How Behavioural Economics can help you save money
We all know saving money for the future is important, but it can be challenging when our brains are hard-wired to focus on the present pleasure rather than the future benefits. In Behavioural Science, this bias is known as Hyperbolic Discounting, which refers to the tendency for people to choose smaller-sooner rewards in the present rather than larger-later rewards in the future. In other words, “Pleasure now, pain later.” This partially explains why credit cards can cause us so much trouble.
Another obstacle we face is the Current Moment Bias, which refers to the idea that humans have a hard time imagining ourselves in the future (making it difficult to alter our behaviour to get us to where we want to be).
Don’t fret—there are ways to overcome these challenges as outlined in a recent article. We will discuss two examples:
1. Make saving easy / Make it the default option
Set up your accounts to automatically make deposits into your savings accounts or pension. Human beings are generally lazy when it comes to making decisions and tend to go with the default option. If automatic deposits into savings are the default, you have to actively make a choice against the default, which requires more effort. A Harvard behavioural economist found that when companies automatically enrol their employees in their retirement savings program, 90% of them stick with it!
2. Imagine your future self!
Think about where you want to be 10, 20, or 30 years in the future. What kind of career do you want? Where do you want to live? Research has demonstrated that just imagining your future self can help you become better at saving. In a study conducted at Stanford University, researchers assigned groups of students different avatars. In one of these groups, the avatars were 70-year-old versions of the students. After interacting with their avatars, students were asked what they would do with $1,000. The students who had interacted with the 70-year-old versions of themselves said they would save twice as much compared to the group of students who interacted with avatars that were the same age!
So what does this mean for marketers? When designing things such as loyalty programs, services, or patient support groups, make it easy for customers or patients to buy and use your product. Favourable outcomes are more likely when your product or service is the default choice! When it comes to financial planning or even preventative medicine, help customers and patients imagine their future and position your service or product as a means to getting there!