Afford Anything - Why We're Irrational with Money - with Kristen Berman

Episode Date: October 4, 2019

#218: Kristen Berman is co-founder of Irrational Labs, a behavioral product design company, along with Dan Ariely. She has a fascinating job that involves looking into why people behave the way they do with their money, and discovering the easiest solution to help them create more positive financial behavior. In short, she’s a proponent of redesigning the current financial system to make saving automatic and easy, and that’s part of what we discuss in this episode. If creating better financial habits has been a challenge for you, or if you have trouble framing spending as a positive thing, rather than a loss, then Kristen has awesome advice for you. Here are some key takeaways from the interview: 1. Habits are overrated - one-time decisions are more effective. 2. Simplify decision-making by giving yourself a rule-of-thumb to follow. 3. Pre-commit to your financial goals. 4. Measure process versus outcome. 5. Use accountability partners to reach your goals. 6. The Three Bs - Behavior, Barriers, and Benefits. For more information, visit the show notes at https://affordanything.com/episode218 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else. And that is true not only for your money, but also your attention, your energy, your focus, your time, anything in your life that's a scarce resource that you need to manage. That leads to two questions. Number one, what do you value most? And not what does society tell you you should value most. But what are you genuinely authentically valued most in your life? And number two, how do you value most?

you align your behaviors to reflect those values? Now, answering those two questions requires a lifetime of daily practice, and that is what this podcast is here to explore. My name is Paula Pan. I'm the host of the Afford Anything podcast. Normally, we are a weekly show. We air every Monday morning, but once a month, on the first Friday of the month, we air a first Friday bonus episode. So welcome to the October 2019 first Friday bonus episode. Today, Kristen Berman joins us to talk about why we act the way we do when it comes to the way that we spend. Kristen Berman, along with Dan Ariely, are the co-founders of Irrational Labs, a nonprofit that tries to figure out why people act the way they do. Many of you are probably familiar with the name Dan Ariely.

He's a bit of a celebrity in this niche. He's the author of Predictably Irrational, which is a book published in 2008 that became a massive mega bestseller. Now, that book talks about why we make the choices that we do, especially around what we buy, and sheds light on the fact that most of the time, our decisions don't actually make a lot of sense. After the success of that book, Dan Ariely and Kristen Berman co-founded Irrational Labs to dive deeper into that topic. And today, Kristen joins us on the show to describe what they found. So if creating better financial habits has been a challenge for you, then Kristen has some interesting advice. Here she is, Kristen Burman.

Hi, Kristen. Hi, Paula. How are you? I'm great. How are you doing? Wonderful. So I would love to talk to you about some of the research that you've done around behavioral economics. And let's start with perhaps your most contrarian and possibly controversial statement. Habits are overrated. Yes.

I think in life, we typically want to think that we can do anything and that we can start a new habit, stop a new habit. And it's only just a matter of willpower and will today be the day. And the reality is today is most likely not the day and neither is tomorrow. So we think about behavior is something that's really hard. to change and habits require you to do something every day, which is probably the hardest possible thing you could design for yourself. And so when you think about the optimal way to change behavior, you'd basically imagine you'd have to do one thing once. You'd have to get enough motivation to do a thing. And then after that, everything would just magically happen. So two examples here. We think about

asking people to save every day. This is likely just not feasible because you forget, maybe some days you have more money, some days you have less money, some days you're highly motivated to get the thing you want, and some days you're not. A better alternative and a proven one is just to put a automatic savings rate at your bank or automatic enrollment of retirement savings. When companies change to automatic enrollment for retirement savings, the enrollment rates went from 30% to 90%. And now people have, you know, the chance of having a retirement on the beach versus people who just didn't do anything, likely we'll be hanging on their cubicle for much longer. So one-time decisions, while difficult maybe to get up the muster

to do something, if you can lock yourself in to a behavior, it basically allows you to not do anything in the future. And my favorite example of this is imagine you want to get yourself to walk every day. What would you do? There are lots of apps for this. There are calorie counters. There's tons of things that can try to motivate you every day to get out of bed and take a walk. And if you were to say, but habits don't work, what now? We would say buy a dog. So you make a one-time decision to buy a dog, and now every day you're not just walking once a day,

you're walking twice. If you can make these one-time decisions, there's no reason to motivate yourself to do something every day. So what I'm hearing is if you can make a one-time decision that automates all of your future decision-making, that is much more effective than the secondary option, which is then trying to cultivate a habit. Correct.

You think habits are something you have to do every day. You need the full environment to support that decision making. And the reality is you have a lot of motivation sometimes and not a lot other times. And so if you can muster up enough motivation to lock yourself into something or automate the decision making, it just becomes a lot more likely that you'll actually follow through. Tell me about some of the other lessons from behavioral economics that individuals can apply to their own lives. So I think one of the other controversial statements of behavioral economics makes is that generally financial education, which is the idea that you're just going to teach yourself everything about FICO and then, or you'll teach yourself everything about debt management, about, you know, optimizing your diversification, that this will actually help you change your behavior. And the sad reality is that it does not. So John Lynch and Daniel Fernandez summed up over two.

