#17 - Hal Hershfield: Behavioral Finance, Future Self

27:41And then if they change, you know, and you can say, look, if I work out today and this is my, this is my habit, then in five years is what I look like. And if I don't today, this is what I look like in five years. Cause today is going to, you know, there's a correlation between what I do today and tomorrow and so on. Then you can see the impact, the long-term impact, but I can see it today and it's vivid and it's in front of me, that would probably change behavior. Yeah, no, it's great. You know, it's funny. I'm reminded, you know, ages ago, I had this idea with one of my collaborators, Dan Goldstein, who's at Microsoft Research.

28:15And we said, okay, along these lines, I mean, this is probably 10 years ago now that we did this. We worked with these computer scientists who had figured out like the minimal number of pieces of data that you need to be able to show someone a silhouette of what they look like. So it's crazy. It turns out if I just get a couple pieces of info from you, I can draw a pretty good silhouette of your body. And so we did this crazy, almost sci-fi study where we mailed all of these Wi-Fi enabled scales, which is not that revolutionary, but 10 years ago it was, to hundreds of people. And we got their little silhouettes.

28:57And then every time they would step on the scale, we would like beam back to them, these projected images and what we failed to consider. And this is where like, I do a lot of work that's, you know, interdisciplinary. What I really needed was somebody I needed like a health psychologist on this, because what I failed to consider is that there's all these different fluctuations in our weight that have nothing to do with whether we get healthy or worked out. And so like all these people were like, one day my projection is I look like this felt fit guy. And then the next day I'm like this balloon.

29:29And so, you know, obviously what we needed in retrospect is sort of a moving average of like, here's your patterns. Like you said, put all that data together and then let me project out what you look like. And you can imagine all different ways to execute that. Right. But I, I love that. I think it'd be cool. You know, in the financial world, what we have a tendency to do as professionals is to show charts and data and the whole notion of compound interest. And if you do, and, and to us, because we live in that world, that is vivid and it is, it changes behavior, but to just about everybody else, they look at that and it just falls flat and has no impact.

30:10Yeah. I always, you know, it's funny. I talk about this because it's one of the things we know is that if you want to move behavior, you got to get someone to feel something. Like we talked about emotions earlier as, you know, maybe sometimes we don't want to necessarily rely on our emotions in these hot moments, the loss aversion and FOMO and whatnot. But then in other times, we do want to get our emotions kicked into gear to do more of the thing that we say we want to do. Now, what's emotional? Vivid, right? Like things that are vivid are emotional. And like you said, that compound interest chart, anybody in the industry that I've talked to is like, this thing is like magic.

30:47I mean, if you think about it, it's magic, right? But then you show it to a client who doesn't think in these terms and they're like, all right, that line is going up fast. That's not as emotional as me showing you what you'll look like or how your world will be perceived or seen based on the decisions you're making now. Right. This is why commercials work. This is why charities show you the people that you're impacting and they'll change in their lives that you can have an influence in and so on. Absolutely. Yeah. Yeah, that's exactly right. And I guess in our industry, there's much less of that.

31:23And I think it's because we don't have enough psychology PhDs as financial advisors. It could be. You've also spent some time and emphasis on time allocation. Would you talk to us about that? Yeah, I mean, so I have some work. This is work done with my collaborator, Cassie Holmes. I looked up because her office is upstairs, but I don't think that means anything to anybody. And, you know, one of the things that we've looked at is the amount of discretionary time that people have and how that relates back to well-being. You know, on some level, so much of what we've talked about already is about these decisions about how I want to how I want my life to look like.

32:07Am I spending more now or saving more later? What does it look like? And then time is another one of these tradeoff type resources. I hands it at this earlier, but this decision about, you know, do I spend it more on the urgent things or the important things or probably, you know, step back. Do I spend more time working now so I have more time to relax later? And so, you know, I know it's not so black and white, but that's the type of decision. We had ages ago, we'd run this study where we had asked people if they wanted more time or more money. Like it was kind of a hypothetical. We just wanted to see what people would say.

32:39It shouldn't be shocking. You know, most people say they want more money, the more time. But then when you look at the, you know, about a third of people who say they want more time, they're happier. And it's, you know, there's a million things you can control for. I'm not going to get into the weeds here, but we do a lot of careful work to say, okay, it's not just that people who want money are more materialistic or they're less wealthy or whatever it is. You account for all these different things. And the people who want more time tend to be the ones who are doing better because they know how to spend their time.

