Evaluate behaviors that affect finances
I have often talked about behavioral economics in this column in the past.
Sometimes it has been about retirement plans having greater participation when there are fewer investment options, and sales of certain products in a store increasing when there are fewer choices. (We like having choices, but not too many of them.)
Sometimes it has been about advertising and marketing tricks intended to make us buy more, like the placement of products in a grocery store, including their location on the shelves (higher or lower). Then, in the last column, we discussed how money eventually just becomes a concept if you only pay by digital payments, whereas money is an object if you pay by cash, and you will spend it differently.
Examples of behavioral economics
A fan of behavioral economics, I try to work in examples in my presentations in the schools. Here are some examples.
First, when I talk to high school students about money is about hard work, I tell them that when they want to buy something, stop for a moment and think about how hard you had to work at that minimum-wage after-school or summer job, or babysitting, to earn the money to buy it. I tell them some days you won’t buy it, because you will say that it wasn’t worth all that hard work. Other days you will, but if you went through that exercise and you buy it, you will appreciate it and value it more, and if you ever have to buy it again, you will find a way to get it for cheaper.
Second, when encouraging students to be frugal but not cheap in life, I talk about being a smart shopper and spender, by doing things like unit price and comparative shopping, going to sales and discount stores, buying store brands when appropriate, and using coupons. Then I tell them to go one step further, and take some or all of their savings and do or buy other things to make a better life for them and their families. It will incentivize and reinforce that smart shopping and spending behavior — that’s frugal not cheap!
Third, when talking about my favorite subject, cash is king, I talk about a college professor’s lesson when trying to use more cash for everyday discretionary spending. When going to the grocery store, only go with a list of the things you need and will buy that day, and the cash to buy it. Don’t bring in your cards, so that you can’t impulse buy something that looks really good, but you don’t need it, because it is not on the list. Also, when it comes to impulse buying, if you are thinking of buying something online or in person, that is clearly something that you don’t need, wait for 24 hours and then go back and revisit the purchase.
Last, if you start saving more seriously, and you actually stay aware of your savings growing, including by earning some compound interest, you will be incentivized to save more. It works for investing also.
Keep to tight budgets
Following up on this subject, I recently read an article in the Wall Street Journal that sets out another good behavioral economics personal finance technique, “Public Displays of Financial Planning.”
Its bottom-line lesson is that, if we finally decide to put into place some reasonable austerity plans and tighten up our budget in order to cut down on overspending, reduce debt or just improve our overall finances in this hyper-consumer, keep-up world, telling others about our plans, especially when we are not going to do some things we did in the past to keep up, results in greater pressure on us to follow through with our austerity and tighter budgeting plans.
Apparently, on social media, it is called, “loud budgeting.”
So, it is a good lesson. Be proud of your efforts to reduce overspending on want, wishes, luxuries and conveniences, and doing other smart personal finance things, and don’t hesitate to tell friends, family and colleagues about it in order to reinforce your smart behavior.
From the classroom
Let’s finish with a little education on behavioral economics from the Harvard University Employees Credit Union.
“Behavioral economics looks at how psychology motivates money habits, often in a way that can be detrimental. While financial responsibility is typically cut and dry, human behavior is rarely so linear, and this can lead to decisions that are financially counterproductive. The upside is that evaluating the behaviors that cause poor financial decisions can lead to better money habits in the future.
“Behavioral economics studies the psychological, emotional, cognitive, cultural, and social factors that influence our decisions. In the realm of finance, the idea is that addressing the underlying behaviors and thought processes that drive a person’s decisions can also provide a framework for understanding the tendency to make bad or irrational financial choices.
“Traditional economic theory lives within the realm of rationality, but behavioral economics teaches that a person’s natural, emotion-driven tendencies regularly don’t line up with the systematic nature of finance. This means that we are often driven, both on an individual and an institutional level, to make money decisions that satisfy us in the moment rather than being optimal for the long-term — so your choice to buy that expensive cup of coffee even if it puts you over budget has a basis in psychology. By better understanding your own underlying thought processes, you can practice better financial decision-making like changing your saving habits.
“One of the more common reasons that people tend to spend too much is decision paralysis. When you feel overwhelmed with too many options, it can be easy to make no decision at all. This can hold you back from making important financial choices that save you money. Another common behavioral pitfall is planning fallacy. This is when you underestimate how long it will take to complete a task, such as paying off your credit card balance.”
My advice: If you have the time, read articles and consider investing in a book on behavioral economics and personal finances.