How to Incentivize People to Save for the Future

Is helping people empathize with their future selves the key to incentivizing them to save? Hal Hershfield, a recent guest on Morningstar's The Long View podcast, thinks so. His path-breaking research looks at how people often look at their older selves as strangers and therefore tend not to prioritize saving for the future. In this excerpt from the conversation, we discussed how to bridge that gap, as well as whether breaking down saving into smaller increments might increase people's propensity to save.

Jeff Ptak: You've contributed to research that helps people glimpse themselves in the future using technology to view photographic simulations of themselves at older ages. What types of behavior did people exhibit after going through that experience? And how is it different than for people who hadn't?

Hal Hershfield: Over the years, we've been trying to devise ways to get people to feel more of a sense of connection to their future selves, to have an easier time identifying with them. And one of the methods we've used is to try to make those future selves more vivid and more visual, to the extent that vivid examples are emotional, and emotional examples tend to drive behavior. In some of our earlier work, we exposed people to these vivid images of their future selves--that would be one group, and another group would just see a vivid image of their current selves. And what we found is that the people who saw the images of their future selves were more willing to make an allocation to a long-term savings fund. And I'll caution that this is a small sample. The results aren't particularly overwhelmingly strong, which you might expect, given that there's a lot of different factors that go into these sorts of decisions.

But I think it was a nice proof of concept of this general idea. And since then, the first time we did this work, which was about 10 years ago, we followed up and we've shown people vivid, visual images of their future selves and looked at how that's impacted things like delinquency and ethical decision-making. We've recently just wrapped up a study that should be published hopefully within the next couple months, looking at a set of almost 50,000 consumers in Mexico, and half of them received the opportunity to view their aged selves, and half of them did not. And those who did were more likely to make a contribution to what amounts to a 401(k). It's called a personal pension there. Again, the numbers weren't huge--I believe it was about 1.7% who made a contribution when they saw their future selves and about 1.5% made a contribution when they didn't. But I'll note this was a really difficult context, as people aren't necessarily always making contributions there.

Also, this is a very simple, low-touch intervention. But I think what's important, it's not always about the visualization of future selves; rather, it's the concept that I think matters. When we can try to implement exercises that make those future selves more vivid and more visual, more evocative, that's when I think you can start getting people to balance things out a little bit more between their present-day wants and their future selves' needs.

Christine Benz: It's really difficult to get people in their 20s, 30s, and 40s to care about their own retirements. Is that a messaging problem? And should we be talking about financial empowerment, financial independence, something like that, instead of retirement? What's your thought on that?

Hershfield: I think there's a couple things at play here. Like any good behavioral problem, there's not going to be one solution. And not just a one-size-fits all, but just one solution. So, I can imagine that part of the problem might be messaging. Wouldn't it be interesting to run an experiment where, rather than say "save for retirement," we say "save for your financial independence or freedom"? That's a fascinating idea to me. And I think it's related to the concept that many young people just don't identify with being older. And to some extent being older, thinking about aging--it feels slightly negative, unpleasant, reminds one of death. Even if those associations shouldn't be there, shouldn't be accurate, and retirement is one of those.

And so, I think it's an experiment worth running, to actually try to see what would happen if you change the framing there, change the messaging. You'd most likely want to couple that with something else, because it can't just be the case that messaging will change this very complex behavior. Because if it was just that, I think we would have come up with something by now. But doing some sort of messaging shift in conjunction with something else may matter. For example, one of the insights that I've been pointing to in my research is that we've got these tensions between current and future selves. And one way to get people to do things to help their future selves is to try to make it easier on their current selves, that is to try to make sacrifices easier.

So, whether that's breaking those sacrifices down into bite-sized bits or whether it's giving somebody a reward alongside the sacrifice. What if somebody was saving? What if younger people received some sort of benefit every time they hit some sort of retirement-saving milestone? I recognize that that would have to come from somewhere; you'd have to remove money from some overall pot. But what if you were to actually reward people along the savings journey? Would that make it easier, in conjunction with your great idea of changing the framing, changing the messaging?

Ptak: That's a good segue to what was going to be my next question, which is research that has found that people are more inclined to save if the saving is framed in smaller increments. In fact, I think you alluded to that idea of breaking things into smaller bite-sized chunks--$5 a day in savings versus $150 a month. Why is it that people might respond more to that? And what are the takeaways for applications like robo-advisors, 401(k)s, and other platforms that attempt to encourage savings?

Hershfield: This is a research project that we recently published, my collaborators were Shlomo Benartzi and Steve Shu. The basic idea there was that we tried to get new investors, through a fintech app, to sign up for an automatic savings plan. And we framed that plan either as $150 a month, $35 a week, or $5 a day, which all amounts to the same chunk of money, but $5 a day feels like an easier sacrifice to make. It also feels like something we can easily imagine giving up. There's a lot of things that I think of that could be $5 a day that I could do without. But when it comes to $150 a month, it's harder to have those thoughts. So, I think there's a lesson to be learned here. One is that, this is what we call temporal reframing. Of course, we're not the first to do this. The mattress industry has been doing this sort of thing for decades now: They tell you that this expensive mattress is only $0.06 a night for the best sleep of your life.

This sort of temporal reframing I think can help people conceptualize these sacrifices. But I do think that there's an important caveat here, which is that we've got to consider what the different amounts are going to be and for what different groups we're talking to. This is something that I think needs some more experimentation in the field. When you think about a robo-advisor, when you think about helping somebody try to save--what if I'm making less than $50,000 a year? What if I'm making more than $250,000 a year? How should I break those saving chunks down? And I think that's something that needs some experimentation to really look at in a way that could be the most effective.

This article was adapted from an interview that aired on Morningstar's The Long View podcast. Listen to the full episode.