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?
One way is: Don’t ask them, “What’s your risk tolerance?” or “How much money do you want to have when you retire?” Instead, ask them to imagine life in retirement: “What do you want to do? Where do you want to be? Who do you want to be with?” Really get them to visualize the details of their future lives, which will enable them to get a realistic picture of their needs and feel connected to them.
How will that help the advisors do a better job?
They’ll know what clients’ needs are: must-haves and would-like-to-haves. It will give advisors the tools to reverse-engineer how clients’ investment portfolios should be.
What are some other strategies to help connect clients to their future retirement?
Studies show that talking about a specific retirement date, say, Oct. 18, 2032, instead of saying, “14 years from now,” makes retirement planning less a “big notion” but more tangible and concrete.
What else can FAs do?
This isn’t a realistic tool for every advisor to use yet — but a bank is experimenting with a UCLA professor to have people, wearing virtual reality goggles, interact with computer-generated versions of themselves in 30 years. In doing so, everybody decides to invest more money [than they otherwise would] for retirement savings.
I like your zany suggestion that, to remind people of old age and think long-term, companies should change the environment of their Human Resources departments — where important retirement-savings decisions are made — to look like a doctor’s office at a retirement home, with shuffleboard sticks and “No. 1 Grandma” mugs.
Yes, that would help people get in touch with their future existence.
You state that a 401(k) plan is a “Ulysses contract” because it’s irrational — yet it’s very effective. Why isn’t a 401(k) rational?
A Ulysses contract [binds you to the future]: You’re, in effect, “tied to the mast of the boat,” can’t [hear] “the Sirens” and so won’t be [doomed]. That is to say, with a 401(k), a barrier has been created against future temptations. The savings are automatic, and you don’t have the temptation to change the plan or take the money out.
But why is it not a rational strategy?
It isn’t in the sense that if you were a professional, you’d analyze your investment portfolio [on an ongoing basis] to maximize it and probably do better than just putting [money] in a 401(k). The next best thing is to set it and forget it — this is about self-control. Ultimately, it’s better to consistently save a certain amount for retirement and maybe not maximize growth versus not saving any money at all.
Based on a survey, 46% of financial planners don’t have a financial plan for themselves, you write. Were you shocked to discover that?
I was surprised at first. I was just starting to dive into this material and learn about irrationality in behavioral economics. But in retrospect, I’m not surprised at all. Investing in our future is a real challenge because, again, we’re not emotionally connected to our future selves. So we can intellectually tell ourselves we should prepare, but emotionally we’re not drawn to making those decisions.
“The pain of paying” is another behavioral principle that you and Dr. Ariely write about. Please explain.
Paying stimulates the same region of the brain that physical pain stimulates. Paying cash is the most painful, then comes writing checks, using credit cards; and now there are very convenient [painless] paying [options], like Easy Pay and Apple Pay.
But aren’t those new ways helpful?
If you feel the pain of paying and thereby are conscious of the decision you’ve made, you start questioning and thinking about “opportunity costs”: What else could this money be spent on now or in the future? That’s very important. So though daunting, or even crippling, the rational thing is to step back and think about opportunity costs. When there’s no pain of paying, we often don’t know we’re even making a financial decision, and we certainly don’t question it.
You write that with continuing advances in technology, things will be designed to make people spend more — ever more easily and too fast. Please elaborate.
Many financial tools are designed to ease the burden of financial transactions. The problem is, again, when something is that easy, you don’t realize you’re spending money — no pain of paying. So it’s not all great when those decisions are easier and less conscious.
Are there any positives to painless paying?
Yes, like easing the burden of savings and investing in retirement, buying insurance and putting money aside for health care — things that are hard for us to do but are wise for our well-being in the future.
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