Can virtual reality convince Americans to save for retirement?

Stanford researchers have created old-age avatars for the young, in an effort to encourage them to prepare for their financial future. Their research has found that simply showing people a retirement-age version of themselves made them say they were likely to save 30 percent more money than the control group, whose avatars were not aged. Now, asset management and investment groups say they plan to put the technology to work for their clients. Here's a brief guide:

How did the study work?

Some participants saw avatars of their current selves, while others glimpsed digital, aged versions of themselves in a "virtual mirror" at Stanford's virtual-reality lab. When asked about their future plans, the latter group said it would save 30 percent more than the former group said it would.

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Why is that?

It's due to a psychological behavior called the Proteus effect, in which "behavioral alterations in the real world are triggered by changes in how our bodies appear to us in a virtual world." For instance, a subject who sees his avatar exercising is more likely to hit the gym in real life. In this case, says Hal Ersner-Hershfield, a Northwestern University professor who has done similar research, people feel more of a connection to their older selves, and commit to saving more for retirement.

Are Americans really that bad at saving?

Yes. According to the Center for Retirement Research at Boston College, "51 percent of American households are at risk of being unable to maintain their standard of living in retirement, up from 43 percent in 2004." There is also a large gap between how much people think they're saving and how much they're actually saving. A 2008 study showed that one in five workers who said they were contributing to their 401(k) account were actually putting nothing in. Those who did contribute overestimated how much money they put in by 79 percent.

So what are the practical applications?

There are a few ways companies are already contemplating using age-altering technology. "An employee's ID photo could be age-morphed and placed on the benefits section of the company's website," says Dan Goldstein, a London Business School psychologist who worked on the project. Cathy Smith, co-director of the Allianz Global Investors Center for Behavioral Finance, says that her company wants to make a simpler, free version of the Stanford software. In her version, a company advising employees on retirement savings could show them an "age-morphed avatar," and ask how the future version of the employee would feel about skimping on savings.

Sources: Wall Street Journal, Smart Planet, Stanford University