behaviors

4 Myths About Economic Behavior We Don't Believe Anymore

Emily Guy Birken — Tue, 31 Jul 2018 08:00:10 +0000

I have felt vaguely guilty about a nonexistent marshmallow for several years now.

This guilt was triggered by the famous Stanford marshmallow experiment, in which psychologist Walter Mischel gave preschool aged children a marshmallow (or other treat) and told them they could either eat the single marshmallow now, or hold off for 15 minutes and get a second one. Mischel and his researchers revisited the same test subjects as they grew up, and found that those kids who could wait for the second marshmallow became successful adolescents and adults. Mischel concluded that the kids who waited were wired for delayed gratification.

So why should this study make me feel vaguely guilty? Because I've met me, and I know there was no way four-year-old Emily would have been able to hold off on eating a delicious marshmallow sitting right in front of her. (Nearly 40-year-old Emily would still struggle with this exercise, and I have the empty Jet-Puffed bags to prove it.)

Despite the fact that I have shown the ability to delay gratification when it comes to finances, education, career goals, purchases, vacations, and other important decisions, I believed that there was some aspect of my brain wiring that was suboptimal as compared to those who could wait for a sweet treat.

Except Mischel's experiment may not have proved what he thought it did. A recent study was unable to replicate his results — and Mischel's experiment is not the only one with a replication problem. It turns out, a number of the most famous behavioral science studies out there are based on somewhat shaky research. Many of the replication attempts are finding that the results from the original studies are either inconclusive, lacking important nuance, or just plain wrong. This is why it's likely we'll see more big ideas from behavioral psychologists getting challenged in the coming years.

So before you rethink your day-to-day habits, consider how these famous studies have been exposed as more myth than truth.

The marshmallow experiment

Mischel's original experiment from the late 1960s looked at too small a sample of children — 90 kids total — and all were from the preschool on Stanford's campus. The new study, by NYU's Tyler Watts and UC Irvine's Greg Duncan and Hoanan Quan, expanded the number of test subjects to 900 and made sure to include children more representative of the general population in terms of race, ethnicity, and parents' education level.

What the new researchers found was that children's ability to wait correlated most strongly with social and economic factors. A kid from a poorer family may not be able to count on food being there from one day to the next, so she has learned to take what she can when it's available — while a kid from a more affluent family may have learned that delaying gratification can be worth it.

When the researchers controlled for family income, they found that rich kids who ate the marshmallow right away did no worse in standardized tests as adolescents compared to their waiting counterparts, and poorer kids who waited did no better than those who dug in.

But the kids from higher-income families all tended to have better ability to delay gratification as adults — which means our "willpower" is less wired into our brains and more a function of how we were raised.

Ego depletion

Speaking of willpower, one of the most influential studies about willpower was conducted two decades ago by Roy Baumeister and Dianne Tice. The study set out a plate of freshly-baked chocolate chip cookies and bowl of radishes. As participants filed in, they were instructed to take either a cookie or a radish. The test subjects were then given an impossible puzzle to solve. The participants who were allowed to snack on cookies spent twice as long trying to solve the puzzle before giving up as compared to those who had to eat radishes while smelling and staring at the plate of cookies.

Baumeister and Tice described the phenomenon as "ego depletion." They believed that forcing yourself to not eat the cookies right in front of you tuckered out your willpower, leaving you less mental energy to keep working on a frustrating puzzle. If willpower is a finite resource, you can use it up by making little choices before facing a big one.

But other researchers have been unable to replicate the original study, and meta-analysis (that is, analyzing all of the studies about this phenomenon) have also found little evidence of ego depletion.

What it comes down to is that our ability to exert willpower can depend heavily on our motivations, beliefs, and mindset. It's not as simple as the original study made it sound — that willpower is like a muscle and can be exhausted like one.

Power poses

You may have seen the popular TED talk on power poses, presented by researcher Amy Cuddy. Cuddy presents some pretty compelling arguments about the power of body language to affect our feelings of confidence and power. She and her research colleagues found that standing in a Superman pose or other powerful pose for two minutes increased levels of testosterone, decreased cortisol (the stress hormone), and increased levels of risk-taking behavior.

