We all know that we should save. But do our brains, biases and beliefs get in the way?
If you lose $100 while walking down the street, chances are you’re going to be super annoyed and upset. Probably for the rest of the day. Maybe even that evening. But on the flip side, if your grandma gives you $100 for your birthday… sure, you’ll be appreciative, but it’s not exactly going to send you into orbit with excitement.
You’re not crazy. You’re just like the rest of us – we’re hardwired to feel greater pain from a loss than we do pleasure from a gain. In fact, we feel the negative feeling of loss about twice as strongly as we feel the positivity of a gain for the same amount of money.
There’s a term for it in behavioural economics: “loss aversion”. And it helps to explain why we don’t always act in our own best interests when it comes to our money.
How our brains make saving harder
Loss aversions influences us when we’re trying to be better savers. When you have to cut spending to save more, it can feel like a loss. It sucks. Pair that with our desire for instant gratification and you’d be forgiven for thinking your brain is trying to make you fail.
For example, if you haven’t been saving, you’ve probably become quite accustomed to living with your current income. If you take some of that away to save, it can feel like you’re depriving yourself. Making a huge sacrifice. It’s painful. So saving gets the old “yeah, nah.” It’s easier to say you’ll do it in the future when your income goes up.
No, you’re not doomed
Even though our deep psyches are trying to sabotage our savings, there is hope! The behavioural biases that hold us back can be overcome with self-awareness and strategy.
Understanding loss aversion and how it might be affecting your judgement will already help you to be a better saver, because you can catch yourself in the act. Next time you hesitate about putting those savings aside, pause and reflect. Question your initial reaction and figure out if it’s just good old loss aversion getting in the way.
Then try reframing the way you see “future you”. The truth is, “future you” is still you - not some other, distant person who you don’t mind passing problems to and sabotaging. Taking a moment to reconnect with “future you” will help you to make better long-term decisions.
If you successfully overcome your loss aversion bias, you’ll probably be feeling pumped about saving. While riding the ‘motivation wave’ when it rolls in is a great way to start saving, its habit formation that will keep you going. Ultimately, the holy grail of savings is to form a bona fide savings habit where saving just becomes second nature. Starting off the habit in a small way with a realistic goal can help. Then it’s all about saving a little and often. Habits strengthen with repetition. So, the heavy lifting happens up front. Kick-off with commitment, and before you know it, you won’t even notice or feel the loss.