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Greatest New Concepts About Cash: How A Self-Nudge Can Assist You Make Higher Cash And Life Selections

For the past 18 months at home, while staring blankly into zoom windows while my dogs stared blankly at me, I pondered this age-old philosophical question: What is really the difference between humans and animals?

Rousseau said our desire for self improvement sets us apart from all other animals. Nonsense, wrote Gertrude Stein: "What distinguishes humans from animals is money."

Perhaps they are both right, and the real hallmark of human hubris is our desire to get better at spending, saving, and investing.

It's not going very well: We are getting into debt too much, misjudging risks and opportunities, buying at the top and selling just before things turn. Our mental software seems programmed to let us fiddle with our finances.

Several Nobel Prizes were awarded for this proof. The subtitle of any behavioral economics paper could read: “How stupid are you? Let's count the ways. ”Giants in this field like Daniel Kahneman and Richard Thaler have identified hundreds of cognitive prejudices that stumble about money and life decisions. I've interviewed both of them over the years and kept asking, “What can we as individuals do about it?” Your somewhat pessimistic answer is generally not much.

I am simplifying a bit. In “Nudge”, Thaler and Cass Sunstein advocated policies that use our various psychological deficiencies to our own advantage. If the GPS of the mind is a lousy navigator, impulses like auto-registration in 401 (k) s aim to redirect us from the path of least resistance to the path to prosperity. Making the default a better option is an example of what they call "election architecture".

Thaler says it is also possible to move yourself to better financial results. "For most of us, life can be improved with well-chosen bells and whistles," he writes in the updated, "last" edition of the book. “People could limit the amount of food in their fridges; They put some money they don't want to spend on a one-year deposit slip that includes an early repayment penalty. "

Thaler adds that we can be architects of our choice “by making certain options more difficult, less entertaining, or by eliminating them entirely”. But his work and the book are much more interested in nudges introduced at the macro level, large-scale interventions that are more likely to have an impact on the whole population.

However, self-nudging is now moving into the spotlight. Over the past decade, a new generation of researchers has paid much more attention to behavior modification and self-stimulation strategies, which has led to some encouraging discoveries. Katy Milkman, a professor at Wharton, brings a kind of radical optimism to ideas about changing our own habits and behavior – and not just because her book How to Change sounds more like self-help than the work of a behaviorist at first.

"You can use almost any tool that is used to trigger other people to change your own decisions," Milkman told MarketWatch. "Once you have insight into these things, you can structure your own life in such a way that you get better results."

Self-nudging doesn't work for everyone, and certainly not in all situations. Changing our behavior is difficult and there are no shortcuts. If we try to be our own architects, we can only end up designing castles in the air. But the techniques that Milkman and her colleagues describe complement our arsenal of weapons to counter our own worst instincts.

Here are some of the most important strategies:

Temptation bundling

Like many behavioral researchers, Milkman began experimenting on herself when she was a student. Frustrated that she wasn't moving enough, she had an insight that has proven itself experimentally as a strategy for overcoming resistance to the important activities we avoid.

"So I set up a rule and said:" I can only enjoy pleasurable entertainment while I'm training in the gym. " said milkman. This is known as "temptation concentration," and it combines an activity that you avoid with one that you actually enjoy doing. Milkman conducted experiments on pooling temptations in the gym and found that those given audiobooks to listen to turned up to exercise significantly more often – at least intermittently. (I've written about how audiobooks can transform the running experience, even if multitasking slows the pace.)

Although many of her studies have looked at fitness, which Milkman says is the behavioral science equivalent of experimenting on fruit flies, temptation bundling can also be applied to a wide variety of financial tasks that we fear: setting budgets, paying taxes, filing expenses. I've been putting this to the test since reading Milkman's book: I only listen to music at work while doing the most tedious administrative tasks on my to-do list. It's like getting the reward for doing something while it's in progress, not afterwards. My concentration of temptations seems to at least alleviate the pain a little.

Commitment devices

The science of self-nugging boils down to a process of eliminating bad decisions. It's a tactical restriction on your freedom. An extreme and effective version of this is called a commitment device and is not a new idea at all.

The best known example of a commitment device is in Homer's Odyssey. If you remember, the sultry but deadly song of the sirens would tempt sailors to smash their ships into the rocks. Our hero, Odysseus, wanted to stream their song without dying, so he had his crew apply noise-canceling wax to their ears and ordered them to tie him to the mast and promise not to release him no matter how bad he was begged. If that seems masochistic, it is – to be fair, that was a guy who commuted for ten years.

Commitment devices aren't always that epic or BDSM, however. In an experiment that economists conducted in the Philippines, a bank offered some customers a standard savings account with interest, while others had the option of a commitment account that locked their money for a period of no added value. "They found that people with access to this particular new type of account saved 80% more year over year," said Milkman.

The cool thing about money: It's also a form of time travel. It's a technology of transferring value over time, and you can apply it to Venmo between the two most important people in your life: you and the vaguely similar person you will become in 10, 20 or 60 years from now.

When she told her students about this experiment, they were amazed, Milkman said, because from a rational economic perspective no one should agree to such restrictions. “It's better for the bank, they say. But it turns out that for some customers it's better for them too. "

There are apps like Stickk that streamline the process of creating your own commitment device. You are setting your goals and putting real money on the line that you can put on a charity that you hate if you don't make it. A friend or foe can be chosen to arbitrate, to be honest. I'm setting up a commitment device in the app to make progress on a writing project that I can't seem to get anywhere. The jury has yet to decide if it will work or if a particular charity will get 250 of my hard-earned dollars.