This was great news for anyone feeling nervous about a speech, a job interview, or talking to that cute guy in accounting. Just find a private spot to pretend to be Superman for a couple of minutes, and you can enter into your nerve-wracking encounter with increased confidence, thanks to your hormones.

Except that a follow-up study which included four times the number of participants as the original has determined that there is no such hormonal effect. Even Cuddy now describes herself as being "agnostic" on the hormonal effects, although she does claim that assuming such poses does help people to feel more powerful.

Cuddy may be correct, although not for replicable, scientific reasons. Because of the placebo effect — the cognitive bias that leads people to believe something will help them because they expect it to — and the huge popularity of the idea of power poses, many who try them will find they feel more powerful after striking a pose. (See also: 5 Mental Biases That Are Keeping You Poor)

Priming

Nobel Prize-winning economist Daniel Kahneman wrote about priming in his book Thinking, Fast and Slow. Priming is the theory that subtle cues in an environment can affect an individual's behavior.

Various studies on priming found that participants would walk more slowly after hearing and using words associated with aging (like Florida and bingo); that people were more honest when there was a representation of eyes nearby when they had a choice to steal or cheat; that holding a warm drink while speaking with someone made people feel more warmly toward the conversational companion; and that seeing money will make people behave more selfishly.

However, follow-up studies have not been able to reproduce these results, suggesting that our behaviors are not nearly as impressionable as the original studies made us believe. This is good news, since it makes it clearer that human behavior is not captive to one's environment. We are more in control of our behavior and reactions than these studies suggested.

Don't believe everything that you read

Behavioral science is a fascinating field that is truly helping us to better understand why we make the irrational decisions we do. But it is important to remember that the researchers in this field are human, as are the journalists who report on their studies. There are bound to be imperfect studies, mistakes, and even frauds that are touted as the next great truth about financial and psychological behavior. Don't let those "truths" keep you from following what works for you. Especially if what works for you is eating the marshmallow right away.

Like this article? Pin it!

This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Behaviors That Risk Your Financial Security

Dan Rafter — Thu, 08 Feb 2018 09:30:05 +0000

Do you consistently spend more than you make? Do you go on shopping sprees to celebrate a raise or to soothe your disappointment at not getting a promotion? Maybe you're constantly charging gadgets or shoes you don't need to your credit card, telling yourself that you'll start whacking away at debt tomorrow.

These are all dangerous behaviors that can damage your financial health. And what's worse, many times we don't even realize how much damage these bad habits are inflicting on our bank accounts.

We all have bad habits. But the key lies in preventing them from turning into missed credit card payments, huge mounds of debt, and low credit scores. Here are four behaviors that could be damaging your financial health.

You're impulsive

Do you give into temptation whenever you see a dessert, even though you've sworn off sweets? Do you immediately purchase that trinket that catches your eye in the check-out lane? You might be a bit impulsive. Impulsive people struggle with discipline, and that can be a real challenge when it comes to building healthy finances.

Here's another example: Instead of waiting a few months to save up enough money to pay for a new laptop, you run out to the store to buy it with your credit card. Now you've added hundreds of dollars to your credit card debt. And this new debt comes with high interest. If you can't pay off your credit card balances in full each month, you'll end up paying much more for that laptop than you would have if you'd simply saved the money first.

How can you beat impulsive spending behavior? Create a monthly household budget. Look carefully at how much money you have left over to spend on extras. If the purchase you're dying to make doesn't fit into the money you have to spend, hold off on purchasing it. And if you do dip into that slush pile, know that you won't be able to spend as much the rest of the month. (See also: 5 Mental Biases That Are Keeping You Poor)

You celebrate, or commiserate, by spending

Did you earn a promotion at work? Did you get passed over for one? It might not matter. You might mark either occasion by spending a big chunk of money.

Some of us spend as a way to soothe our feelings when we're upset, to celebrate when we're glad, or both. This can become a big financial problem when these spending bouts bust your budget.

