Put clients in the right frame of mind for retirement planning by connecting them emotionally to their future, older selves. Well, that’s tough since most folks think of their future selves as virtually separate people. So says behavioral economics specialist Jeff Kreisler in an interview with ThinkAdvisor.
Still, the co-writer of famed Duke University professor Dan Ariely’s most recent book provides actionable ways that FAs can help clients become invested emotionally and financially in their future selves.
Ariely is a behavioral economics expert and three-time New York Times bestselling author (“Predictably Irrational”); founder of Duke’s Center for Advanced Hindsight lab; and chief behavioral economist of Qapital, an automated savings app.
Kreisler, cool at giving serious finance a humorous spin, was Ariely’s co-author for “Dollars and Sense: How We Misthink Money and How to Spend Smarter” (Harper, Nov. 2017). “If you want to get better at making good financial decisions,” read it, The Washington Post cheered.
Kreisler is also the editor-in-chief of Peoplescience.com.
To be sure, people are funny about money; that is, they’re often irrational: “Money makes everyone do crazy things,” Ariely and Kreislser state. Financial decisions are indeed one of life’s huge challenges, particularly because behavioral biases often self-sabotage the decision-making process, the authors say.
In the interview, Kreisler discusses the No. 1 “financial sin” in a list of 10, which includes self-deception and greed.
The former attorney and self-described “financial comedian” is often hired to punch up executives’ speeches to make them humorously engaging. He has delivered talks to firms such as BNY Mellon, Citibank and JPMorgan and appeared on CNN, Fox News and MSNBC. His first book, published in 2009, was the satirical “Get Rich Cheating” (Harper). Penthouse magazine proclaimed it “’Catcher in the Rye’ for evildoers.”
ThinkAdvisor recently interviewed Kreisler, on the phone from his New York City office. Among other issues, he examined the why’s of common money mistakes, as well as why a 401(k) plan is an irrational, but effective, retirement savings strategy.
Here are excerpts:
THINKADVISOR: Dan Ariely and you wrote: “Money makes everyone do crazy things.” Why are people irrational about money and investing?
JEFF KREISLSER: The irrationality comes from uncertainty. When we’re uncertain about things, we get emotional and apprehensive and sometimes look frantically for a solution. Often we go for an easy answer. But that isn’t always the most rational or wisest.
Yet you write that the person we trust most is ourselves. But that isn’t necessarily a good thing.
Correct. We think that every decision we make is the right one. This can involve the behavioral bias called herding [following the crowd]. Investors do it all the time: “Let’s get onboard with those hot stocks because everyone else is doing it.” Oftentimes, that “everyone else” becomes ourselves, or self-herding, based on decisions we ourselves have made in the past. For example, if we spend $5 for coffee every day, eventually we convince ourselves that it’s worth it — and then it just becomes automatic.
You cite a paper that Dr. Ariely and peers wrote showing that men make poorer decisions while sexually aroused. Does that apply to investment decisions too?
I don’t think they wired up people to an Ameritrade account while they were aroused! But I would imagine that it would also apply. There are studies beyond Dan’s showing that arousal does affect decision-making.
In women, too?
I don’t know if they’ve tested women. My layperson’s guess would be yes, it applies to women too, but perhaps to a different degree.
You specify “10 Financial Sins”: emotions, selfishness, impulse, lack of planning, short-term thinking, self-deception, outside pressure, self-justification, confusion and greed. Did you rank them?
No. Because everyone is affected in their own way: different “sins” resonate with different people. But I think that ultimately the biggest one is lack of self-control, which is a result of our emotions.
Regarding retirement saving, you write that because we don’t know how we’ll feel 20 or 30 years from now, people are detached from their emotions about the future. And that could cause them to make bad investment decisions now.
Absolutely. Even though investing feels that it should be a numbers-based game, there’s so much emotion that goes into investment decisions. Even with fund managers and personal wealth advisors, often the decisions they make are driven by emotion, resulting, for example, in the bias of loss aversion — not wanting to take a big loss. That occurs with their own personal investing and sometimes for the people whose assets they’re managing.
How can advisors help clients feel connected to their future selves when investing for retirement?