IN THE BATTLE BETWEEN our current self and our future self, it’s no contest: We overwhelmingly favor today. We spend excessively and take on too much debt, while giving scant thought to how we’ll service these debts or how we’ll pay for distant goals like retirement and the children’s college education. We also procrastinate over buying insurance and organizing our estate, thereby putting our family and our future self at risk.
What explains this behavior? Once again, we can blame the instincts we inherited from our hunter-gatherer ancestors. They were focused on consuming today and didn’t need the self-control required to save for the future. Today, by contrast, that self-control is critically important, but often sadly lacking.
Not only do we struggle to save, but also we don’t fully appreciate the benefits. Studies suggest we underestimate how much our savings will grow if left to compound. We also underestimate how much we’ll pay in interest on the money we borrow. Indeed, we’re so anxious to consume today that it often takes a huge reward to get us to delay gratification for just a few days or weeks, a phenomenon known as hyperbolic discounting.
Our intense focus on today also affects how we invest. We might be managing money earmarked for a retirement that’s decades away, and yet we get caught up in the excitement of short-term market rallies and find ourselves rattled by stock market declines. We put too much weight on recent results, prompting us to buy into market sectors and mutual funds that have lately performed well—but which could be ripe for a setback.
In addition, when we pick investments, we don’t just ponder the potential long-run return. We also focus on the here and now: What an investment says about us and how it makes us feel. For instance, we’ll buy hedge funds as status symbols, purchase socially conscious mutual funds as a political statement, and day-trade stocks because we find it thrilling.
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