Learn to recognize what feelings trigger your spending urges. Find some other way to celebrate or soothe your emotions. This could mean calling a friend, exercising, or journaling. If you just want to escape, try watching a fun TV series or reading a good book. Don't let shopping be the only way you deal with emotional swings. (See also: 7 Effortless Ways to Prevent Budget-Busting Impulse Buys)

You let your spending swell as your economic situation improves

What should you do if you get a raise at work? The best financial answer is to take that extra money and use it to boost your savings or pay down high-interest credit card debt. Unfortunately, many of us instead start spending more.

We get a raise and we automatically raise our lifestyle to fit our new paycheck. Maybe we buy a more expensive car. We might start eating out more often. We might upgrade to a fancier TV or a top-of-the-line laptop. But don't start spending loads more just because you've gotten a raise. You'll never build your savings or improve your financial stability if you fall into this pattern.

When you do get a raise, it's OK to loosen your belt a little with a few small luxuries that you budget for. But most of your new income should go to increasing the money you devote to savings or paying off credit card debt. (See also: 9 Signs You're Suffering From Lifestyle Inflation)

You put things off

Are you a procrastinator? This can be a challenging habit when you're trying to improve your finances. For example, you might decide to start paying extra toward your credit card debt but not until the next month starts. In the meantime, because you plan to make improvements the following month, you figure it doesn't matter what you do this month.

The problem is, the extra money you give yourself permission to spend this month only makes your financial health that much worse. And for some people, next month never comes. They don't actually ever start making those extra payments.

If you have a financial goal, don't put it off. Write it down in a location where you can see it every day. And don't give yourself permission to hold off on tackling it. If you keep procrastinating, you'll simply build up more debt that you'll have to tackle anyway. Why not get to it today? (See also: 7 Biggest Ways Procrastination Hurts Your Finances)

Like this article? Pin it!

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What Happens When We're Not Logical With Money

Dr Penny Pincher — Mon, 04 Dec 2017 10:00:06 +0000

Traditional models of economic behavior assume that people will make logical money decisions to achieve the best outcome. But in many real-life situations, people tend to make irrational decisions with money. Consumer behavior that makes people feel happy often does not add up to the best move for them in terms of dollars and cents.

Understanding irrational decisions when it comes to money can be useful, not only to predict illogical choices that people make, but to influence economic behavior. This is something behavioral economist Richard Thaler, winner of the 2017 Nobel Prize in Economic Sciences, has studied at length.

Thaler's understanding of the quirky thought processes that result in irrational spending can help us make smarter financial decisions for ourselves. Here are some of his key insights into the thinking that drives people to defy logic when it comes to money. (See also: 5 Mental Biases That Are Keeping You Poor)

Endowment effect

Raising the price of a good when its value goes up is logical from the perspective of classical economics. But people see price increases as unfair, and consumers may decide not to make the purchase. In the 1991 paper Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias, Thaler, along with Daniel Kahneman and Jack L. Knetsch, explored a few examples of this particular phenomenon, dubbed the "endowment effect."

Research showed that people found it unfair for a car dealership to raise the list price of a new car by $200. But people thought it would be fair to remove a $200 discount that the dealership has always offered for that car. The cost of the car is $200 more either way, but raising a price makes people feel like something they already had was being taken away, while removing a discount is less of a barrier to making the purchase.

Thaler demonstrated this tendency of not wanting to give up something that you already have with coffee mugs. Half the students in a class received a coffee mug. The randomly selected students who received mugs valued the mug at a much higher price than students who did not receive a mug would be willing to pay to get one. The drive to value what you already have more than something you could obtain is one of the factors that drives illogical human behavior with money.

One way to use the endowment effect to your benefit is to synchronize pay raises with increased retirement fund contributions. That way, the increased contribution to a retirement fund does not reduce take-home pay and is not viewed as a loss of something you already had.

Mental accounting

Money is fungible — in other words, dollars are interchangeable, with one dollar being equal in value to any other dollar. But people’s mental accounting systems do not treat all dollars as equal, and this can result in people acting in ways that defy simple math.

People tend to categorize funds and use them for their intended purpose even if this is not efficient. Thaler presented an example of this type of mental accounting in his 1985 paper, Mental Accounting and Consumer Choice. A couple had saved $15,000 for a vacation home that they planned to buy in a few years, and put the money in an account earning 10 percent interest. At the same time, they bought a new car with a three-year loan for $11,000 at 15 percent interest.

