Are you as tired of hearing about behavioral finance as I am? Researchers tell us that investors use Stone Age thinking to anchor on a (high) stock price and refuse to sell that (tech) stock until it gets back to its 2000 high. Clients suffer from recency bias, thinking that their portfolio value will fall into negative numbers each time we hit a free fall like 2008.

We've learned that the amygdala in the human brain jolts us with pleasure-inducing hormones. They affect us like a cocaine high whenever we gamble and win, and they hook us on gambling with our portfolios. Our brains are better suited to stalking antelopes than to capturing investment returns.

Okay, fine. But I think most advisors were already telling clients to avoid gambling with stocks. They were helping to quell panic and euphoria well before neuroscientists caught on that the amygdala is a dope dealer. Tell us something we don't know.

A recent presentation at the Greater Phoenix chapter of the FPA tells me that the field is starting to become more relevant to advisors. David Laibson, the Robert J. Goldman Professor of Economics at Harvard, described some research that he and his graduate students conducted in the past few years. In one study, they identified thousands of mostly blue-collar employees, all over age 591/2, who were not contributing to their company's 401(k) plan-even though the company was providing a generous match. Think about the illogic of it; they could contribute a percentage of their salary, get the match and then immediately take their contribution back without penalty. In effect, they were refusing to take free money from their employer.

Laibson's team first assumed that these workers simply didn't understand their good fortune. So they paid them $50 to attend an educational workshop that explained how the match worked and what the retirement plan offered.

The result? Nearly zero change in behavior. In a follow-up study, the team asked workers about their savings habits and provided more education. Two out of three said they weren't saving enough, and a large subset of this group announced its intentions to save more in the future. Following up four months later, though, the Harvard researchers discovered-still-an almost zero percent increase in saving activities.

The big takeaway here is that education and financial incentives appear to be ineffective ways to change people's behavior. Laibson's team looked at alternatives and found one that was fantastically successful: automatic enrollment. When 401(k) participation became the default option, and workers had to opt out affirmatively, participation rates jumped to nearly 100%, and nearly everybody chose the default contribution option.

Interestingly, this was true almost no matter what contribution rate the company chose. When the default contribution was 2% of the worker's salary, almost 100% of the workers made 2% contributions-even though the plan allowed up to 15%, with employer matches rising accordingly. When the default contribution went up, those higher contribution rates became the norm-until about 15% of salary, at which point workers began to realize that their paychecks were painfully diminished. But even then they didn't opt out altogether; the majority dialed down their contribution rate instead.

DISCOUNTING THE FUTURE

What's going on here? Laibson's team came up with an interesting model: Our minds tend to discount future benefits by about half, while giving full value to immediate gratification or expense.

As an example, suppose you were offered a free 15-minute massage right now or a free 20-minute massage two hours from now. Laibson's research suggests that most people will opt for the immediate massage. But suppose you were offered the choice of a 15- minute massage in exactly one year, or a 20-minute massage in exactly one year and two hours. Given that choice, most people will take the longer massage.

You could frame each offer numerically: The immediate massage would equal x and the future massage x/2. So the first decision would be framed as 15 vs. 20/2; that is, our mental accounting gives the immediate massage a "value" of 15 minutes of relaxation and pleasure and assigns the massage in the future a value of 10 minutes. In the second choice, our mental accounting halves the value of both the 15- and 20-minute massages, so 20/2 beats 15/2. This time, the longer massage wins.

Here's another example: going to the health club. Laibson hypothesized that the value of getting more fit and healthy would be an 8. But the hassle of changing into sweats, driving to the health club and spending two hours feeling the burn or trying to mimic the exertions of a perky, indefatigable aerobics instructor is a -6; the number is negative because it's a "cost." We know we want to get fit, but whenever it comes time to go do it, the mental accounting looks like this: -6 plus 8 divided by two (future discount): -6 + (8/2) = -2. The negative result means that, in our minds, there is a net disincentive to go, even though we know we should.