Mis-Remembrance of Things Past
I took liberties with the title of Proust’s book for this post — which looks at the way we mis-remember things – and how it can screw up our decision-making, financially and otherwise.
A fundamental rule of economics suggests that people make rational decisions based on self-interest. They look at their options; use their knowledge and experience to predict the consequences of making one choice over another; then choose the action that they expect will maximize their welfare. But it doesn’t always work that way, because people don’t always behave rationally.
Sometimes predictions are easy: Last night, for instance, I accurately predicted that it would be more appealing to go to a Super Bowl party than to go to bed early (although I paid for it in the morning).
But sometimes it’s serious. As George Loewenstein and David Schkade write in the book, Well-Being: The Foundations of Hedonic Psychology, “Although (predictive) errors may be rare, they can also be momentous when they occur: experimenting with crack because you think you can resist your own future craving; marrying ‘on the rebound’ or while in thrall of a transient passion…or committing suicide because you are convinced you will never feel happy again, are only a few examples of the significant consequences that can result from errors in predicting feelings.”
Or, say, not saving for retirement because you predict you’ll win the lottery, marry rich or would like (and be healthy enough) to work forever.
We rely on our memories to help predict which choices will make us happy. The problem is we remember badly. Our memories trick us. As Nobel Laureate and Princeton Professor Daniel Kahneman describes it, there are two people involved in our decisions – the self that actually experiences events, and the one that remembers them. “The remembering self keeps score and is in charge,” Kahneman explains. When we recall events, we tend to craft a narrative about our experiences, paying closest attention to the peak and the end of the experience – which results in a limited representation of what actually happened.
Psychologists discovered this phenomenon by having subjects do both real-time, minute-by-minute evaluations of an experience, and then having them describe the event after the fact. What they say afterwards doesn’t always match what they expressed during the episode. (In my Feb. 7 Yahoo!Finance column, I discuss what this means for relationships.)
For instance, Kahneman did a study of patients receiving colonoscopy exams, an uncomfortable medical procedure, that lasted anywhere from four minutes to an hour in length. Patient A went through a build-up to sharp pain, and then the exam was over. Patient B went through a longer procedure – a build up to piercing pain which then declined to slight discomfort before the exam ended.
Those whose experience ended on a less-painful note rated the experience better – even though they suffered exactly the same pain as Patient A, and the event lasted for a longer period of time.
“What really mattered was the peak pain they had experienced and how much pain they had experienced at the end,” Kahneman says. “This tells you that there are really two ways of looking at experience… the experiencing subject who was actually living through the colonoscopy, and the remembering subject was passing judgment on the colonoscopy later, and saying, ‘how much did I suffer?’ So, if we have people whose memories work in this way, it can cause (them) to make rather foolish judgments or judgments that clearly are not in their own best interest.”
So what does this have to do with money and happiness?
If we are not consciously in touch with what we really value, we can make career and money decisions that make us unhappy. We’ll remember the rush of getting a big commission at work, and we won’t remember what it cost in time away from our families. We’ll remember the thrill of buying a Louis Vuitton handbag, but we won’t remember how long or hard we had to work to pay for it. So we’ll repeat those experiences to our detriment, losing touch with family and racking up debt.
How do we solve this dilemma? Make a list of the top ten things you value most in life. Make a list of the people, the qualities and the experiences that are most essential to your happiness. Then set goals for yourself as to how you’ll build a life that consciously reflects those values.
That means finding ways to quantify and automate your goals. If you value maintaining your current lifestyle in retirement, figure out what that will cost, and then automate it by having money withdrawn systematically from your paycheck and into a 401k; or from your checking account into an IRA contribution.
If you value helping others, decide what that looks like: Maybe it’s volunteering for a charity or mentoring a kid who needs your help. Set up a monthly commitment so your value doesn’t get put on a backburner.
Bottom line: Put the experiencing self – the one who is here right now, and conscious of your values — in the driver’s seat, rather than relying on the remembering self (and its faulty memories). You’re more likely to achieve your goals.
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