How to shift money from the present to the future and vice versa in order strike an equitable balance between our present and future selves.
In this episode you’ll learn:
- How financial technology moves money forward and backwards in time.
- Why our present self often wins out over our future self.
- What are two ways we can strike a better balance between our future and presents selves.
- What are skyscraper bonds.
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How Money Is A Time Machine
In the movie “Napoleon Dynamite,” Uncle Rico believes the trajectory of his life would have been totally different if his high school football coach had put him in the big game during the fourth quarter.
“We would have been state champions, no doubt. No doubt in my mind,” says Rico.
A professional football career, millions of dollars in compensation, a mansion with a hot tub for him and his soul mate are now unattainable because of that fateful decision by Rico’s coach.
Rico asks his nephew, “Kip, I reckon you know a lot about cyberspace. You ever come across anything like time travel?”
“Easy,” says Kip. “I’ve already looked into it for myself.”
“Right on,” says Rico, “Right on,” a tortured look on his face as he realizes he will not be able to change the past.
How Money Time Travels
William Goetzmann in his book “Money Changes Everything: How Finance Made Civilization Possible,” reveals that time travel does indeed exist.
He writes, “In essence, financial technology is a time machine we have built ourselves. It can’t move people through time, but it can move our money. As a result, it alters the economic position of our current and future selves…Economic value move[s] forward and backwards in time.”
Goetzmann gives the example of how a home mortgage allows a borrower to shift money into the present so they can buy a house today while for the lender it moves money (i.e. interest and principal payments) into the future.
Likewise, a person contemplating retirement can purchase future living money today by entering into a single premium immediate annuity contract with an insurance company that guarantees them income for life.
Debt accelerates future spending into the present while savings shifts current consumption into the future. The challenge arises in that it is human nature to make choices that benefit the present self to the detriment of our future self.
Our Time Inconsistency
University of Chicago Economist Richard Thaler conducted a fascinating experiment on how humans make decisions between their present and future selves. He presented the following choices to the study’s participants. They could choose:
A1. One apple today,
A2. Two apples tomorrow,
B1. One apple in one year,
B2. Two apples in one year plus one day.
Most participants chose one apple today over two apples tomorrow, as it is human nature to value the “bird in hand over two in the bush.”
But very few participants chose one apple in a year when they could get two apples in one year plus a day.
When the temporal distance is extended we find it easier to wait for a more valuable item. The incremental pain of delayed gratification is much less between two choices in the distant future.
More difficult is the choice between getting something today versus tomorrow as our emotions and feelings dominate the decision rather than our logical selves. We can almost taste that apple or piece of chocolate cake.
Balancing the Present with the Future
Choices that benefit our present self often win over those that benefit our future self because we cannot feel our future feelings, as Mark Spitznagel points out in his book the “Dao of Capital.” He writes, “we weight the future and past subjectively and disproportionately, such that, like the warnings on the rear view mirror, they seem fuzzier and further away in proximity to the present.”
The irony is even when we think we are making a decision based on how we think we will feel in the future, those decisions are biased by how we feel today.
In his book, “Stumbling on Happiness,” Daniel Gilbert writes, “We assume what we will feel as we imagine the future is what we’ll feel when we get there, but in fact, what we feel as we imagine the future is often a response to what is happening in the present.”
As we get older, our ability to make choices that strike a more equitable balance between our present and future selves improves.
Spitznagel writes, “It’s the young adult in the deep end of the temporal pool who lives like there is no tomorrow, while older folk who have far fewer actuarial years ahead are better able to make intertemporal choices that prepare for a future (perhaps that may very well exceed their own lifespan—thus thinking and acting for the benefit of intergenerational fitness and advantage).
Two Ways To Achieve Better Balance
Here are two ways we can make better choices as we balance the present with the future.
First, we can decide now before getting that next raise or bonus that the new money will go to savings rather than be spent. Ideally, we will automate the transfer of funds into savings so we never see the money in our checking accounts.
How easy it is to increase our consumption and elevate our lifestyle as our income rises. Our present emotional self quickly adapts to the higher standard of living.
By deciding today to maintain our existing consumption patterns as income increases and not allow ourselves to emotionally taste of the new bounty we will find it easier to save for the future.
Second, we can’t feel our future feelings, and even if we can imagine how we might feel in the future that exercise is biased by our present feelings. Consequently, there is a simple way to determine how we might feel in the future about a decision we are contemplating today.
We can find someone who is having the experience or made the decision we are considering and ask them how they feel. Since they are currently feeling what we might feel, they can be “surrogates for our future selves,” says Dan Gilbert.
We can ask people how they like living where we are considering moving or working in a profession we are contemplating. How do they feel now that they are retired or switched careers.
In a sense, we are time travel as we can get an accurate sense of what life might be like in the future from someone who is actually living it today.