Thursday, September 18, 2008

How our brains got us into this mess...

We really have trouble escaping the "right now" aspect of of life.  This is a good thing when you need to stay alert to stay alive in the African savanna, but not when we contemplate years-long commitments like mortgages.
This discovery has important implications. (A more recent paper by the Cohen lab extends the theory.) For starters, it locates the neural source for many of our financial errors. When we opt for a 2/28 mortgage, we are acting like experimental subjects choosing the wrong gift certificate. Because the emotional parts of our brain reliably undervalue the future - life is short and they want pleasure now - we end up delaying saving until tomorrow (and tomorrow and tomorrow.) George Loewenstein, a neuroeconomist at Carnegie Mellon University and a collaborator on the Cohen paper, thinks that understanding how we make decisions will help economists develop better public policies: "Our emotions are like programs that evolved to solve important and recurring problems in our distant past," he says. "They are not always well suited to the decisions we make in modern life. It's important to know how our emotions lead us astray so that we can design incentives and programs to help compensate for our irrational biases." [More]
Of course, we have been ignoring our rational brain (or taking advantage of others' emotional brains) for millenia, but watching it unfold on an fMRI scan, I think somehow makes it more real than before. The other complicating factor is the wide array of pleasures on sale right now.  A consumer driven economy after all competes to engage your attention and dollar immediately - not at some appropriate future moment.

Many of the "braking tools" to control our emotional impulses were previously embodied in cultural strictures (a penny saved...yadda, yadda).  With the demise - or the at least diminution - of the power of popular mores, we have not constructed either formal rules or folk wisdom to replace these tools to balance our choices between future and the present.

What does this mean for your farm?  I think it is simple: continue to plan a generation ahead. If this means foregoing rewards right now, it could likely be such a price will will be small for the security and paybacks decades ahead.

No comments: