Finances: The Concept of the Three Selves and How it can help you with Financial Decisions

Here’s a scenario: You are saving money for a new phone and are only a small amount away from saving and paying for it in cash. A friend or a coworker, however, becomes aware of your plan and offers to pay for the phone with their credit card in installments, with you paying the monthly rate, including the interest, to her.

You get excited and eventually cave in, thinking the interest is nothing compared to the return on investment of using it as early as today.

The concept of Saving and Investing

Two very different concepts in adulthood, saving and investing, are taught to us all our lives but in different ways. Some have already learned the value of money early in life by necessity, while others learn it by saving for something that they want growing up.

With the rising cost of living both in and out of the Philippines, financial maturity through cost-saving measures and saving techniques are considered key to increasing your savings.

However, these modes of saving can only work as far as you allow yourself to continue. What really matters when it comes to your finances is, in a sense, your perspective. That is what Financial Quotient writer Rose Fres Fausto believes when she first introduced the concept of the Three Selves.

Where did the concept come from?

Fausto based the concept on a study conducted by University of California, Los Angeles professors Hal Hershfield, G. Elliot Wimmer, and Brian Knutso covering the mind’s reaction towards their subjects’ future selves.

The data revealed that the brain can distinguish a person’s perception of the present self and future self, while similarities exist between how a person “sees” a controlled variable with their future self.

A deeper exploration of Hershfield and company’s research also conducted a time allocation experiment. The researchers asked how much time the respondents would be willing to spend tutoring someone immediately and in the future, as well as their allocated time for other people to do the same.

The results showed that a large amount of the respondents are willing to donate a small amount of time to help immediately, while providing a larger allocation for their future self, and other people.

Taking it a step further, the team took photos of the respondents and partnered with Daniel Goldstein of Microsoft Research and Jeremy Bailenson of Stanford University, among other researchers, to create a virtual realm.

The respondents are then introduced in the interactive environment where they are directed to look at a mirror featuring vivid images of their older self, with half being exposed to an avatar of their current self.

Afterwards, the researchers went to the next phase of the experiment: a new allocation test. Each respondent was given USD 1,000 to allocate among four things: a nice gift for a special someone, investing in a retirement fund, planning a fun event, or depositing the money into a checking account.

Respondents who were exposed to their “old” avatars put twice as much money into a checking account compared to the other half. Afterwards, the other portion of the respondents were exposed to aged photos of other people, however, this did not change their choices.

The researchers then drew the conclusion that those who have seen their future selves are more likely to favor long-term rewards.

Instant Gratification versus Long-Term Rewards

Saving and investing are both future rewards-based practices. The experiment conducted by Hershfield and company explain why saving and investing is not on the forefront of everybody’s mind.

According to the researchers, most people make decisions based on the length of time it would take for them to get the reward; that is, the shorter the waiting period, the more it is usually done in comparison to long-term plays. This is what Fausto, in her article, calls hyperbolic discounting.

Gratification

Instant gratification delves on emotions. It is the rush, the short boost in mood we get when we are happy with the outcome of a small luxury. The after-lunch cup of iced coffee, an extra hour of playing a game, your latest online shopping checkout, and, yes, even that extra cup of rice can be considered immediate gratifiers.

Yet, most of the time, these come at the cost of a larger, more important goal. The after-lunch cup of iced coffee could cost you tomorrow’s lunch budget, an extra hour of playing a game could set you back an hour of sleep or time to study, your latest online shopping checkout could minimize your grocery budget, and that extra cup of rice could ruin your diet. These instances are considered hyperbolic discounting.

Gratification, both instant and delayed, has long been recognized as a factor when it comes to making decisions. From Hershfield and company’s research, Fausto is able to create the concept of the three selves, each being a version of an individual in different points in time: the present self, the future or old self, and the medium-term self.

The Present Self

According to Fausto, a behavioral economist, the part of us that indulges in hyperbolic discounting is the present self. This is the version of ourselves that prioritizes what will make us happy at the present, rather than looking out for our future self.

The Medium-term Self

Using the same process as the Hershfield experiments, envisioning the future self can be key to shifting our perspectives in terms of thinking about future-proof plans. Which is why a commitment device will be used, bringing us to our second self: the medium-term self. Decisions that the present self makes will be felt by the medium-term self, making it an effective tool for better financial advice and decision making.

Over time, the accumulation of better financial decisions will help the future self by allowing us to have options for the needs and wants of both ourselves, and our future family. Of course, taking this path requires maturity and discipline.

Do you want it now or can it wait until later?

Everything in today’s world can cost you, from finances to your health all the way to your emotional well-being. While it can be restraining to cut down on instant gratification, the thought of a financially secure future is the best trade-off anyone can make.

Begin your financial maturity journey and open an AllBank savings account today!