hundred papers around financial literacy and education that related basically, if you teach somebody something, does this change their behavior? And it's almost close to zero. So it's 0.001% behavior change from teaching yourself about financial domain like savings or expenses or debt management to actual behavior change. Now, I think people hearing this are probably like, that's not me. Of course, if I teach myself about asset management, I will change my portfolio. And it's not that it doesn't change your knowledge. So if you teach yourself about how to do asset diversification, you're going to learn this. You know, we're not stupid. We can learn. The question really relates to how does that change your behavior? So does that make you do something different? So if you

teach somebody about FICO, in order to change their FICO score, they're going to have to log into their credit card and then know how much to pay to keep a 30% utilization rate. And that is a very different motivation and behavior change than just learning about FICO. So many times we think that, you know, reading a lot of, even this podcast, right, we say we could find out all of these wonderful things about how to manage money and yet actually people taking action on this is a very different story. It's fairly depressing. It is fairly depressing. So what's the upside? So basically you want to think about designing your environment or your financial life, again, so that your environment supports the goals that you have. And again, this may be a one-time decision. So you have to still muster up

enough courage and motivation to do it. But then your environment is changed. So if we think about how the theory of financial education not working applies to something that we might have all tried like budgeting, it's quite obvious, right? You look basically back at your budget and you say, wow, I really overspent on food this last month. And the question is, does this change what you order on a meal the next weekend? It may. But but most likely, you're just going to order the second glass of wine or an appetizer and you're going to forget about how you overspent last month. So knowing information about your budget is just not enough to change behavior. So what could? So in this world, you'd basically say looking backwards

is not going to help me when I'm at the restaurant. Instead, what we want to do is simplify decision making. We call these heuristics. So I'd give myself a heuristic or a rule of thumb about what I should be ordering and if I should actually be going out. So imagine a world where I said, when I go out to eat, I will only have one glass of wine. Now all of a sudden I'm not sitting at the table with my friends thinking, do I order a second glass of wine? By the way, restaurants are a big contribution to our overspending and alcohol at restaurants is one of the top contributors as well. So you think about how you would design to spend less and you would say something like instead of I want to spend $50 less this month, you'd say, when I'm at a restaurant, I will only order one glass of wine.

or you'd say I actually only go to restaurants one night a weekend. Right. You don't even put yourself in the tempting situation to say I will spend more. All budgeting apps don't work like this, but budgeting or personal financial management apps assume that basically we will be making a decision based on how much we're going to spend over a period of a week or a month. And that's helpful knowledge, but it really doesn't correlate to the behavior change. In fact, there's no behavioral science research to suggest budgeting actually change.

changes spending behavior. Crazy. And you found that gaining financial literacy does not over the long term impact financial behavior. Financial literacy is correlated with improved financial behaviors. But that doesn't mean that increasing your knowledge or your financial literacy will change your behavior. So it's a slight nuance. It basically says that people who are good with their money may know a lot about money, but it's not that I should teach people who are bad with. money about money, that's not the thing that will get you to improve. Instead, improving is about designing your environment to help you be successful in the moment of decision making. Does that make sense? So, like, yeah, I can teach people about healthy eating, but if you're just not used to

eating healthy, there's going to be broader interventions, you know, whether it be cooking classes or changing your friends. But yet, if you are thin, you may know a lot about eating healthy. It just doesn't suggest that this is the answer to change behavior. The study, to clarify, was around 200 financial literacy papers that were analyzed. And of all the papers, there was close to a 0.001% chance of changing behavior from increased financial literacy. Let's talk more about then how to change your environment. So how to change your environment. One thing is to evaluate the things you're spending the most on and how happy this makes you.

We're spending probably a lot on rent. You're probably spending also a lot on transportation and the car payment. Our environment would push us to spend more and more on these things. We all know the idea of keeping up with the Joneses. And so if your neighbors have a nice car, you're more likely to get a nice car. And by the way, if your neighbors win the lottery, you're more likely to go bankrupt. Spending money is quite contagious. So if you think about who you surround yourself with, this is the environment.

So if my friends are buying nice purses and nice shoes, this will increase the likelihood that I would overspend on my budget. You know, one of the better things that's happened to society these days is the term minimalist. So instead of being cheap, I'm now a minimalist. And I can really create rules of thumb for myself around spending that could drive my behavior. So again, kind of back to the heristics of the rules of thumb, I can decide that I'm only going to, you know, to go on Amazon and spend $50 this month on something, versus kind of saying I'm going to buy the new purse because I'm going out this evening and I'd like something new to wear. So when we realize that we're really motivated by the present moment and the present moment has an outsized influence on our behavior,

I'm in the diner and I want another glass of wine or I'm about to go out and I'd like to buy something, then we create rules and mechanisms for ourselves that can help hold us accountable. The tax refund is one of the largest paychecks that Americans get a little bit over $3,000 on average if you get a refund. And the reality is this is a windfall of money, just like your bonus would be a windfall of money. When we asked people to pre-commit to save some of their refund, basically we asked them in February before they get their refund versus in April when they get their refund, people will double the amount that they're willing to save. So we didn't experiment with a company called Digit, which saves your money automatically for you. And two groups of people and half were asked in February, half were asked in April. And Digit's pretty slick because they swipe your money into their savings wallet for you.

So when people said that they wanted to save a certain percentage of their refund in February, Digit then, when the refund came in, automatically saved this for them. People were asked in April if they wanted to save, they would automatically save the money for them. But the difference is that in April, you already have the money in your bank account, and you're moving it now into another account. In February, you don't have the money in your bank account. This is called pre-commitment, or you're pre-committing to do something that you haven't yet done. And even better than pre-commendment is locking yourself into that behavior. So with Digit, people pre-committed to save a certain amount of money, and then Digit automatically swiped it in when they came in.