33:11That's the key answer. So then we started thinking about this a little more deeply. And one of the questions we realized that was unanswered was, well, what's the right amount of time, so to speak, to have? We all have 24 hours in a day. Like no matter, you know, no amount of wealth gets you more hours, kind of in a way, like subjectively, I can get more people to do things. But a day is 24 hours. But then we started wondering, like, what's the right amount of time to have? And so we were able to get our hands on some pretty intensive data sets that literally map out how people spend their days minute by minute.

33:51And we can look at things like, how much discretionary time do they have? How much time do they have to do the things that they want to do versus the things that they have to do? And how happy are they? and it was the finding there was very interesting which is that it's not a perfect one-to-one match it's not that the more time i have the happier i am there's kind of this plateau where it's like the less time i have i'm not doing that well and if i get more and more time i'm doing a little better but then at a certain point more time isn't going to necessarily breed more happiness no and at that point in this particular data set it was around two hours a day around two hours of discretionary time you got to think about all the other things sleep and eating and feeding your kids and work and all that stuff right what was interesting though is if you look at how people spend their discretionary time if you're someone who spends your discretionary time in social pursuits or in doing things that seem purposeful to you, that you deem purposeful, then it's the sky's the limit.

34:59The more time you have of that, the happier you are. So I think the takeaway, the punchline of this is that it's not a simple thing that if you could just get more hours back in your day, you'd be happier. But rather, it's how you spend those hours rather than how many hours you have. That's what leads to more well-being and happiness over time. And look, I say this and it's like, I fully recognize how hard it is to then make the effort to spend those extra hours doing the things that are deemed purposeful, that are social and whatnot. Because it's just like any other one of these trade-offs we're talking about.

35:41What's the easiest thing to do? The easiest thing to do is to pick up my phone and goof around a little bit. Or maybe put something mindless on. The harder thing to do is to step outside and call a friend or do something and take some action that feels a little bit more purposeful. But those are the things that matter and add up to mattering over time. It's pretty fascinating. And you're right. We all have 24 hours, but we have the flexibility to prioritize as well to some limitation. and part of that prioritization, if you could optimize, if you're a computer, you do the things that give you the greatest utility, not just today, but over time and you discount, you know, over time to today and you'd probably be happy, but we don't do that.

36:27You know, as humans, we have these biases and tendencies and blind spots and some, you know, are probably good and many are not. So it's pretty, that whole thing is just fascinating. And I don't know if there's a simple solution, but I guess being aware of it at least gives you some insight into if I make this decision, it may benefit me today, but over time I lose. And just knowing it may help tilt the odds in the favor of doing what's better for you long-term. Yeah. So actually, just as a plug, Cassie Holmes has a great book. It's called Happier Hour. And one of the things that she does is walk through exercises to try to be more conscious of how to spend those extra hours.

37:14Because you're right, it is like knowing it. But then there's also one of the things I can do. And one of the gaps that we have is not fully appreciating how we spend our time and how the ways we spend our time maps on our own happiness. And so one of the things that she suggests is like a time audit where you almost look at, you know, you take a week and you sort of each day at the end of the day, write down, what did I do today? And how happy was I doing it? And you start to realize, you know, oh, writing my hundredth email wasn't. Yeah. You see a couple of those things. Like if you hire a nutritionist, you have a food log, right?

37:50You know, now on your iPhone, it tells you how many hours, how many hours of screen time you have, you know, and it's better or it's worse than last week. It's part of the education process, right? You want to understand the impact of your decisions. And a lot of people don't think about it. And when you put it in front of you, and especially if it's compelling, and it's one of those things where you learn it, and then you act on it, and then you gain some utility. And therefore, and you start building momentum, right? Is that just a general idea? The nutritionist example is a great example, because again, it's sort of like, highlights something we were talking about earlier, which is that it shows you a pattern where our tendency is to ignore it.

38:32And the same can be said for our time expenditures too. Auditing that, logging our time can help us show us the patterns and the patterns that add up to doing things that don't make us that happy. Right. If you try to succeed financially, I think of it as two steps. I always try to simplify these things. Step one is save and then step two is invest wisely. Um, let's talk about savings. Uh, we've talked about that. That's a, that's a perfect example of delayed gratification, but I know you've done some studies where you've looked at different ways to save and maybe techniques to actually help lower the gap of, you know, difficulty to, to get there.

