Have you ever had difficulty in making a financial decision, either because you couldn’t fully grasp the impact on your future self (saving for a retirement that seems so far off!) or because your emotions were at the wheel for your present self (that new phone will be so exciting to have!)?
When we make decisions, our closeness to the circumstances and outcomes can impact our ability to lead ourselves to our best outcomes. Behavioral economists call this psychological distance and the concept was given shape by Yaacov Trope, Nira Liberman, Cheryl Wakslak in the Journal of Consumer Psychology in 2007.
Trope, Liberman, and Wakslak share four measures of closeness:
- Time: is the event about which we’re deciding soon or many decades in the future?
- Space: is the decision about a location close to us, or something far away?
- Social Distance: (not the kind we’re used to in 2021) is the decision about someone near and dear to us, or about an abstract “other” person?
- Probability: Is the circumstance we’re considering a high probability, or is it a long shot?
The nearer the circumstances and impact of a choice are to the decision maker on these factors, the more heightened emotions are likely to be. While emotions provide important information, they may obscure clear choices.
The more distant the circumstances and impact of a choice are to the decision maker, the more difficult it is to grasp the full impact of a decision.
Finding a middle ground allows us to work toward our best outcomes by helping us integrate our information-rich emotions with a longer-term perspective.
Behavioral economists suggest a few strategies for moving to the middle ground:
- If we’re too close – such as deciding whether to make a purchase in the near future:
- Try de-personalizing the decision by considering what we might advise a friend in a similar circumstance.
- Give ourselves some time to make the decision – take a break and come back to it later.
- Take the long view – what will our future selves think about the current choice in front of us?
- If we’re too distant – such as figuring out what to save for retirement:
- Imagine our future selves in great detail, trying to use a first-person “I” or “we” perspective. Doing this in regular conversations, such as with a partner or financial planner, can help prime us for better decisions.
- Bring the decision closer to ourselves in time – rather than deciding how much we need saved for retirement, we can decide how much we’re going to save next week.
- Automate decisions that are good for “future” us – with savings on autopilot or pre-committing to adding a certain percent of future pay increases toward our goal.
Having this framework for understanding why decision-making is difficult, and ways to shift perspective, may help to alleviate the burden.
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