They didn't really have a choice or a decision to make at the point of temptation, at the point of temptation, at the point of being tempted by their tax refund because the money was already out of their account, they never even saw it. And when we do this, not just with tax refunds, but generally in life, we're able to behave in a way that aligns with our future intentions. So it's not that people don't want to save, it's just that when you see the money in your account, you'd rather do something else. People doubled their savings rate when we asked them, this pre-commitment. This is something nice to think about of when you get your bonus or you get a tax refund or there's something called Five Fridays where if you're paid every Friday, if you're paid weekly on Fridays, there's a few times a month that you'll have a fifth Friday.

This will feel like extra money. A third Friday, wouldn't it be? There's third Fridays and then there's the fifth Friday. If it's biweekly versus weekly. Yeah, that makes sense. Okay. Yeah. Because we're used to paying our bills on a monthly basis, utilities and rent, having an extra payment within the month will actually feel like a windfall.

It'll feel like extra money. Your bank account will be higher than it normally is at the end of the month. And so instead of having a lower balance, you'll feel like you have more money to spend. So what we suggest is people actually outline when the Five Fridays are and then commit to just moving all of that money to savings. Because you really won't notice if you've aligned your life to spend with your bills and your rent and your normal paycheck happens. All that money can just go to savings without you noticing. Right. Another thing to think about is any loan or debt goes back to the one-time decision.

You know, typically we're paying in especially a mortgage or a car payment. paying what the lender has asked us to pay. We're paying the actual payment. When you think about how much you could be paying, it doesn't have to align with what you're actually paying. So what we suggest is that people round up their payment to a round number. You're already doing that in your head. If I ask people what their utility bill is, they never tell me it's, you know, $82. They'll say $80 or $90. Because you're already rounding up these payments in your head, you can basically overpay your mortgage or your car payment and save yourself thousands of dollars and years off your loan payment. So we didn't experiment with a company called Earnup that got people to overpay their

mortgage payments and people who opted into this ended up saving on average eight years off their loan payment. And it was just, you know, on average around $19 that they were rounding up. So it feels like a very small amount. But over the years of your 15 or 30 year mortgage, this really adds up. Another thing we think about is regret. So if you ask people about expenses that they regret, actually, this is a question forever. If people just want to think now about the expenses that they regret, it's interesting because many times we purchase things and we just are very happy with ourselves. And it turns out that we're happier with ourselves is the higher amount of purchases.

So if you buy something very large, you're pretty happy. If you spend money on something you don't control or you don't feel like you control like your rent or utilities or anything, bill, you're also fairly happy. The expenses that we regret the most are things that we do control. And this tends to be things like going out to eat or spending money on food or entertainment. By the way, when I say food, I mean spending money, food on the weekends. Like restaurants. Like restaurants or, you know, staying at the bar late. In general, our behavior on the weekends is different than our behavior on the weekdays, which is pretty routinatized, right? You're basically doing the same thing every day. On the weekends, we

succumb to more temptations, we're more present biased. And so when we ask people to evaluate their last 40 transactions, the majority of the transactions that had a regret score were things like eating out on the weekends. And so you think about that and you think about how would you design life in order to decrease the amount of regret you have. And we come back to things like rules of thumb. We come back to things like default so that you don't feel like you have a lot of money. So sadly, many times people get paid on Fridays. So if you get paid on Friday, your bank account will be higher. In fact, there's research that shows when you get paid, you spend more. And so this is fine to feel great about getting paid, but it's probably not in your long-term intentions to just overspend every time you get

a paycheck. So if you were designed an automatic transfer from at the point that you get paid into savings, then your bank account balance looks much lower. So instead of basically having a high bank account balance for the weekend, knowing that you're going to spend more on the weekend, you're going to spend more when you get paid, and these are likely transactions you'll regret, you'd basically say, how would I prevent myself from doing that? And you time your automatic transfer into savings with your paycheck. This is kind of a typical advice people give as you, you know, pay yourself first. One of the smart reasons for that is because as soon as you get paid, you spend. But if you save, then it becomes harder to spend. Right. And pay your

yourself first. You've cited that as an example of one of many ways in which people can actually reframe savings into earnings for their future self. Yeah. So savings in general can feel like a loss. You're putting money aside. It's really not working for you at this point unless you're investing. And what we know from behavioral economics is that we don't like losses. Right. The word is loss aversion. and they feel more painful than gains. So researchers suggest 2x more painful than a gain. And sadly, savings, which is one of the things that will make us wealthy and increase our financial health and success, can feel like a loss.

And so there's a real question on how you reframe that in your head to more feel like you're earning money or you're making money. When we think about the debt hack, which is round up your debt payment, it may feel today like a loss because you're spending 19 more dollars a month, month, but actually you're earning money for yourself. You're earning money back on your mortgage by reducing your interest payments and increasing the amount of money that you'll have in the future. And so this is the same with any kind of investment where people are more likely to want to invest in something that grows their money. And so if you just think about savings as a way to kind of earn

money, we think this is a very nice hack on our mental model to say, you're not losing money, you're just setting it aside to spend later. You're earning it for your future. On the topic of loss aversion, and its closely related cousin, information aversion, how do people safeguard against that, particularly given that at some point in the future, nobody knows when, there will be a recession during our lifetime. And when that happens, it can be very, very tempting to not step on the scale because you don't want to see your weight. What do you do? How do we prepare now, knowing that that lays ahead? Yeah, great questions. So information aversion is just as you described, we basically don't want to see bad things. So if I step on the scale and I have gained weight, tomorrow I just won't step on the scale. There's no need to put myself through that. Sadly, our bank accounts are also like that, right? We log into mint or clarity. Many times it could be bad news. They show us pie charts that make it extremely easy to see how much money we're losing. You know, the apps are just so beautiful these days. that it's hard to avoid understanding how much money you're spending.

