Thinking about retirement, imagining yourself at 70, understanding that the life you lead today will impact the life you will have in the future…
You’ve probably come across these questions, right? Or at least you’ve heard from someone who should care more about the future — who hasn’t been confronted with the classic question “What are you going to do with your life?”
But if thinking about a future that goes far beyond the next few weeks was (or still is) a difficulty for you, know that you are not alone.
According to research conducted by the University of California at Los Angeles (UCLA), our brains can’t think about the long term easily.
That’s because when we make decisions that involve us, we activate a region of the brain called the median prefrontal cortex (MPFC). When we think of other people, on the other hand, this region is little activated.
But how does this information relate to thinking about the long term?
It turns out that the longer you try to imagine your life, the less your MPFC will activate.
Basically, your brain acts as if your “future self” is someone you don’t know very well, someone you don’t care about, making it harder to think long-term.
But the self of the future does matter, and a lot — and so does his financial life!
To better understand this subject and how our finances can be affected by the difficulty of thinking about the long term, we talked to account executive Betina Lopes de Mello, who can’t plan and would like to reverse this situation, and Professor Jurandir Sell Macedo, PhD in behavioral finance.
Read on and discover some tips on what can be done to circumvent this brain mechanism and learn how to invest in the future.
After all, why is it so hard to think about the long term?
The response to this type of behavior may be strongly associated with the way our brains evolved.
As a species, we used to live a short time, at most 30 years. So it didn’t make much sense to think about where we’d be in 10 or 15 years.
But life expectancy has been increasing more and more (in places like Japan, for example, it is already close to 80 years). It’s just that our brain hasn’t evolved at the same speed, so it’s still hard to think about the long term.
When we bring this debate to the field of finance, it is even more important to understand the effects of not being able to circumvent short-term thinking to plan from a distance.
To illustrate how our brain works in these situations, professor, economist and PhD in behavioral finance Jurandir Sell Macedo gives an example:
“As soon as I walk into class, I ask students if they’d rather travel to New York today with a three-star hotel stay, economy class travel and having $80 a day to spend, or if they’d rather wait four years, travel business class, have a five-star hotel available and spend $200 a day. 80% of students prefer the first option.”
The professor assures, however, that the scenario changes when he makes a small change in the narrative.
“If I put the cheapest option for a four-year term and the most expensive option for eight, for example, many change their minds. About 70% prefer to wait the eight years. This is because, kept at a distance, they can see that the second option is much more advantageous, although it takes longer to happen”.
But why is this? Why, after all, is it so difficult to make rational decisions when it comes to how we consume?
It is this answer that seeks to find the academic area of behavioral finance, which studies the behaviors involved in the act of buying beyond the illusion that we are always rational at this moment.
