Imagine you're being interrogated in a movie. "We can do this the easy way or the hard way," you're told. The interrogator is letting you know that you are going to spill the beans no matter what; the only question is whether you'll do it before you get tortured or after—which is the hard way. A very similar principle applies to spending and saving.
Suppose, at 55, you need a lot more savings to retire comfortably. One day at Starbucks you are tempted by a $4 latte. Will you order it? Sure you will. What contest is there between immediate refreshment and the distant prospect of becoming imperceptibly closer to one's retirement savings goal?
The rub is that, though you buy the latte, you probably aren't going to fully enjoy it. Because humans are trained to feel negative emotions such as guilt and fear when we give in to temptation, each sip will serve as a reminder that you indulged yourself and that your savings goal remains elusive.
How do we know this? Researchers in the field of neuro-economics have been able to scan people's brains while they are given opportunities to buy products. The pain of spending shows up in the resulting brain images. Subjects in the study are first tempted with an item such as candy displayed on a computer screen. If they like the item, a part of their brain called the nucleus accumbens (NAcc), which processes pleasant sensations, shows up as a bright spot on the scan.
Next, they're shown the price. If the price is high, a part of the brain called the insula, which processes negative emotions, kicks in—another bright spot on the scan.
Finally, our subjects get the option to buy. Now, the two parts of the brain have to duke it out. If the NAcc wins, they buy the product. If the insula wins, they don't.
The insula, the naysayer, plays an important role in shopping. It's our first line of defense against buying things we can't afford. The problem is, the insula is activated even as we ultimately decide to buy. Much like spilling the beans after being tortured, we spend the money yet feel the pain.
Fortunately, there's a relatively simple solution: Establish a personal spending policy. Decide what to spend your money on ahead of time and avoid exposing yourself to temptations. The point is to understand what brings you pleasure. Ideally, you won't even think about the things you buy, especially if you're on target with your savings goal.
George Loewenstein is a professor of economics and psychology at Carnegie Mellon University in Pittsburgh.