39:11Would you tell us about that? Yeah. You know, one of the things that, um, that I think is true about any of these delayed gratification contexts is that, you know, if you If you tease apart that concept of delayed gratification, it doesn't sound that exciting because I'm delaying something that's fun, right? Or gratifying or whatever. So who gets to suffer because of that? You know, it's me right now. Oh, sure. I've delayed gratification. Well, you know, that's about, you know, it doesn't sound like, that's not a great marketing pitch. Here's a great thing. Just don't do it now. Um, one of the sort of principles that I've been trying to put into place with a lot of my research recently is to figure out the ways that we can dial down the pain that is felt in those contexts.

40:04Because again, it's present self who has to suffer the sacrifice or, you know, experience the sacrifice. It's future self who gets to have the delayed gratification. And that's always the case. The future self never gives up anything. It's an unfair compromise. It's unfair. It would be like being in a relationship where you're always the one that's doing everything for the other person. You'd get out of that if you were smart. That's not fun. So, okay, well, what can you do about it? Because you can't suddenly make future self sacrifice for present self without bending the laws of time. So, we've been trying to explore different ways.

40:42When I say we, some of my collaborators and I have been trying to explore different ways to make the pain feel less bad. So, you know, here's one thing we can do. We can frame savings in terms of smaller and smaller time amounts, right? So instead of saving 150 bucks a month, I could save$5 a day. Well, you know, I fully admit that sounds pretty dumb. And it's ripped right out of the pages of like the mattress industry advertisements. You know, yeah, it's a$2 ,000 mattress, but it's only six cents a night for the best sleeper. You still see those ads. You still see them because they do work. You know, we ran a study with a FinTech app and found that four times as many people sign up for an automatic savings plan when it's framed as five bucks a day compared to 150 bucks a month because it feels less painful.

41:32Now, that's just one technique. Another thing that we've done is help, you know it's it's not just dialing down the pain but also helping people understand how their actions today what that actually gets them later on right so one of the things we know is that lump sums may actually seem subjectively they may seem like more money than if you were to break them out into like an annuitized stream right so we ran this study where we asked people well, you know, how adequate does$100 ,000 seem for retirement? And then we said, well, to a different group and also to the same group, we varied things around, you know, how adequate does$500 a month seem, you know, or whatever the equivalent amount is.

42:19And there's, we can talk about the, well, we don't have to do, there's math behind this that we can, you know, you can consider, right? The funny thing is that people think that the lump sum seems more adequate. It seems like a bigger amount than if I break that amount down. Probably because we're not used to dealing with such large lump sums. We deal with those infrequently. Many people deal with those infrequently. And so then when we see one, we say, oh, it's pretty big. We're not thinking about what that actually gets us. Right. People aren't doing the mental math. They're not doing the mental math.

42:55They're not doing that translation, right? Or if they are, they're doing it wrong. They're thinking$100 ,000 can buy me this, this, this, and this. since before you know it, you're at$500 ,000, right? And one of the things that we've done is ask people how much they want to save, how motivated they are to save for the future, and show them a hypothetical retirement balance in the lump sum terms or in the sort of monthly broken out amount. And when it's broken down by month, then all of a sudden people say, oh, I think I want to save more. I think there's an important lesson here, which is that we see the flip of this with any of these buy now, pay later schemes.

43:31You know, I buy a new TV and they say, well, you could buy it now or you could pay a certain amount over 12 months. Well, when it comes to spending, if we're trying to save more, the right idea is to probably aggregate the amount, right? And say, okay, that TV, that's going to cost this amount in total. That may scare me away from it or get me to buy the slightly lower end model. When it comes to saving, it's probably better to disaggregate and to think about saving in terms of smaller and smaller amounts because that's easier to do. So I can add it up over time to ultimately create a larger amount for me.

44:10So, you know, but I think there's a bigger point here, which is that these are just a couple of the ways to think about, you know, framing the saving spending decision. I think the point here is to consider, are there different ways to frame the same action to make it more likely that you'll follow through with it? By the way, if you come up with any other ideas, I'm happy to talk about some of the other ones or like someone listening does like, tell them to me, I'm happy to test them. Well, one that I just thought of as we're talking is the notion that the present self sacrifices everything and the future self sacrifices nothing.

44:45So it's an unfair relationship. And as I think about it, I think it's because the reference point may be incorrect. And what I mean by that is the future self is sacrificing everything for the present self. And it's only because it's the present self who's looking at it in some way selfishly and thinking, why am I the one giving up? They're actually the one taking everything. So the midpoint isn't the present. It's somewhere between the two extremes. and all we're saying is get there, but you have to, and this is part of the zooming out. If you can see the world through your future self and you can see the world through your present self, you're more likely to meet in the middle, which is probably more optimal anyway.

