power of hyperbolic discounting. I’m going to pose a question to you. Don’t think too deeply about it; just go with what your gut tells you.
Would you rather have $100 now or $101 two months from now?
Most of you would rather have $100 now than $101 in two months, even though that extra dollar two months from now represents nearly a 6% annual return, better than anything you can get at a bank right now.
To explain why hyperbolic discounting is so powerful and pervasive in our lives, we need to examine our brains and how they developed the way that they have.
Inside our heads are two primary systems competing against each other for your attention. One section is called the prefrontal cortex. That’s the section of the brain that allows us to have advanced thoughts and separates us from the rest of the animal kingdom. When you’re considering the philosophical implications of politics and whether or not the Braves are going to finally win it all this year, that’s the prefrontal cortex. The prefrontal cortex knows that you need to behave rationally, to live within your means, and to set aside money in the future. It’s the part of your brain that comes up with those best laid plans that will get you to a comfortable retirement.
INSANE IN THE MEMBRANE?
However, there’s another part of your brain fighting for attention. It’s called the limbic system, and we share this part of the brain with other animals, particularly monkeys and apes. That’s why I often refer to your limbic system as Monkey Brain. It wants pleasure and fun now, and doesn’t really care about the future consequences.
Back in the good old days, when we lived in caves and hunted woolly mammoths, our conception of the future lasted about 30 minutes. It was either eat the woolly mammoth or be eaten. When we caught a woolly mammoth, we feasted and gorged on it, because there were no refrigerators for freezing filet of mammoth, and we didn’t know if we’d catch another one tomorrow.
Therefore, whatever happened in the present was all that mattered to us. We needed to think and react quickly, because when a mammoth appeared, we didn’t have time to contemplate the philosophical underpinnings of hunting the mammoth. Thus, we relied on instincts, emotions, and gut feelings to get us through to another day.
Since we lived a day-to-day existence, our limbic systems developed a strong disdain for distant futures; after all, we didn’t know if we’d make it to see tomorrow, much less old age.
Today, we still have the remnants of those caveman days sitting in the backs of our heads telling us that pleasure now is much better than pleasure in the future. Furthermore, with hyperbolic discounting, not only do we care less about future pleasure, we care less about future pain.
So, if you don’t have the money in the bank account right now to go buy those Jimmy Choo shoes or the man cave accessories, your limbic system has no problems telling you to whip out the credit card and charge it all. The day of reckoning – when you’re going to receive the credit card bill and have to pay it – is a long way off as far as your limbic system is concerned, but the joy of wearing those new shoes or turning on that new 183” flat screen TV to watch the Braves sweep the Mets is right around the corner.
So, when you finally receive the credit card bill and look at what you bought, wondering “what was I thinking?” you finally know who the culprit is. It’s your limbic system – your Monkey Brain has been going ape on you.
How do you fight off the impulses from your limbic system to reduce the impacts of hyperbolic discounting?
- Automate your finances. If you have automatic contributions to your retirement accounts, automatic bill pays, and automatic transfers to your savings accounts, that’s less money that your limbic system can see in the first place. Less money to play with means fewer mistakes that you can make with your money.
- Think of your future self as if you’re watching a movie. Remember, your limbic system doesn’t want to think about the future. If you can imagine paying that credit card bill or having to work when you’re 97 years old, it will serve two purposes. First, it will make the future seem like the present. Second, it will give you a few seconds to allow your prefrontal cortex to take back over from your limbic system.
- Think of your future self as a sibling. Since your limbic system wants to treat your future self as a stranger, it’s important to make that future self a part of the family. Back in the days of hunting woolly mammoths, we relied on our family to help us hunt in packs, and our limbic system does care about our family. Therefore, if we think about our future selves as part of the family, our limbic systems will care a little more about taking care of our future selves.
Once you know what is happening inside of your head and how your brain regions fight against each other, it’s a little easier to influence the outcomes. Even taking a few seconds to stop and think about decisions before making them can allow your prefrontal cortex to regain control and keep you from falling prey to hyperbolic discounting. Treating your future as an equally important part of your life is Clark smart.
Jason Hull is an hourly, fee only financial planner in Fort Worth, Texas. He is a veteran and a graduate of the United States Military Academy at West Point, and he earned his MBA from the University of Virginia. You can receive his free e-book Four Places Your Monkey Brain Should Never Live by signing up here.
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