Loss aversion or information aversion, the ways to think about two things. Number one would measure yourself on process versus outcome. What this means is basically if you are doing the right things and something bad happens, you don't necessarily have to feel bad about it because you're still doing the thing that you're supposed to do. I have an automatic transfer from my bank account into savings account. if a recession hit and I lost money, I'd feel bad, but I still have my life set up so that I'm doing the right things to equal success. And so we would have people focus less on the numbers of

their bank account and more that they have the process set up and feel really good when they have the process set up. So that's kind of one is orientate your life to process versus outcome and even reward yourself for process versus outcome. I wish banks would basically congratulate us after getting three months of automatic savings, six months of automatic savings, or increasing the amount we saved every month. Instead, the only feedback loop we have is the number of our bank account, which many times is just not controllable. You may have an emergency expense. You may have an upcoming wedding or something to spend money on. It's out of your control, but if you're doing the right things, you should feel good. And then the second thing is when you're thinking about

asset management is to use what we explained before, which is pre-commitment. And so we know that there will be a recession. So what you want to do now is make an if-then statement. If the market goes down, then I will not take my money out. Behavioral research finds that when you think about something in advance like this and pre-commit to it, you're less likely to be influenced by the present moment. So if I commit to voting at a certain time, at a certain day, I'm more likely to go out and vote than if I just commit to voting. So we really want you to think about kind of what would happen if the market went down and then what you would actually do or not do. Good news. Good news. news is there are apps that make this harder. So betterment is one where if you log in and try to

withdraw your money, they ask you five or six questions to really get to the idea that are, is this an intentional withdrawal or is this something motivated by the current events in the day of which, while they can't get financial advice, it's very clear that they don't recommend this. We'll come back to this episode after this word from our sponsors. What kind of interest rate are you getting from your checking account? According to the FDIC as of August 2019, the national average interest rate is 0.06% APY. That's not great. Check out Radius Bank. They offer an account that's called Rewards Checking, which is a free high interest checking account. Now, they call it rewards checking because it offers unlimited 1% cash back on debit card purchases. And here's how

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So give them a try. You can get three months free when you run your first payroll. So try a demo, get three months free, and check it out for yourself at gusto.com slash paula. That's g-u-t-com slash paula. gusto.com slash paula. In the example that you gave earlier in which people pre-committed their tax refund and they did so, by essentially arranging their accounts such that they would use this tool. In this example, it was digit, to take that tax refund and automatically put it in savings so that it never crossed their account, right?

In that example, pre-commitment happens through the use of a tool or through the use of technology. How do you establish pre-commitment for areas of your life in the future, such as investing, such as anything related to your home, any area of your life in which a tool wouldn't necessarily. be part of that process. Great question. So I think first, if there is a tool for it, use it. Many times we think that we have enough willpower enough strength in order to follow through on our intentions. And we just know that's not true. So I think first is kind of admitting that, right, that like generally you may want to organize your money in the perfect way, but maybe you're busy one Sunday when you were going to do it. And now a week or two has gone by and you haven't done it. And so if you had a tool like, you know, a betterment that would just swipe away money

into savings or clarity that would help you. And clarity is also really wonderful to swipe away money into a 2% interest account. We should do that. And most people should. And we're probably underusing we're in age now where tools can help us with a lot of things. So if you're not on one of these tools or haven't tried them out, this is probably the first step to not assume that you have perfect self-control and we'll make the perfect decisions at every moment. And then the second step is designing your bank account so that it does help you out. And again, this is a one-time decision where you have automatic transfers set up and you have maybe a limit that you're setting and say, I'm going to save this amount of my bank account and then transfer it to investment. People should just be using tools more.

And the second is thinking about telling other people about your ambitions and your goals. So if there isn't a tool, maybe you're trying to save for coding boot camp or another kind of, education or training course. Many times financial behavior is so anonymous. The question for folks is, do you know really what your parents save? Do you know what your siblings save? Do you know the bank account of your best friend? Likely not. And we talk about sex more than money. And so this makes it much harder to fall through in our attentions if we're the only one keeping us accountable. So imagine you basically told your best friend, you know, I'd really like to pay off my credit card in the next two or three months. Just by saying, you know, just by saying, you know, you know, I'd really like to pay off my credit card in the next two or three

months. Just by saying this, you're doing this whole like pre-commitment and implementation intention saying this is, I will do this. And you're, you're making it real. So first is just not having anonymous financial behavior and bringing it to other people and sharing your intentions. And the second thing really is having them ask you about it. So you can tell them, hey, you know, follow up with me a month and see how much I paid on my debt. Now, this is tough. This is, this is not an easy thing to do, but the question that you'd have to ask is, are you committed to kind of changing your behavior and having something in your life change? And if you're not, that's fine. But if you are, you definitely want to bring somebody else into the fold.

