When we fail to do the obvious, we might have to condition us to do the right thing. This is what behaviorist tricks are for. We all know that spending more than we earn will lead to disaster. Yet many of us do exactly that. Behaviorist financial tricks may be able to help.
The diverse financial responsibilities that many of us have often make saving money difficult. Housing, student loans, and health care are usually high on that list of financial obligations that prevent us from putting cash away for investments. This dilemma is heightened when it comes to crucial long term financial goals like funding one’s retirement. We know that funding our retirement is on our shoulders because many companies have moved away from providing pensions. Often, we fail to act.
Financial advisor Carl Richards calls this the behavior gap, the breach between what we should do to build financial freedom and how we fail to live up to fiscal prudence in reality.
Behaviorism is a social theory claiming that human and animal behavior primarily results from conditioning. In this view, it is possible to treat psychological disorders or suboptimal response about, i.e., money, by altering behavior patterns.
Here are five guidelines for making smart financial decisions for life. We can call them tricks because they trick us into behavior that is against our initial feeling of avoiding pain and seeking pleasure. And the behaviorist tricks go against what the majority of people might recommend. As the saying goes, ‘Do what everybody does and get what everybody gets.’ When it comes to money and finance, following the herd usually does not bode well.
Behaviorist Financial Tricks 101: Beware of Generic Financial Advice and ‘Anchor Bias’
You are a specific individual with a life and experiences, unlike any other person on planet earth. But concerning financial advice and retirement planning, we often listen to general information from mainstream media. A good saving plan does not have to be perfect, but it ought to be unique and personal. Nobody can accurately predict the future development of financial markets all the time. You may well stop chasing the ideal investment or portfolio.
Preferably, design your portfolio in line with your current understanding of the market and finetune when things change. You are you and are entitled to your style of investment as you are to your clothing.
Do not fall for an ‘anchor bias.’ which is relying too heavily on one piece of advice. Your company might offer you auto-enrollment for retirement provision, and everybody goes along with the official recommendation. Keep your mind open to finding out what works for you.
Realize the Value of Money Now Compared to When You Are Old
Here is the story about how a child’s hand seemingly automatically reaches into the cookie jar. Numerous people prefer a smaller amount of money soon over more substantial benefits later in life.
A 2016 study by the insurance company Prudential found that many young adults couldn’t imagine themselves when old. They compared saving money for their future selves to giving money to strangers. It is this very picture, yourself in the future after a successful career, perhaps with wrinkles and grey hair, that may help you perceive the value of today’s money in the future.
A convenient way of getting a good understanding of your future old you is to spend time with the elders. In a culture obsessed with youth, do the opposite and seek out advice from the elderly. Listen to their stories about how life unfolded for them and pay attention to their regrets, so you know for what to prepare.
Time Your Retirement and Follow through with Your Financial Goals by Preparing for Surprises
You have heard it before from at least one financial advisor: Don’t try to time the stock market. Rather time your retirement. Investments will develop in unexpected ways, and finding that perfect moment to buy or sell may very well spell disaster.
It is wiser to determine when you’d like to retire, which will help you figure how much money you need to save, how much time remains to build up capital, and how to best invest those savings.
Think of it like a target-date fund: this is an investment tied to a specific year in which investors may choose to retire. Let’s say, someone in her late 30s may invest in a 2040 target-date fund, assuming she will retire in her late 50s. Target-date funds automatically rebalance every few years, so that as the prospective retiree ages, the investments become more conservative.
This might not be right for everyone, as some investors may rather stay invested aggressively into their retirements. But becoming increasingly conservative closer to retirement is a right way for many to ease to the excitement of unpredictable investments.
Enjoy Your Life and Remember that Money Can only Buy so Much Happiness
Overspending is rampant in our consumerist societies. Overspending is what you have to avoid to accumulate prosperity. This does not mean, however, to become stingy across the board and entirely forego treats. The trick is to spend on what you value and to scrutinize all other expenses. Demand value whenever you spend money.
Do you need that bigger car and that fancy watch? What about all those subscriptions? Never spend money because ‘this is what people do.’ Have your explanation for your expense patterns and ensure they are in line with what you value as a personality. Feel that you are in control of your expenses.
And once you have your finances on track, remember that money is a means and not an end. Most people will say that they strive for financial security because they want to be happy and provide a good life for the ones close to them. Happiness is undoubtedly paramount, but it does not depend on how much money we have in the bank. Happiness is a by-product of a fulfilled and meaningful life, and it involves expectations and desires.
Money, in turn, is merely a means for pursuing personal goals. And there is proof that money can’t buy happiness: Nobel Prize winner and behavioral economist Daniel Kahneman and Princeton professor Angus Deaton showed in a recent study that happiness correlates to income only up to individual earnings of $75,000 per year. After that threshold, people with higher personal incomes don’t commensurately experience higher levels of emotional well-being. This figure, of course, ranges depending on the living expenses of the location you live. The critical insight is that there is a financial threshold that does not increase happiness.
The Kahnemann Deaton study indicates that most people overemphasize their finances. If money can only buy you a limited level of happiness, then beyond this point, money is merely a means to pursue things in life that bring true satisfaction.
Use Behaviorist Financial Tricks for Painfully Honest Investing and Always Stick to Your Personal Goals
When feelings shape your financial decisions, things can go wrong. It is an open philosophical discussion in its own right to what extent humans are capable of rationality. Let’s aim at avoiding emotions dictate your finances as much as possible and not worry about the philosophical notion of rationality.
In a first step, this means being honest with yourself about the investment success or failure until date. Great investments require next to financial acumen and skill, just the same amount of luck. Sometimes you place smart bets that lead to lucrative investments. On other occasions, you’re just plain lucky. So don’t beat yourself up over the failures. And don’t allow yourself to believe you are the next Warren Buffet over a fluke. Stay with both feet on the ground, keep calm, and keep on investing.
A second step in steering yourself away from emotional decisions what Carl Richards calls the Overnight Test. Imagine that someone sold all your investments overnight. Which of your stocks would you buy the next day again? In this hypothetical setup, you might get rid of a few investments. More often than not, we hang on to investments because we have grown accustomed to them. We check their prices regularly, and they perform poorly, yet we get to know the company behind the stock more, and we start to follow its development like a sitcom. We feel comfortable with it. The Overnight Test can help us discard any pre-existing, emotional biases, and re-evaluate an investment objectively. If you are not sure if you would repurchase an investment tomorrow, let go of it.
A third step to shield your finances from your emotions is always to ensure that investment decisions can potentially help you reach personal goals. Look around at the advertisement on finance websites, and you might find messages like ‘Wallstreet legend reveals his stock of the century,’ or ‘The one stock that will dominate the 5G Revolution.’ The ‘next big thing’ is always out there. But buying into something just because it’s trendy and you might feel FOMO (Fear of missing out) isn’t a financial choice. It is following an emotional impulse. A rational investment choice is building savings for retirement.
The path is to know what you want for yourself and your family in the future. Then ask yourself if the potential investment plays a definite role in the portfolio you require to help meet the envisioned financial goals. It goes without saying that the rational decision might not produce expected results. Because whatever rationale you might apply, investing always remains to make an educated decision amid uncertainty.
The only thing you can do is this: Outsmart yourself by making the best possible decision today using behaviorist financial tricks. Then sit back knowing that you’re never fully in control of outcomes and take responsibility for the potential results anyway.