Time travel

It is impossible to get better at money without getting better with time first. Time is money, as the guy on the $ 100 bill says. And yet, over time, people can be even worse off than money. Even those of us whose hearts beat as steadily as a metronome, who seem to move effortlessly across all the dance floors of life, have trouble reckoning with past, present and future hours, years and decades.

The cool thing about money, however, is that it's also a form of time travel. It's a technology of transferring value over time, and you can apply it to Venmo between the two most important people in your life: you and the vaguely similar person you will become in 10, 20 or 60 years from now.

Hal Hershfield, a professor at UCLA, conducted a series of fascinating experiments on our perception of our future selves. His work suggests that you don't need a DeLorean charged with 1.21 gigawatts to send more wealth into the future, but rather the much simpler technology of pen and paper or Google Docs.

By regularly writing letters to our future selves and making that older version of ourselves a real, three-dimensional character, we can better weigh the tradeoffs between our hedonism today and our future well-being (or hedonism).

"There's always a tension between what I want to do and what I think is best for my future self," Hershfield told me. "This type of self-talk can make it easier to see the benefit of something like registering on an automatic savings account."

As you write these letters, it pays to find out how you will react when the S&P 500
SPX,
+ 0.75%
drop by 50%, your Tesla
TSLA,
+ 3.02%
Share rocket to the moon or your bitcoin
BTCUSD,
-3.70%
falls back to earth. This is a form of self-nudging in the sense that you strategize with a cool head instead of waiting for your emotions to take control in the heat of the moment, Hershfield said.

How we spend time and money can also improve our financial behavior. In one experiment, Hershfield gave people the option to invest $ 150 a month, $ 35 a week, or $ 5 a day. Which one would you choose?

Well, they all add up to the same thing, and yet people found it a lot more palatable to invest $ 5 a day. This is kind of a reverse of "skip the bar," that most clichéd and unnecessarily decaffeinated personal financial advice.

"This advice is derided because most people don't have a well-funded retirement just by saving $ 5 a day," Hershfield said. "But just signing up is that first barrier, right, and so $ 5 a day makes it easier to go from nothing to something and then from something to something more."

Time can also be a valuable tool for starting new habits, as Milkman's research on "reboots" suggests. The calendar can change because the start of the school year, a birthday, a new year, or even a new month seem to help us shape the end of a bad habit and the start of a new one. Well-chosen new beginnings can only be the self-boost we need to get started.

Wear your holder

Habits are hard to start and even harder to maintain. New Year's resolutions rarely make it to Groundhog Day. We will change our diet and spending, but our waistlines and wallets seem to revert to their old format at some point. Anyone who has ever worn braces knows that those hard-earned straight teeth won't stay straight for long if you aren't wearing your retainer.

"That's why I'm more optimistic about making longer-term changes," said Hershfield. "And I'm somewhere between agnostic and pessimism when it comes to changing the everyday."

Thinking about whole categories of decisions or making one-off set-it-and-forget-it moves are more likely to be successful because everyday expenses are much more like food: there is a temptation to buy "a little of everything" online Time, ”as comedian Bo Burnham puts it.

A retainer is basically proof that braces alone won't really solve the problem. Crooked teeth can be a chronic condition. And since so much of our troubling behaviors are chronic diseases, "we need to think about permanent solutions rather than looking for a one-off solution," said Milkman.

Maintaining behavior change long term is an area that researchers are now paying much more attention to. Hershfield said he was interested in how this dialogue between the present and future selves could help change habits.

Milkman said an experiment she conducted suggests that rigid habits aren't always the strongest habits. Which of these two habit changers are likely to be more successful: someone who pledges to exercise at the same time each day, or someone who pledges to exercise at a specific time each day? It surprised me to hear that in Milkman's experiment, flexible habits worked better for many.

Habits are important to changing us for the better, but there is such a thing as too much autopilot.

Don't eat the stale popcorn

Academic work doesn't usually keep me up at night, at least not since I was a student. But one that I read last month gave me a slight panic. It wasn't about the pandemic or climate change or any of the 14 other disasters that Cassandras and Jor-Els keep warning us about. It was a study on popcorn.

Look, I love popcorn. Or at least I thought I did. But Wendy Wood, a psychology and economics professor at USC, makes me question everything. In an experiment that she carried out about a decade ago, half of the test subjects at a film screening were given boxes of freshly popped kernels, wonderfully salted and buttered. The other half was given week-old stale popcorn with the texture of rubbery cardboard.

The following gave me a slight existential fear: the moviegoers who reported that they always ate popcorn in the theater turned out freshness and taste to be irrelevant. They consumed about the same amount, regardless of whether they were served the fresh stuff or the stale cardboard. Inhaling popcorn in the movies was so automatic they didn't even notice or care that they were snacking on something like Amazon packaging.

Nothing in life can be achieved without habits. We only need them to get through the day. But think about how much time and money we are wasting, or consuming the equivalent of stale popcorn.

I don't know about you, but I would definitely have eaten the stale popcorn. My dogs too. Perhaps the difference between humans and animals is that while we're both creatures of habit, humans feel guilty – and maybe, with a bit of luck, we can actually do something about it.

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