I've heard competing theories. Yeah, on one hand, as you've just described, I've heard the idea that if you state your intention out loud and you have an accountability partner, it makes you more likely to stay on course. I've also heard, though, people talk about how sometimes if you talk too much about a goal, your mind believes that you've done it and that the talk actually takes the place of any action. This research is pretty weak. It's mostly about, like, posting on Facebook that you like a donation or a cause, and then you're less likely to donate to that cause if you post on Facebook or if you basically tell

a mass audience. So the research exists. The majority of it has been done with mass advertising, so, like, basically saying, I am going to do X, Y, and Z, you really haven't told anybody. You've told a lot of people. You haven't told one person about this commitment. So this recommendation is around budding up and telling one person about what you want to do and asking them to keep asking you, asking them to basically be your accountability buddy and hold you to the intention that you just set. You know, if you advertise, I'm going to lose weight. If you advertise that on Facebook, think about this. There's much more

reputational risk there where people come up to and say, how is this going? And so what you really want to design is people coming up to and saying, how is this going and talking to you about it more so that it's harder to make excuses. If you just publicize the fact that you support a cause and then you don't do anything about it, it's not a lot of reputational risk that you're putting yourself under. This is probably a separate podcast, but I live with now around eight people and at once 11. and we have accountability groups where every three months we come together and we tell each other what we want to achieve. And we actually don't allow each other to put goals that are not achievable. So if I say, you know, I really want to learn a new skill. People will say, Kristen, you just don't have time.

You may have time later, but you just don't have time now. And we push each other into a more reasonable goal that is achievable. And then half the time is spent thinking about the goal and half the time is spent on the system that will help us achieve it. So imagine I did say I want to learn a new skill. During that session, I would create a calendar invite for myself that would have every day giving myself time allocation to study or sign up for the course or prepay for the course. And then our group also follows up and says, how is it going? Right. We have weekly updates where we say, you said you wanted to do this. Please give me an update. So I think we wildly underuse other people to achieve our goals. And we especially do this with things that are anonymous,

like money, or very averse to basically kind of sharing our financial situations. And this is likely to our detriment. How do some other common cognitive biases also harm us in the way in which we handle money? And what can we do? Like being aware of them is the first step. But how do we actually in our daily lives recognize when these things are affecting us? So being aware of them, is likely helpful. I don't think it's required as in if my phone turned off notifications at 9 p.m. I wouldn't be on my phone before bed, which is probably a common goal. So, but I wouldn't have to have to have to be aware of the idea that this was that Google or the other people are taking advantage of my attention. I wouldn't have to wear the name of the bias in order to change my behavior.

So being aware is nice so that you can design a system to help you. overcome it. Anyway, so that's one. Second, I think we're optimists in general. It's called optimism bias. You give people a chance to basically predict what they're going to spend, and they constantly underpredict it. And some researchers did this, and they said, great, okay, people underpredict it. But what if we actually corrected them and says, yes, yes, but last week you were wrong, you underpredicted by this much, and this is how, now predict next week. And when they predict next week, what happens? They continue to underpredict their expenses. They did this for five weeks and people just don't get better. Why? Because there's always one thing that's

new and interesting. You may go shopping and it's not that you normally buy fancy salt from the grocery store. It's not that you normally buy this dress for an upcoming event. It's just this time. And so, you know, we tend to basically be optimist and say, yes, but next month I will, next week I will, I will be a little bit better. And the reality is this is likely not true. And so we may not take our financial situation as seriously as we should, right? If you imagine that actually things may get worse and not better, you may spend more and not less in the future. This may give us more motivation to act today. Sadly, stuff with finance, except starting your retirement fund, there's very little urgency. All of a sudden you wake up and your savings account is not as big as you thought it should be.

You know, I'd like to add more urgency into people's view on their financial situation and say, actually, today is the day. It's not tomorrow. It is today. We can do this by adding deadlines for ourselves and saying, I'm going to do this by this date, telling other people about the deadline. But because we're kind of optimist, we say it'll be fine. Tomorrow will be better. We don't have as much focus on making change. Right. There's no urgency. There's no urgency. And if you look at how when people pay taxes, it's, I think, 30% pay on the last day. When you look at when people sign up for, health care the last week. And so we tend to do very well when there's a deadline. You know, we tend to basically figure out how to get stuff done. And just if you think about a work environment, you know, at no point do you like wake up and go to work and see, I just couldn't get that PowerPoint done. I'm so sorry. I know the meeting is today, but I just couldn't do it. You know, we have deadlines at work. We have meetings at work in order to help us do stuff. Otherwise, we may just kind of procrastinate and not get stuff done. So in our personalize, we, the question is how do you create those kinds of mechanisms that, quite frankly, have worked

fairly well in the corporate world to help people accomplish great things. You've named a few examples already, but what are some other examples of how do you create that in your personal life, imitating some of the best practices of the work environment? Yeah, I think we should think about natural milestones, so your birthday. So think about kind of, it's actually in the literature called the Fresh Start Effect, where you say there's many times where you feel like you can make a change. And so obviously New Year's is one of them, where the day before New Year's Eve was a completely different you, but New Year's is now a new you. It turns out that actually on Mondays, we also have this effect. So more people search for diets on Mondays.

And you can create this kind of urgency by saying maybe there's a fresh start effect by the first of the month. So you're saying, by the first of the month, I'm going to have set my automatic transfer into savings up. By the first of the month, I'm going to have looked at my finances and figured out the rule of thumb that I'm going to have for the next month. The other thing is, you know, and dieting does this really well, is temporary experimentation. So if you've ever done a juicing diet, A, you don't do this by yourself. I don't think anyone has ever done a juicing diet by themselves. You tend to partner up.

