Individuals who know a great deal about personal finance don’t always make the wisest investors.
A new study conducted by Philip Zimbardo, an emeritus professor of psychology at Stanford University, suggests that our financial decisions are strongly impacted not by what we know, but how we view time.
In fact, the research concluded that an individual’s perspective on time is more important than his or her level of financial literacy.
According to the study, individuals who are oriented to the past are more likely to be financially healthy. In contrast, people who live firmly in the present are more likely to be financially irresponsible.
Here’s a breakdown of three types of individuals that the study explored:
People who live in the past are the most likely to make the wisest financial decisions. These individuals, who are more likely to base their decisions on memories rather than current experience, are also more likely to be conservative and more risk averse.
Zimbardo, who has written more than 50 books and is best known for his provocative prison experiment at Stanford in the 1970’s, suggested that possessing positive memories of the past is important for making good financial decisions now. On the downside, individuals who are strongly tied to the past can handicap themselves by spurning new technologies and ideas.
The researchers divide these people into two categories – hedonists and the powerless. The hedonists are so focused on their current experiences – and spending money now – that they aren’t looking at what their future financial needs might be. The powerless, who believe they are stuck in the present, are likely to assume that their life is dictated by influences out of their control.
People who are focused on the future are apt to sacrifice pleasure today for success tomorrow and are more likely to leave little time for friends, family and themselves. These individuals tend to believe that they are financially literate, but they aren’t necessarily better off financially.
Zimbardo made his conclusions about time and personalities after surveying 3,000 people in six countries. The Stanford emeritus professor, along with other academic researchers, examined the financial health of individuals in the U.S., as well as Brazil, Britain, Germany, Italy and China. Participants were given a quiz about how they view time and were asked to assess their financial literacy.
Great Britain and Germany were the most financially healthy countries and the United States was in the middle. Italy, Hong Kong and Brazil were the least financially healthy.
The study also showed that millennials think they are less financially literate, but they demonstrate better financial health than baby boomers.