BeFi Bulletin, Summer 2011

Saving for the future often requires taking on more immediate burdens for the sake of longer-term benefits. Small changes in the design of communications can influence people's patience for future benefits. This could have important implications for efforts to increase saving as well as for marketing of financial and other products.

Imagine you were asked to choose between receiving $3400 in one month or $3800 in 2 months. Which would you choose? Would the decision feel like a tough one? Now, imagine you were asked to choose between receiving $3400 when you are 1 month older or $3800 when you are 2 months older. Which would you choose? Does the decision feel the same? Is it harder or easier to make?

Shane Frederick of the Yale School of Management and his colleagues found that this subtle difference in phrasing had a big impact on patience. While 57% of respondents were willing to wait for the larger amount "in 2 months," a whopping 83% were willing to wait for "$3800 when you are 2 months older."

Framing time in different ways also impacts patience across longer time periods. As Table 2 illustrates, respondents choosing between smaller sooner and larger later rewards to be received several years apart were most patient when an age frame was used ("When you are 49") and least patient when a delay frame ("In 11 years") was used.

People change over time; who you are 20 years old you can be very different from the person you turn into by age 65. Psychological connectedness refers to the level to which you think important characteristics of your current core identity carry over to your future self. It is the degree to which you believe your current self overlaps with your future self. Daniel Bartels of Columbia, along with his colleagues Oleg Urminsky and Shane Frederick, find that patience is impacted by psychological connectedness with one's future self.

In one study, participants were induced to feel either high or low connectedness to their future self. They then performed a budgetary planning task, indicating what proportion of the next year's cash flow would be spent on each of ten categories. Next, participants rank ordered categories from most to least responsible use of money. Findings indicated that those induced to feel highly connectedness allocate more money to budgetary categories they consider more responsible.

People don't always pay attention to the tradeoff between current spending and saving for the future. Psychological connectedness exerts the greatest influence when attention is directed towards the tradeoff between current and future benefits. Daniel Bartels and colleagues asked participants whether they would prefer to (a) buy a 64 Gigabyte Apple iPad for $735, (b) Buy a 32 Gigabyte Apple iPad for $635, or (c) Not buy either iPad. In some cases, choice (b) was supplemented with the phrase "…leaving you $100 in cash" to highlight the tradeoff implied by choosing the more versus less expensive iPad. Those induced to experience higher connectedness indicated that they would spend less money, but only when the tradeoff was made explicit.

Small differences in the description of options can influence the decisions people make when faced with choices that involve tradeoffs between short- and long-term benefits. Subtle differences in the way time is described impact patience. Furthermore, messages that induce high levels of psychological connectedness with one's future self, combined with attention to tradeoffs, could increase the farsightedness of consumers' decision making.

Marketers of financial and other products could benefit from attending to these and other details when crafting communications, an idea mentioned by Shane Frederick. Aileen Heinberg of the RAND Corporation discussed this idea further and also pointed out that the temporal descriptions used in mandatory disclosure forms for financial products might also impact consumer decision making. In addition, interventions intended to encourage individuals to save for the future could try applying some of the findings described above. For example, sending people text message reminders seems to increase saving. Daniel Bartels has proposed that coupling such reminders with a message that heightens feelings of connectedness could possibly strengthen their effectiveness. However, as discussed by Angela Hung of the RAND Corporation, what it means for consumers to make better decisions is not always clear and therefore policy prescriptions should be applied with care.

Table 2:Effects of Temporal Description on Patience as Expressed By Choice Between A Smaller Sooner and Larger Later Reward
Source: Adapted from Shane Frederick, "Temporal References and Temporal Preferences," RAND Behavioral Finance Forum 2011