45:28Yeah. I think that's exactly right. That's great. I love that too. Cause you're right. Any decision I decided to do for right now is taking away something from my future self. That's right. That's great. That's right. Um, yeah, I mean, it's, it's almost the opposite, right? A couple other biases that I've seen in my career is this idea of chasing returns. You know, one of the first rules of investing is buy low, sell high. And most people have a tendency to buy high and sell low. And that's basically looking backwards. You know, they talk about investing through their rear view mirror, but it's so prevalent and it's done by so many.

46:11and the commentary follows it. You know, when things are going up, there's more optimism. When things are going down, there's more pessimism, more fear, you know, and more FOMO going up. How do you think about that? And do you have any suggestions besides just being aware? Yeah, I mean, look, I think this comes back again to this idea of stepping out, right? Because, you know, when you're chasing those returns, part of what you're doing is you're, I mean, this goes back to the recency bias, availability bias. I'm going to something that just happened. And I'm not sort of zooming out and looking at the big picture and what are the trends here and what are things that are like this particular pattern in the past and would now have been when I wanted to buy before, right?

46:53And so I do think that taking a minute to step back is the type of thing that's very helpful in these contexts to try to get a step away from these decisions. The other thing I think is really useful to say is take the outside perspective. You know, what would I tell a friend doing this? Because it's a little easier to step away from the emotions that way. You know, would I advise my friend to get into this situation or would I tell them proceed with caution? And if I say proceed with caution, then I should apply the same advice to myself. And I guess part of it is also thinking about these things in advance and maybe even writing it down or send yourself an email that gets triggered, you know, when the market goes up 20 % and it gets sent to you and say, you know, the market's up 20 % now.

47:38We talked about this before and, you know, you just got to be careful. Uh, you would have been better off buying it 20 % before, not necessarily now. And also part of it is setting a plan and, you know, this is what we're going to do. We're not going to, we recognize that we have these emotions and, and, and maybe this one isn't healthy. So we're going to basically put in a trigger to remind myself, don't fall for this again. Yeah. I think that's That's exactly right. That's right. The other thing that I think is pretty unique in the investment world, and hopefully you can comment on this, is that time is very different here.

48:16So five years is a relatively short period of time. That might just be one cycle, maybe even not a full cycle. Whereas in everywhere else in life, five years is a long time. You can graduate college in four years. So how should one think about that? Yeah. I mean, it's such a great question because I think part of what you're hitting on is the idea that there's no objective or rather subjective perceptions of the same objective length of time vary greatly depending on the context, right? I mean, look, the way that I think about this is that it probably boils down a little bit to what's most important to us, right?

48:57If we're thinking about, let me step back, in other words, many times with these sorts of decisions that take place that have consequences now and later, there's many laters, right? So if I want to save more for a big trip in five years, like I can see something on the horizon, we want to do a big trip with our family in five years. It's not just that it's now and later. There's also many other time points along the way. So it also impacts what sort of travel I do next summer or don't do. But that doesn't take away from the fact that five years can still feel like a really long time. I do think, you know, one way to grapple with this is to bring some rewards into the present so as to allow for a longer period of patience.

49:51Right. So, you know, I don't know. Look, I'm not a financial advisor. I just I just talk to them. But, you know, when you talk about five years feeling like a long period of time, I think part of what you're talking about is the idea that it's hard to be patient and wait. because like, and this goes back to what we're saying before, which is that those rewards are accruing for some later self. So is there a way to peel off some of those rewards earlier on? Is there a way to, you know, somehow reward myself for sticking with a plan? I don't know what that looks like. I think that's idiosyncratic for everybody.

50:28But I guess my point is, if five years feels like a long period of time, is there any way to make that period of time shorter by introducing some rewards earlier and at many points along the way to increase the chances that I stick with whatever the program is. Yeah. I think part of it is education and understanding. Part of it is small wins along the way towards big wins. Um, sort of like when you're working out, you don't go from today to five years, what you look like without seeing the improvement through time. Exactly. Um, so I, I, I guess you, like you said, you try to shorten the time with some benefit so that you don't have to wait for the full period.

51:08That's exactly right. That's great. The other tendency that I've noticed, and maybe you can comment on this, is this notion of the herd and either following the herd, or if you're not following the herd, you can easily reference the herd and that becomes your comparison. And then, you know, a lot of things that I talk about is oftentimes the herd isn't doing things, you know, the most efficient way. And so if you're comparing yourself to that, then you leave yourself the risk of doing the wrong thing at the wrong time. So how do you think about all that? Yeah, the way I like to think about that is, you know, who comprises the herd, right?