And it doesn't last forever. So you say, I'm just going to try this for a short period of time and see how it goes. So if we could do that more with our money, you know, we could imagine basically saying, let me partner up with somebody and say, this week, I'm going to bring my lunch to work. Now, you don't have to keep that forever, but it's an interesting thing to try and say, how does that, how does that feel? You can imagine saying, I'm just only going to bike to work. I'm not going to take a lift or an Uber or even my car with the tolls. I'll just bike. You could have things around not eating out on the weekend or cooking in where you jointly make these. types of short-term commitments, less because you know that's going to be your forever lifestyle, and more because you just haven't tried it. Many times people don't cook and say, well, just try it. You know, heat some veggies up and maybe this will be interesting. Now, maybe it won't. Well, we really don't know if we don't try. And so having some time-bound experiments with friends is a very nice idea to create change. And then deadlines that you put on yourself, whether it be the first

of the month, your birthday, like also holidays, saying you're saving up for a certain event. You know, a lot of people lose weight right before their wedding. Weddings are a wonderful time to set a deadline for yourself. You've also coined something that you refer to as the three bees. Can you walk us through that? Basically, Irrational Labs, we are a group that works with companies. We work with nonprofits. We work with cities to design behavior change. And through this process, we've figured out, how to assess the problem and then design a solution. And, you know, psychology is a complicated field. There's lots of cognitive biases. Many people probably have the cognitive wheel on their,

you know, printed out on their bathroom. If you Google cognitive wheel, you'll see how many biases there are. So the reality is, it's very hard to memorize all these and design these into your own life, you know, or for us, a company's world. So we invented something called the three Bs. And very plainly the first step is probably the most obvious, but it actually is the most difficult, which is a behavior. In order to change behavior, you have to identify the behavior you want to change. And many times we overlook this and say, well, of course, if I may want to like spend less, but the question we'd ask is, what do you want to spend less on? In what time frame? And so we ask people to identify the exact, we call it uncomfortably specific behavior that they

want to change. So if I say I want to eat healthy, this is not enough. You'd have to say, you know, I want to eat a salad for lunch at work. Right. Now we can design a system around you eating a salad for lunch at work. The reality is if you get the behavior wrong, there's the whole other stuff that comes after it is not that interesting because the behavior is wrong. So we suggest spending time thinking about if this is the right behavior for you. So if you say, I want to stop drinking coffee and you love coffee, you know, this is just not a good behavior. So pick something that is something that would actually be achievable for you to do and is specific enough to design behavior around. And by the way, we also don't want people to think about the outcome. Like I want

to save $50. We want you to think about the process. So I'd like to, you know, have an automatic transfer every month for $25 for six months. You know, we know things come and go and saving $50 may or may not happen, but the process is an extremely measurable behavior that you can say, did I do it or did I not? The second two are around actually how you get yourself to do this behavior. So the first is to decrease barriers. So barriers is a second B. And the third is to increase benefits. Benefits is the third B. When we say this, we mean basically decreasing barriers is about reducing friction or making something easy. If behavioral economics was boiled down to one principle, it would be this, to make something easy. We tend to take the path of least resistance in life. We do things that are easy.

This is why defaults work. It's very easy. It's not that people, when you ask them, why are you and donate your organs or not? People may have high, strong preferences about this, but the reason that they donate their organs or chose to donate their organs or not to is because it was a default on the form at the DMV. So we tend to take the path of least resistance despite preferences one way or the other. And so when you're thinking about changing behavior, you'd say, how do I get myself to do the behavior that I've just outlined? You'd say, I need to reduce the barriers to doing it.

How do I make it as simple as possible to do this one behavior? So, you know, if you want to stop going out to eat, you may say that maybe there's a WhatsApp or a messaging group that always talks about stuff you can do on the weekends, and it tends to be restaurants. So if you're in that group, the path of least resistance is to go out to eat with those people. So you'd want to basically say, I want to design against the path of least resistance there, and you'd remove yourself from the group.

You can still go out to lunch or dinner with these people, but it's going to be harder, a little bit harder now, for you to execute on that. And then the third thing is to increase benefits. And by the way, this is really society has figured this one out. So, you know, it's very easy to spend money because, it feels good. You know, you're spending money on movie tickets and eating popcorn and you're spending money on video games and online shopping and all these things have benefits associated with them. Sadly, in our world, there's not many benefits associated with paying down your debt or saving money

or spending less. In fact, if you pay down all your debt today, no one will say congratulations. This is so sad. If you start to save today, nobody will say congratulations. And so, you start to save today, nobody will say congratulations. And so sadly in our financial world, you know, we have to figure out how to increase the benefits of a behavior, but the systems currently don't work that well to do this. So if we could design it, we'd say every time that you did an automatic transit, we'd chip you chocolate and you'd get to eat chocolate. We can't do this. However, some of the benefits could be, is we think about reputation and image of basically saying, if you tell other people about your goals and then you actually do them, this feels really good.

It feels really good to get something on your to-do list done. It feels really good to continue on your goal. So if you're running and you actually achieve the progress that you're meant to do, how would you design a reward system for yourself? So you could imagine saying, if I save every month for the next six months, I get to do X, Y, Z, something that's important to you. Or if I only take one lift or one Uber a week,

I'll reward myself with some certain behavior. So we do suggest kind of figuring out how you can make something more enticing to yourself. This is likely the hardest because you actually have to follow through on it and you're on worse end of me here. But it's an important piece of the puzzle. We'll come back to the show in just a second. But first, do you remember starting a small business? Yeah, it was not a minor task.

