IMAGINE YOU’RE on a gurney, head immobilized, being rolled into an fMRI, a functional magnetic resonance imaging machine. Initially, as the machine clicks, pings and hums loudly around you, you’re instructed to think of nothing in particular. But then the work begins. Pictures flash on a mirrored panel in the closed tube. They’re crude, almost like early PowerPoint presentations. The first shows a small reward that you can have right now. The second shows a larger reward, but you have to wait until tomorrow. You’re told to choose between them and indicate your preference on a small clicker placed next to your dominant hand. The pictures continue. There might be bigger rewards. Longer delays. Other scenarios.
That’s been the scene not in hospitals but in labs at Stanford, Carnegie Mellon and other universities as neuroeconomists try to get a grip on why we make -certain choices about money. This research has been particularly enlightening when it comes to why we’re so bad at putting money away. The savings rate in America is 5.5 percent, only about half of what experts believe it needs to be. The fMRI scans show us the reason: We prefer immediate gratification to delayed gratification. Some researchers have found that when we see what we want and get it quickly, there’s a lot of pleasurable brain activity. When we consider something for consumption later, the pleasure centers of the brain react less intensely.
So how do you get yourself to save more? Mind games. You can play tricks on yourself either to feel better about saving and therefore want to do it or to simply do it anyway. Here’s how to get yourself to spend less and save more.
MAKE IT REALLY UNPLEASANT TO MISS YOUR FINANCIAL GOALS
In 2007, after struggling to lose 25 pounds for more years than he wanted to count, Yale professor Ian Ayres put his money where his mouth was. He challenged himself to lose a pound a week and, when he lost 25 pounds, to keep the weight off for three years. He’d weigh in once a week and choose people to monitor his progress, and for each week he failed, he’d cough up $500 to a friend to give to charity. Ayres succeeded—and has conducted research that shows how a similar approach can help you save money.
Incentives like this work, he says, largely because of loss aversion, a principle of behavioral finance that essentially means we humans will go to greater lengths to avoid losing money than we will to gain an equal amount. “Losses loom large,” says Ayres, who wrote a book on the subject called Carrots and Sticks. “People will work really hard to avoid them.” In fact, people who make good use of incentives are three times as likely to reach their goals as those who don’t.
How do you put an incentive program into play? Let’s say your goal is to save 10 percent of each paycheck. You need to come up with a penalty that makes missing that mark both expensive and uncomfortable. (Ayres believes he lost the weight precisely because the price was so high. Weight Watchers, he points out, costs about $500 a year, not a week.) To compel yourself to save, he suggests committing to give away 10 percent of your disposable income if you fail: “You’ll feel the pinch, but you’ll still be able to pay the rent.”
Choosing a charity to receive the money if you fall short is equally important. “Picking one you would support anyway is not a very effective commitment device,” he says. (Some experts suggest you should send the money to
a group whose cause you despise, like the NRA if you support gun control.) And then there’s the choice of your hall monitors. “They shouldn’t be people who love you too much,” he says. “The problem with unconditional love is that it has an enabling quality. Instead, pick your boss, a colleague, an acquaintance who will hold you accountable.” Stickk.com, a website started by Ayres and two Yale colleagues, can help you put these ideas into practice. After signing a “commitment contract,” you set the stakes and choose a referee; you can also enlist friends to cheer you on.