Thursday, September 29, 2011

Your perception of your future self affects how you value future outcomes

Many choices in life reflect a tradeoff between the value of things in the present and in the future.  For example, if I buy a new computer today, I get to use that new computer now, but undoubtedly a better one will come out a year from now that will be nicer than the one I just bought.  Similarly, if I invest money in the stock market, I am trading the value of that money to me now for the hope that it will be worth a larger amount in the future. 

Clearly, some option in the future has to be more valuable than the option available in the present in order for us to wait for it.  But how much better does the future have to be in order for us to wait?

You can think of your willingness to wait until some time in the future to get something (an object or money) that is similar to what you could get now as your degree of patience.  An interesting paper in the February, 2010 issue of the Journal of Experimental Psychology: General by Dan Bartels and Lance Rips suggests that the people are more patient when they view their future self as being similar to their current self.

Let me break this down.  Being patient means that you are willing to wait to get something that you could get more without requiring a huge increase in value to pay for the wait.  For example, imagine you had the chance to get $100 right now.  I might give you the chance to wait a year to get more money.  How much more would you need to get to wait the year?  If you said that you needed $110, that would be more patient than if you said $150. 

The authors looked at this question a few different ways.  First, they just used correlations.  They had people rate how similar the person they are right now would be to the person they think they will become at various points in the future.  Then, they had people do exercises in which they had to say how much money they would want to wait a particular amount of time predict the amount of money that would be required for them to wait to get some amount of money (as in the example in the previous paragraph).  They found that for each individual, time periods with large decreases in self-similarity people also became less patient.

In other studies, they had participants read about other people and their life changes.  Some of those life changes were fairly small (Jill discovered she likes rice dishes), while others were more significant (Bill had a health scare in which doctors thought he had a rare blood disease, but in the end he was found to be perfectly healthy).  The participants in the study rated the similarity of the people in the story before and after the events.  Later, they also did patience tasks like the one described earlier.  In some of these studies, the valuable things were things like vacation days from work rather than money. 

In these experimental studies, participants judged that the people would be more patient in periods in which they had undergone only small life changes than when they had undergone big life changes.  People also felt that the big life changes would make the person more different from their former self than the small life changes.

What does this all mean? 

When we plan for our own future, we are most focused on sharing the things we have with our future self.  The more similar we are to that future self, the more willing we are to share. 

 Often, though, we must make plans to put things off to the distant future when we feel that we will be quite different from what we are now.  For example, many people have difficulty saving enough money for their retirement.  You must begin saving for retirement when you are in your 20s or 30s, even though you may not  retire until you are in your 60s or 70s.  That means that you must agree to share your current money with someone who feels very little like you now.  Because this future self feels so different, people often put away too little money toward their retirement.  That is one reason why government pension funds like Social Security end up being so important to people.

In the end, when trying to plan for the future, it is probably best to use a little more math and a little less intuition.  For example, in the case of retirement savings, work with someone to make an assessment of how much money you will need when you retire.  Then, create a specific savings plan that will lead you to that amount of money in the future. Otherwise, you will be most likely to share that current money with a self that is more like who you are right now.