Lim Kopi Fridays Videos

Ep. 9 - Temporal Discounting: How Your Brain Values Immediate Financial Rewards


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Have you ever stepped up a sale item only to regret not saving that amount for something that is more significant later on? Or maybe you pick a lavish dinner even though you’re on credit? The way our brains are wired is we tend to favour immediate rewards over future gains and that might lead us down a path of not planning for our financial future. This is called temporal discounting.

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Hello everybody, My name is Adrian and welcome to another episode of Lim Kopi Fridays with Adrian. Have you ever constantly found yourself in a constant tug of war with planning for the future and being in the present? If you encounter that, you are not alone. Do you know that a lot of us would favor immediate gains such as, for example, if you have $50 in your hands right now versus the promise of $100 one year later? Most people in that situation will choose to get their $50 right now because they are able to visualise what their $50 dollars can bring to them now or within the next few days.

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And that is temporal discounting at play, whereby, we favour immediate gratification over long term gains because of the fact that a lot of us, we can’t really visualise what’s going to happen in the future. That’s one of the reason why we tend to go for something that is more shorter term, where we are able to visualise. Do you know that throughout human history, our ancestors in the olden days, they are usually in the survival mode?

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And that’s where our brains are wired to get instant gratification over things that we can see and do right now. However, in modern days where people are living longer, people are living healthier. And that’s where planning for the future comes to play very handily. Because we may have to strike a good balance between planning for them now and planning for the future. Now we know that human beings have the tendency to get immediate gratification, what can we do to really bring ourselves to a new level where we are able to plan for the future as well? One way is to structure our finances to be able to allow ourselves to live in the present and at the same time plan for the future.

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Having two extremes, that means planning solely for the present or planning solely for the future might not benefit us, because we might encounter a situation of overspending right now or being too hard on ourselves by putting every single cent that we have for the future. As a result, we may not be mentally stable if we are in that situation. The second way would be to have automatic savings or automatic investments whereby we don’t have access to the additional amounts that we have after we spend everything.

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By staggering our finances, by putting aside automatic savings on all investments, we are able to tech onto the compound interest. Because for long term financial planning, compounding is our next best friend apart from investments that can give us a higher return. Because compounding can help to lower the need to go for risky investments. When we have compounding working for us over the long term, we don’t have to get into risky investments in order to get a very high return.

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This is another way of planning for the future while we live in the present. Another way that you can do to really plan for a future is to visualize your future self. And one way you can do is by putting in your budget. And there are many tools out there that can help you to visualize your retirement. For example, if you are 13 years old now, you are 40 years old now, you can start to plot your future goals and by slotting in manageable goals that is not long term,

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maybe you can set something within the next three years or in the next five years and can help to build them along the way. These can help lessen the need to have instant gratification. So you’re dragging the gratifications not immediately, but you are dragging it for a few years. And slowly you can start to build up a fullproof plan that you can visualize for the next five years, or next 10 years and beyond. Having this visualization can definitely help you to look at your future planning in a different light.

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On the other day, it is not just about accumulating wealth for now or for the future, is about cultivating a mindset that values patients, foresight, and consistent efforts that can bring you to reach your goals in the future. I hope this helps and I’ll see you in the next episode.