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20 Feb

Spending problem? Blame it on your brain


Posted by: Danielle King

Just because you are financially literate does not mean you make the right decisions. The problem may not be what your brain knows. The problem may actually be your brain.

The importance of retirement planning is understood, especially as we are in the midst of RRSP season; but we are genetically compelled to live in the present, to indulge, and to soothe ourselves with shopping. So the Financial Post’s Melissa Leong asked neuroeconomists to help us overcome our instincts by providing solutions to four savings challenges.

Problem: You feel no urgency to save for the future.

Saving for retirement will maximize your quality of life in the long term — but people are focused on what makes them happy now. “Saving doesn’t do much for your happiness,” says Michael Norton, an associate professor at Harvard Business School and co-author of the upcoming book Happy Money: The Science of Smarter Spending. “Having more money in the bank isn’t highly correlated with being a happier person but the more debt you have, the less happy you are.”

Trick your brain: Put a (personal and aged) face to retirement.

“To people estranged from their future selves, saving is like a choice between spending money today or giving it to a stranger years from now,” U.S. researchers said in a 2011 study. But in the absence of a time machine, how do you connect with your future self?

Scientists showed people aged renderings of themselves and found that they were willing to allocate about 30% more of their paycheques to retirement than those who had not seen their “future selves.”

“It’s almost like an imagination aid to give people something to grasp onto and make them realize: One day you will be in retirement. That person who will ultimately end up being you, is dependent on the choices you make now,” says Hal Hershfield, one of the lead authors of the study and a marketing professor at New York University’s Stern School of Business.

Based on their research, Merrill Edge, which is a division of the Bank of America Merrill Lynch, just came out with a tool called Face Retirement that will age you virtually. Or try a hypothetical exercise where you imagine your future self; for example, write a letter to 65-year-old you.

“Even just the act of sitting down and thinking about this self is more than what we do 99% of the time,” Mr. Hershfield says.

Problem: Your superpower is that you feel no pain when you spend.

When people see a product they want, say a new tablet or a pair of shoes, it triggers the nucleus accumbens, the so-called sex and money area of the brain. This patch of tissue is active when humans receive a reward, whether drugs, or money, or food.

However, when people are shown the price tag of the product, it stimulates a part of the brain known as the insula, which is associated with pain such as smelling disgusting odours. Where spenders and tightwads differ is how often they experience activity in the pain-processing centre. “For spendthrifts, it’s like the brakes in the car don’t work,” says Scott Rick, assistant professor of marketing at the University of Michigan, and one of the authors of the study, Tightwads and Spendthrifts.

Trick your brain: Look at the alternatives.

Research on opportunity cost shows spendthrifts respond to being reminded of what else they can spend the money on. For example, people were 20% less willing to buy a $15 DVD if the option to “not buy” was described as “keeping money for other purchases.” In another experiment, the choice to buy a 16-gigabyte iPod touch over a 32GB iPod doubled when accompanied by the phrase: “leaving you $100 in cash.”

“Tightwads are not sensitive to this. For spendthrifts … it’s like news to them,” Mr. Rick says.

Problem: You get distracted by day-to-day living and forget long-term goals.

We’re hard-wired to act on impulse and we enjoy the euphoria (the burst of dopamine in the nucleus accumbens) when we buy. “People talk about when they buy something, they feel good about it. That becomes a powerful drug, a motivator to keep spending the money,” says Lee Anne Davies, president of, which offers information on aging, health and wealth.

Trick your brain: Get peer pressure.

In a study of Chilean entrepreneurs, those who reported weekly to a self-help peer group deposited 3.5 times more often into their savings account, and their average balance was almost twice that of those not receiving peer pressure. The Harvard Business School working paper that discussed the finding noted that feedback in the form of text messages was also effective.

For help, Ms. Davies pointed to online tools such as ImpulseSave, which allows you to transfer money with a text message and shares your progress via social media, or SaveUp which encourages you with rewards. “These companies are coming up with social media approaches to get that same drug-like feeling from saving.”

You might consider looking to your spouse for peer support but there’s a caveat. “Tightwads and spenders tend to marry each other — fatal fiscal attraction,” Mr. Rick says. “But we also found it was bad news. The more they’re different, the more they fight about money.”

Problem: You can’t save because you’re drunk on credit.

Buying with your credit card isn’t just a problem for shopaholics. “For tightwads, they turn into spendthrifts when they’re using credit. With cash, they look like themselves,” Mr. Rick says. “For spendthrifts, none of it’s painful. It could be gold bars.”

Trick your brain: Ditch the plastic and pay off the card with the highest interest.

Studies show that people’s instinct is to pay off credit cards with the smallest balance rather than the cards with the highest interest because it feels good to “pick low-hanging fruit,” says researcher Cynthia Cryder.

But her advice is to “pursue a path that is the most motivating.”

“If closing the account makes you allocate an extra $100 to your debt, close the account,” the assistant professor of marketing at Washington University says. “However, if you want to be as efficient as possible, allocate funds to the highest interest rate account after minimum payments are met.”

Melissa Leong | Financial Post