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Because when it comes to decreasing friction, often there can sometimes be a tension or a trade-off between what is easiest, simplest, most convenient, and what is the most frugal or cost-saving option. Yeah, this is a very big problem. This is, I would say, probably the problem. Amazon has figured this out and they've made the button one click. They understand friction. They understand that if they make things less. friction, people will buy more. And society's making it much, much harder for us to save money. They're making it much, much easier for us to spend money. So we're in a battle here. When we make something

easier, you can also make something harder for yourself that's bad for you or something you don't want to do. So for instance, if you drive for Lyft or Uber or Instacard or DoorDash or any of these service providers, you have a side hustle, they ask if you want to get paid after you drive or you work. And that is not the right answer because you basically make it really easy for yourself to spend money. Instead, what you'd want to say is, no, no, keep the money. I want to make it hard for myself to spend money. And so if you're any one of these positions or if you're even paid weekly, there's a real question of basically making money hard for yourself to spend. And so this could be putting it into a savings account. So because we know that you can't actually transfer out that much into the savings account, this could be not looking at your balance after you.

you get paid because you're making it harder for yourself to see the temptation. And then also, you know, just making it easier for yourself to do things. Say, again, things like, you know, defaults and automatic transfers are kind of the number one thing that people could do to automate their financial life and make it so that you never have to think about your financial situation. I mean, in a perfect world, you just wake up and everything's working for you in the background. That takes some time to set up, but it's really worth doing because.

because you've made life much, much easier. In fact, this is probably the number one thing that has helped Americans with their money is, again, where we started, which was automatic enrollment. We've just made it incredibly easy for people to save for retirement, and now people have retirement savings. By the way, the default was 3% saving for retirement savings. And the anecdote story that is told is basically this number was on the form given to HR managers. It says, for example, people could match, employers could match up to 3%.

And so the very small text of the 3% kind of made its way through the forms. And now the median amount that people are saving for retirement is just 3%. Because it was made really easy to save 3%. People are saving 3%. So we want to think about making things easy for ourselves in order to do the thing that you're trying to achieve. How do you find the balance between simplifying and optimizing? I think people should just do something. So I think when you're trying to optimize, you procrastinate.

You say, if only I could get to the right amount of asset allocation, or I don't know exactly if I should be doing something that's high risk, or, you know, something that's like very risky or low risk. And this just delays your decision for weeks and you don't do anything. We're in reality the correct answer is to make any decision. So less think about optimization and more think about making decisions. And also experimentation. So many times we think that we have the right answer.

And in reality, you probably haven't tried enough things to have the right answer. So in no world could you know exactly what you should spend on because you really haven't spent on most things. So you'd say if I want to cut back on something, maybe I should try cutting back on multiple things to see what's achievable for me and feasible because it's not about figure out the right thing if you can't actually do it. Well, those are all the questions that I have. If the audience wants to hear more about you and your work, where can they find you? at irrational labs.org. So that is our company website. And if you want to contact us, we have a nice contact form.

And if you sign up for updates, we tend to give a lot of insights on behavior change in general for companies, but also personally. Great. Thank you so much. Thank you. Thank you, Kristen. What are some of the key takeaways that we got from this conversation? Here are six.

Number one, habits are overrated. We hear a lot about the importance of forming great habits. And yes, habits are important, but one-time decisions are more effective. We think about asking people to save every day. This is likely just not feasible because you forget. Maybe some days you have more money, some days you have less money, some days you're highly motivated to get the thing you want, and some days you're not.

A better alternative and a proven one is just to put a automatic savings rate at your bank or automatic enrollment of retirement savings. When companies change to automatic enrollment for a retirement, retirement savings, the enrollment rates went from 30% to 90%. And now people have, you know, the chance of having a retirement on the beach versus people who just didn't do anything likely will be hanging on their cubicle for much longer. Saving is tough. There are days where you feel like you are an unstoppable savings machine.

You are trimming costs left and right. You're this pro at savings. And then the next day, all you want is some fancy champagne and expensive buckets of ice cream, right? So it's better to make a one-time decision that will automate your behavior. When you automate your savings, you remove the emotion from it, you move the decision from it, and it runs in the background. Kristen gave the example, if you want to walk every day, get a dog. Because you make one decision once, which is to get a dog. And now you're in a position in which you have to walk twice a day.

So it's a one-time decision that forces what happens next. Now, to be clear, I am not right. recommending that people are casual or flippant about getting a dog, but it is a powerful illustration of how making one decision that changes your circumstances or changes your environment can lead to big changes going forward. So that's key takeaway number one. Key takeaway number two, simplify your decision making by giving yourself an easy rule to follow. We are often told to make a budget so that we become more aware of our money, but reviewing your budget and realizing that you overspent last month doesn't mean that you're not just going to do the same thing again next month.

Looking backward alone doesn't help us. There's no behavioral science research to suggest budgeting actually changes spending behavior. Crazy. So if budgeting isn't effective enough, if backwards looking isn't effective enough, what is? Well, Kristen recommends creating a rule that will modify our behavior and make it less likely that we're going to overspend. So imagine a world where I said, when I go out to eat, I will only have one glass of wine. Now all of a sudden I'm not sitting at the table with my friends thinking, do I order a second glass of wine? And so that is the second key takeaway.

Create rules for yourself. Key takeaway number three, pre-commit to your goals. To pre-commit means to decide what you're going to do before you're in that situation. So for example, in the study that Irrational Labs did with Digit, which is a money-saving app, those who pre-committed to saving their tax refund actually doubled their savings rate as compared to those who didn't pre-commit. The reason for that is because it was easier for them to decide that they were going to save when they weren't actually in that situation yet.

