How Awareness and Valuation of the Future Jointly Shape Intertemporal Financial Decisions

How Awareness and Valuation of the Future Jointly Shape Intertemporal Financial Decisions Daniel M. Bartels (bartels@uchicago.edu) University of Chicago, 5807 S. Woodlawn Ave Chicago, IL 60637 USA Oleg Urminsky (oleg.urminsky@chicagobooth.edu) University of Chicago, 5807 S. Woodlawn Ave Chicago, IL 60637 USA Shane Frederick (shane.frederick@yale.edu) Yale University, 52 Hillhouse Ave. Room 116 New Haven, CT 06511 USA missing how these considerations interact to shape inter- temporal choices and therefore failing to predict when people exercise restraint in spending. We find that these factors are mutually reinforcing. Our three studies find that valuing fu- ture outcomes reduces spending primarily when opportunity costs are considered. These results help account for the dearth of evidence showing a relation between time preference (as measured by elicited discount factors) and saving or restraint in spending. Abstract We examine people’s preferences about whether to engage in discretionary spending vs. save their money and find that re- duced spending in the present requires the combination of both being motivated to provide for one’s future self (valuing the fu- ture) and actively considering long-term implications of one’s choices (awareness of the future). Feeling more connected to the future self—thinking that the important psychological prop- erties that define your current self are preserved in the person you will be in the future—provides the motivation for people to make far-sighted choices by changing the valuation of future outcomes. However, this change only reduces spending when opportunity costs are highlighted. Keywords: Judgment; Decision Making; Choice; Personal Identity; Consumer Behavior. Valuing future outcomes Time preferences (i.e., the strength of people’s preference to receive outcomes sooner and thereby forego larger outcomes that occur later) have been interpreted as the degree to which the future is valued, and therefore have long been viewed as one of the primary determinants of savings and spending de- cisions (Frederick, Loewenstein, & O’Donoghue, 2002). While the degree of discounting, the functional form of dis- count rates, and correlates of discounting have been widely studied, less work has been done on the motivational reasons why people discount the value of future outcomes so steeply, and why some people are less patient than others. Prior work has instead primarily focused on either economic considera- tions (e.g, liquidity constraints; Meyer, 1976) or perceptual accounts (e.g, subjective time, Zauberman et al., 2009). One starting point for understanding the underlying moti- vation is the idea that a person can be construed as a temporal sequence of overlapping, but partly distinct selves (Parfit, 1984), rather than a single identical entity over time. The mo- tivation to sacrifice consumption on behalf of future selves could then depend on how “connected” the current self feels toward those future selves— how much overlap the person perceives with respect to beliefs, values, goals, and other de- fining features of personal identity. The more one anticipates change in these aspects, the less motivated the person may be to save for the future self who will benefit. Recent work im- plicates psychological connectedness as a determinant of in- tertemporal choices. High felt connectedness has been related to impatience in intertemporal choice tasks (Bartels, Kvaran, & Nichols, 2013; Bartels & Rips, 2010; Ersner-Hershfield, Wimmer, & Knutson, 2009). Intertemporal Introduction “If you're wasting $5 a day on little things like a latte at Star- bucks or a muffin, you can become very rich if you can cut back on that, and actually took that money and put it in a savings account at work, like a 401(k) plan or an IRA ac- count… [I]n your 20s, you can actually be a multimillionaire by the time you reach retirement by simply finding your latte factor and paying yourself back. ” (Bach, 2002) The advice above—offered by financial self-help guru Da- vid Bach—describes a savings strategy that is not easily fol- lowed. Continuous restraint is difficult to achieve: one must take into account the future opportunities that current indul- gences displace and must value those future outcomes, even though the benefits enjoyed by future selves come at the cost of current forbearance. Individual differences in these two dispositions (considering and valuing future outcomes) may help explain why people in similar economic circumstances sometimes save at very different rates. In the current studies, we study how both factors jointly shape spending decisions. We investigate people’s awareness of the future consequences of their choices via the degree to which they consider the opportunity costs of their choices. We investigate the valuation of future outcomes via connected- ness to the future self, which has been shown to impact time discounting (Bartels & Urminsky, 2011). We think that study- ing either factor in isolation yields an incomplete account,