51:46And are those, you know, is that herd made up of people who have the same values I have and who, you know, have lives in theory that look like the life that I want to have, right? Not to get too specific about it, right? But I think, especially when it comes to investing behavior based on herd mentality, it's really easy to get overly focused on the thing that's salient, which is that I, you know, I see some information about some hot returns from somebody who's posted them. And this is a little like that hidden zero thing we're talking about before, which is that what am I not seeing? Right. And I, you know, I think it'd be so useful to say, all right, first off, what percent of the people in that group aren't having those sorts of returns?

52:34Secondly, what does this strategy look like? And what's it going to continue to look like for somebody in that group? Is that somebody, do I see myself being just like them? Or does that look stressful to me to have to hold on to something for a really long time before it pays off again? But we don't tend to do those things because what's salient is the number and whatever has been fed to us, you know, algorithmically on whatever platform we're on. Right. We know that awareness is just the first step to making better decisions. People also need to care. Do you have any observations about that and any advice you can share?

53:11There's a great paper by Dan Bartels and Oleg Reminski in Chicago, and it's called To Know and To Care. and they basically say it's not enough to just know that we should save or that we should discount future rewards less but we also have to care about the outcomes that befall our future selves because if we if we you know if we just care but don't know how to do something that's not going to put us in a good situation if we know but we don't care that won't put ourselves in a good situation and so i do think you know it's a little bit difficult to say oh we'll just care more you know that doesn't work right but then you start thinking like okay well does that apply to any other context in our lives you know if i said just care more about your spouse or care more about your kids i don't know if that would do anything but if i said okay step into their shoes what would life be like if you were them and they were being you were being treated the way they're being treated or the same outcomes that are happening to them would be happening to you, it's a little easier to imagine because I don't have to engage in as much mental simulation of some other outcome.

54:17But if I put myself in their shoes and I can say, well, what would it be like to happen to me? Well, if that's some decision down the line and it's impacting future me, I think then that can help us to think about not just knowing, but then caring as well, like you said. That goes to the point of it hitting you emotionally. And you think about movies and the impact they have on people because they see themselves in the movie. I think about significant events in economic or financial markets history. Somebody who lived through the Great Depression, they never borrowed another penny. Somebody who lived through a very challenging environment, that changed them forever.

54:56And if it lasted a short period of time, it had less impact than if it lasted a long period of time. That's exactly right. And it's because it hits you and you feel it. Yeah, exactly. And so I guess a lot of this is about trying to emotionally stimulate, either by being closer to that or seeing it through other people's eyes. And just, I think the big takeaway that I have from this is learning about these biases, but also trying to find some emotional connection so it has an impact and it motivates you to take action. I think you said that really well. Wow. This has been great. I just wanted to close with if you have any additional suggestions for people to become better investors or savers from a behavioral standpoint.

55:41Anything else that we didn't cover? I mean, I think one of the, you know, if there's two or three things, it would be like, make anything that you can make automatic within reason, right? So the downside of making things automatic is that you've got to make sure that there's money in whatever pot something is being drawn from. And I would say set up your decision-making environment to make it as easy as possible to follow through with the decision that you want to follow through with. It's something that many of us probably know, but don't really like execute on. And that would be a good thing to consider.

56:17And it is helpful to have somebody that you're accountable to. So a lot of times, you know, if you're on an institution and on your board and you have investment policy and you set the rules, you're accountable to that investment policy and you're less likely to act on your emotions. If you, you know, if you have a spouse that is watching you like a hawk, you're more accountable or an advisor that you have to, you have to talk to, um, that I guess effectively removes the impact that emotions have on the decision-making process helps with the education part. And when you put it all together, hopefully you make better decisions over time.

56:53Exactly. That's great. Yeah. Um, all this has been fascinating. I, I enjoyed our conversation. I feel like I learned a lot and I appreciate you taking the time. Thanks so much, Alex. I appreciate it. Thanks for listening. We hope you enjoyed this episode. Please visit our website at insightfulinvestor.org to access past shows and learn more about our podcast. If you have questions, feel free to email us at info at insightfulinvestor.org. And if you enjoyed the discussion, please subscribe to this podcast to ensure you don't miss future episodes. And don't forget to forward today's conversation to others you think would enjoy listening.

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