The money wasn't actually in their bank account yet. Compare that to people who had the money in their account and then were making the decision because when the money is in your account, then you start thinking of all the fun uses you have for it. Pre-committing avoids this temptation altogether. And when we do this, not just with, tax refunds, but generally in life, we're able to behave in a way that aligns with our future intentions. And so that is the third key takeaway. Pre-commit to your goals. Key takeaway number four,

measure your process rather than your outcome. Your process, the actions that you take, that is within your control, that is directly within your circle of influence. The outcome isn't necessarily always inside of your control. You hope that your process over the long term will affect it in the way that you want it to. But celebrating your process, celebrating taking their right actions should be at the forefront rather than celebrating the results that happen. Orientate your life to process versus outcome and even reward yourself for process versus outcome. I wish banks would basically congratulate us after getting three months of automatic savings, six months of automatic savings, or increasing the amount we saved every month.

Instead, the only feedback loop we have is the number of our bank account, which many times is just not controllable. You may have an emergency expense. You may have an upcoming wedding or something to spend money on. It's out of your control. But if you're doing the right things, you should feel good. So instead of focusing on the outcome or on the numbers, such as your portfolio going down or you needing to tap your savings account in order to deal with an emergency, right? Instead of focusing on the numbers or the outcome, focus on the fact that, you're going to, you need to tap your savings account. Focus on the fact that you have set up a process that will lead you to success.

And as long as you're taking the necessary actions that lead down the road that you want to be on, then you're on the right track, regardless of the momentary outcome or result. That's key takeaway number four. Celebrate the process. Key takeaway number five. Use accountability partners to reach your goals. Pick a few select friends or family members and share your goals with them. And ask them to check in with you on your progress.

Now, note that this is different from publicly declaring your intentions on social media, which might not be as effective. Imagine you basically told your best friend. You know, I'd really like to pay off my credit card in the next two or three months. Just by saying this, you're doing this whole like pre-commitment and implementation intention saying this is, I will do this. And you're making it real. By sharing your intentions with a friend or a family member who will check in on you, you have somebody to be accountable to. And that can help you make the changes that you want.

So that's the fifth key takeaway. Finally, key takeaway number six. Let's talk about the three Bs. The three Bs is a system that you can use to make the changes that you want. The first B is behavior because in order to change it, you have to identify it. So be specific. In order to change behavior, you have to identify the behavior you want to change. So if you want to spend less money,

money, what do you want to spend less money on, specifically what item or expense do you want to cut? And how will you do it? This is the system. So that's the first B. The second B is barriers, which you need a decrease. So that means reducing friction and making something super easy to do. And then the last B is benefits, which you want to increase.

And since there aren't many benefits associated with saving money or paying down your debt, you need to figure out a way to make it more beneficial and more rules. awarding. So for example, being an active member of a personal finance community or a financial independence community, like the Afford Anything community, all of a sudden you're in this subculture, this community where people really do celebrate hitting a savings target or paying down your debt. All of a sudden, you have this peer group online of people who are super happy for you when you increase your savings rate from 20% up to 25%. You might not get that out in the default world, but you get that in these niches, these internet

subcultures, like what we've got, the afford anything community. And so that's one way that you can increase the benefits, the immediate benefits of what you're doing. That's one way that you can celebrate increasing your savings rate or paying down your debt or all of those things that regular mainstream society often does not go out of their way to announce and celebrate. And so that is the sixth key takeaway. Thank you again to Kristen for coming on the show. If you enjoyed today's show, please leave us a review. As of the time of this recording, we have 1,800 ratings on Apple Podcasts. So please go into the app that you're using to listen to this show or go to Afford Anything.com slash iTunes, which will redirect you to the Apple

podcast page and leave us a rating or a review. I want to give a shout out to Farrell Feline, who recently left a super awesome review. Ferrell Feline said, Paula Pant is an awesome host and puts together a truly high-quality, worthwhile show week after week. Listening to her and her guests helps keep me motivated and inspired on my path to craft my best life. Thanks, Paula. You deserve all the success you encounter. Thank you so much. I love that review. I'm thank you. So please, if you haven't left us a review yet, head to Afford Anything.com slash iTunes. That'll take you to the page on Apple Podcasts where you can leave us a review or just go into whatever app you're using to listen to today's episode.

Speaking of community and speaking of connecting with people in the afford anything community, remember how, if you're a long-time listener, we've been talking for a few months about launching a brand new community platform. Our original plan was to launch this at the end of August, beginning of September, but right before we were about to do so, Hurricane Dorian struck. And Aaron, who's our community manager, was in South Carolina at the time. She was right in the hurricane's path. Fortunately, she's fine. Her family's fine. home's fine, but we decided to delay the rollout of this new community platform at that time in case of power outages. After that, we launched our real estate investing course.

The enrollment is now closed, but we focused on the course launch for the end of September. And now, with both of those things behind us, we are now ready again to launch this new community platform. And so stay tuned because on Monday, October 21st, we are going to officially announce the launch of this awesome new community platform. Now, this is free. It's open to everybody, and it is a great way to connect with people inside of this community. On this platform, you're going to be able to organize and connect with other people based on what you're into. So if you're super into side hustling or real estate or travel and travel rewards, or if you are in your 20s, or if you're in your 50s or 60s, you can organize into groups based on those commonalities. So it's a super

cool platform. It's totally free. open to everybody and we're launching it on Monday, October 21st, 2019. So stay tuned. Join our community when we roll out this awesome new thing. Thank you so much for tuning in. I want to give a big shout out to our sponsors, Gusto, Radius Bank, Blinkist, and Fresh Books. You can find a complete list of our sponsors and all of the discounts and special deals that they offer at affordanithing.com slash sponsors. Thanks again for listening. If you enjoyed today's episode, please share it with a friend or a family member. And don't forget to hit subscribe or follow in whatever app you're using to listen to this show. I'm super thrilled that you are part of this community and I will catch you next week.