A New Way To Encourage People to Save More for Retirement

Rohan Mascarenhas, Russell Sage Foundation
December 1, 2011

Behavioral economists who study why people don't save enough for retirement often discuss the phenomenon of "hyperbolic discounting." The general idea is that people tend to place more value on rewards that can be enjoyed sooner rather than in the distant future. Researchers believe this effect may partly explain why Americans face a looming retirement crunch; a 2008 McKinsey report found that two out of three early baby boomers do not have the resources to maintain their lifestyle once they retire. For many, it is simply easier to enjoy a paycheck today rather than save part of it in a retirement account.

To combat excessive discounting, researchers have offered two types of solutions: make consumers commit to saving for retirement in advance (see Richard Thaler and Shlomo Benartzi's Save More Tomorrow program as an example), and try to teach consumers about the benefits of a bigger retirement pot (such as showing a projected estimate of savings after 40 years of investing).

Digitally Aged AvatarsBut with support from the Russell Sage Foundation, researchers have tested a novel approach: help consumers identify with their older, future selves. The theory is that if a young person can more vividly imagine himself on the verge of retirement years later, he may start to put more money away. "It's easy not to think about the future self," said psychologist Hal Ersner-Hershfield. "If we have options, we'd like to spend them on things that give us immediate pleasure. It's much harder to recognize how the future self will feel based on the decisions we make today."

Using virtual reality technology and interactive aids, Ersner-Hershfield and his colleagues showed research subjects digitally aged images of themselves before asking them to allocate an unexpected windfall. The results, summarized in the November issue of the Journal of Marketing Research, found participants were more likely to save after the experience.

Here's how it worked: in the first study, researchers used a software program to create a digitally aged avatar of a subject's face. "We grayed the hair, grayed the eyebrows and grew some more wrinkles to make it look more natural," Ersner-Hershfield said in an interview (see the image above). The participants then put on a virtual reality helmet and were hooked into a virtual technology lab, where they could "see" a virtual room with a mirror. At this point, half of the students saw an avatar similar to their own. The other half saw an aged version, which they observed for over a minute.

After taking off the helmet, participants were asked how they would spend an unexpected gift of $1,000. Would they use it to a) buy a gift; b) invest in a retirement fund; c) plan a fun occasion; or d) put it into a checking account? Participants who saw the "old" version of themselves allocated more than twice as much money to their hypothetical retirement account as those in the control group. In follow-up studies, the group of researchers tested if the effect would hold without the virtual technology. In one experiment, they asked participants to use a special computer program that would allow them to slide a button to allocate a percentage of their salary for retirement. As participants decided to save more, a digitally aged image of themselves smiled; as they saved less, the face frowned (see image below). Again, results showed these participants were more likely to save compared to the control group.

Retirement Savings Slider

"We've done the research showing hypothetically that this could work," Ersner-Hershfield said. "This makes people want to put more resources to the future."

The implications of the study could lead to a shift in the way consumers are encouraged to save. Speaking to the Wall Street Journal, Daniel Goldstein, another psychologist involved in the project, outlined how the research could be applied in the workplace: "An employee's ID photo could be age-morphed and placed on the benefits section of the company's website," he said. "From there, we're just a few clicks and a few minutes away from someone making a lasting decision that can be worth thousands."

Read the full study below, provided by permission of the American Marketing Association (which publishes the Journal of Marketing Research).

Increasing Saving Behavior Through Age-Progressed Renderings of the Future Self


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