The Proteus Effect and Saving

If you are interested in behavioral economics or the psychology of investor behavior, read Jason Zweig.  His book Your Money & Your Brain is the classic in this field.

In a thought-provoking article, "Want to Retire Wealthier? Start by Scanning Your Photo,"  in Tuesday's Wall Street Journal, he described the research being done using, of all things, avatars.  He reports that research being done at Stanford University enables people to see themselves at retirement age via their avatar. This, in turn, gets them to save more. The use of avatars has worked in the area of increasing confidence by giving people an attractive avatar in virtual reality space. The research suggests it can help people save.

Now DIY Investor is admittedly low tech. He doesn't deal with avatars and such. He doesn't even have, as far as he knows, an avatar. In his low-tech style, he merely reminds clients that one day they will wake up and it will be their 65th birthday and whether they have choices depends on their saving behavior today. It's hard to tell how effective this is.

Who knows? Maybe avatars are the key to getting people to focus on the long term. As the article points out, research by the Center for Retirement Research at Boston College finds that over 50% of Americans are not in a position to maintain their lifestyle in retirement.

Interestingly, some people already have the talent to think longer term without putting on the headset and going into virtual reality space.  Warren Buffett, for example, thinks about the value of spending on a haircut today compared to investing the money for 30 years. Most advisors dwell on the spending that takes place at life's big events and wonder whether people give them sufficient weight. DIY Investor tends to think, as well, that not understanding the basic concept of compound interest plays an important role in people spending significant amounts on weddings, funerals, and the first two years of college.

Mr. Zweig points out that one difficulty is that people don't know what they will want 30 or 40 years from now, and this is a hindrance to saving. DIY Investor suggests that perhaps a better way to think about it is in terms of what you don't want. This is a good place for a little Zen. DIY Investor doesn't want to work part-time for Walmart.

One of the psychologists, Dan Goldstein,  working at Stanford suggests putting employee's "age-morphed" photo on benefits section of company website. Great! Now we'll be even more depressed in down markets with statements showing how we'll look at 65. Admittedly, this isn't as big a deal for DIY Investor as it might be for some of his readers.