Can't save? Blame your brain
Slow and steady wins the race, but a bird in the hand is worth two in the bush. Those dueling proverbs sum up the investing mind. When you imagine choosing between making a quick buck or growing rich later, you know the right answer: Be patient and hold out for the bigger gain. But as soon as you face a real rather than an imaginary choice, the fast money seems irresistible. New discoveries in neuroscience labs are helping to explain why it's so hard to resist the allure of instant gratification. It turns out that your brain is much more aroused by $1 today than by $1 tomorrow. And $1 six months from now barely registers. Only the promise of a much bigger reward later can fire up your brain the way an immediate score does. No wonder it's hard to save instead of spend and, when you do save, to think long term; the average holding period for a stock, among individual and professional investors alike, is just over 11 months. And the temptation to buy dotcom stocks in 1999, energy stocks in 2005, real estate in 2006, emerging markets in 2007 or gold right now -- what's hot when it's hot -- is overpowering for many people, no matter how often they've been burned before. startclickprintexclude--> A second team offered people the choice between $20 immediately and an array of alternatives ranging from $20.25 six hours later to $110 six months later. And a third group measured how individuals responded to the choice between various dollar amounts today and an extra 5 percent to 30 percent up to six months later. "When our emotions are charged, we have a hard time waiting for a reward," says Carnegie Mellon University's George Loewenstein, one of the first study's authors. Even the chance of getting a slightly bigger reward tomorrow doesn't have the same stimulating effect on your brain as a gain today does. It's all downhill from there. A gain the day after tomorrow carries even less of an emotional kick, and so on. In fact, to the typical person, $20 now is better than $23 three weeks from now, $40 three months from now or $47 six months from now, according to the second study, led by a pair of New York University researchers. In short, for your brain to be willing to wait a mere three weeks for a higher payout, that $20 would have to grow at an annualized rate of roughly 4,800 percent. Rational? Hardly. But evolutionwise, the response makes sense. In our hunter-gatherer days we often faced scarcity. And when we're really hungry, a future feast has to be huge to justify choosing it over eating now. So are we moderns doomed to save and invest like cavemen? Not necessarily. Knowing that you operate in what NYU's Paul Glimcher calls "as soon as possible" mode is the first step to making better financial decisions. Willpower and good intentions, though, aren't enough. You need help. Here's what to do: and send an e-mail to a small group of friends now and on that day reminding them that you have committed. other than a rising stock price -- should I invest in this business? Do I have any reason to think that I know more about this company than whoever sells me the stock? Sleep on it. If putting money into a hot mutual fund is really a good idea, it'll still be one tomorrow. Waiting until the next morning won't cost you much profit, but letting your brain's anticipation circuitry cool down overnight could save you from an ill-timed bet. And you'll be richer for your patience. |
