Mad World: Smoke and Mirrors | Part 2

Fallacies and biases affect the choices you make. In Part One, we looked at some of them in action, and how they translate into our decision-making processes at micro, institutional, and national levels.

Looking in the Mirror

Our brains also actively work to address our shortcomings in response to our environment.

Do you have a profile picture saved on your computer? Let’s try an experiment. Visit this site: Transformer.1 Upload your picture and adjust the settings as necessary. Take a moment to look at yourself in the future. Do you feel any overwhelming desire to do ______? What’s your brain telling you (other than I need to use more moisturizer)?

aging behavioral finance

According to the Proteus effect, “real-world behaviors can be altered by a virtual experience.”2 So if you see an avatar getting fat, you’ll be more motivated to get fit. If you see a car accident, you’ll drive safer. One of the most surprising things Stanford’s virtual reality lab has discovered that our avatars can make us do is to put away money or save for retirement. Even when investors get compound interest explained to them, it’s difficult to rationalize the act of actually receiving the benefits, because the future self is a complete stranger. Seeing an avatar changes that. The Stanford virtual lab team found that seeing a digitally aged picture (by several decades) dissolves all hesitation to save, and in one study, increased contributions to imaginary IRAs by 30 percent.3

One asset management company plans to offer the “age-morphed photos for 401(k) enrollees…effectively introducing customers to their future selves.”4 Hopefully, by now, you’ve recognized that policy as a Nudge, if not a push or a shove.

It’s time to be a more aware decision-maker. So, think about how fallacies and biases affect the choices you make. There are decisions you can make today that may ultimately mean a wrinkle or two less in the photo in the next tab over. Make your brain work consciously for you.

 

Start Today

  • Automatically deduct portions of your paycheck into savings, retirement or 401(k) plans.
  • Review your risk tolerance with your financial advisor, don’t stick to the same investment decisions and allocations just because that’s how they’ve always been (Status Quo bias)
  • Don’t make emotional decisions about normal market fluctuations. (Anchoring effect)
  • Don’t overestimate how strongly a news event, political announcement, or market shift will affect you in the future (Impact bias).

Note: Please feel free to search for any of the bias/fallacy terms provided in the article for further information.

 

Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC (“Hewins”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli LLP. Information pertaining to Hewins’ advisory operations, services and fees is set forth in Hewins’ current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional. Hewins does not provide tax, accounting or legal services.
Nima Tolooi
Nima Tolooi

Founder, Former Editor in Chief

Nima Tolooi is the founder, web developer and former editor-in-chief of OneBite. He was formerly the Interactive Marketing Manager for Hewins Financial Advisors, based in Chicago, IL.

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Mad World: Smoke and Mirrors | Part 2

time to read: 2 min