Simple math dictates that the couple would have come out ahead using their vacation home fund to buy the car, paying themselves back instead of paying the bank at 5 percent higher interest than they were earning. But people tend to label money with a purpose and assign value to their keeping dollars in the proper categories in their mental accounting system.

Even the source of funds can trigger people to put their money into different mental categories. Would you spend $500 of lottery winnings in the same way you would spend a $500 raise? People would probably use the lottery winnings to buy something fun, but use money from a raise to pay down debt or boost savings. It’s the same $500 either way, but people attach different purposes to money based on their mental accounting system.

Overconfidence

In a 2005 study analyzing NFL first-round draft picks, Thaler (along with Cade Massey) found that teams often pay too much for early picks based on their perceived ability to spot the next "superstar" player. Second round picks are generally a better value. So why do teams keep paying sky-high prices for first-round draft picks?

One explanation is that teams spend a lot of time studying and analyzing the high draft picks and become overconfident in their ability to pick a winner. Overconfidence can lead consumers to buy the latest and greatest new tech products at top dollar, and investors to confidently buy stocks at prices that are not in line with their assets and earnings.

Status quo bias

Momentum is a powerful force in human psychology. People have a predisposition to prefer the current state of affairs over alternative options. They'd rather hang on to what they have than risk the potential disadvantages of making a change.

An example of businesses taking advantage of status quo bias to sell more products is through opt-out subscriptions. You might get a low teaser rate on a gym membership, wine club, or magazine subscription that automatically continues at full price unless you opt out. Once you are signed up for the subscription and start receiving the benefits, status quo bias makes it more likely that you will stay subscribed rather than taking action to opt out right away.

Status quo bias can be used to help people save money, too: If employers automatically enroll employees to contribute to a 401(k) plan with a choice to opt out, participation can be up to twice as high than if employees need to take action to sign up in the first place.

Like this article? Pin it!

This article is from Dr Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Self-Destructive Habits That Keep You in Debt

Kentin Waits — Fri, 24 Mar 2017 09:00:17 +0000

America's consumer economy is built on overspending, and our consumer culture encourages the liberal use of credit to pay for everything from cheeseburgers to cars. Pulling ourselves out of the "debt is just part of life" mentality takes a nearly herculean effort. If you're having a hard time getting there, maybe a few bad habits are holding you back. Here are eight self-destructive behaviors that keep you in debt.

1. Keeping up with the Joneses

Viewing consumption as a competition will keep you overworked, stressed, and broke. Disconnect as much as possible from a lifestyle influenced by constant comparison and one-upmanship. Instead, shift your focus to things less visible — freedom, financial peace of mind, and victory over debt.

2. Impulse buying

Developing new methods to tempt consumers with impulse buys is a science unto itself. If you don't recognize and steel yourself against the tactics marketers use, your budget will always be vulnerable to last-minute splurges. Explore ways to stop impulse buying and teach them to your kids.

3. Playing the victim

Maybe your parents didn't set a good financial example. Maybe you're terrible with numbers. Maybe you're reeling from a financially disastrous divorce. Whatever the situation, it's time to move beyond it. Playing the money victim only deflects responsibility and sets people up for a lifetime of financial chaos. Retire your old script. Embrace positive change and develop new financial skills little by little. (See also: How to Get Your Finances Back on Track After Losing Everything)

4. Practicing "retail therapy"

Coping with boredom and stress by shopping creates a maddening loop. Working harder to pay the credit card bills makes us more stressed — a condition that only invites more retail therapy and more debt. Jump off the hamster wheel once and for all. Try to de-stress through simple experiences, time with friends and family, mindful exercise, and relaxing hobbies. (See also: 50 Things You Can Do Today Instead of Going Shopping)

5. Bailing out your adult children

It's difficult to watch kids make the same mistakes we made (or worse, make mistakes so profound, ours pale in comparison). But bailing adult children out of sticky financial situations only achieves two things: First, it spreads the damage and puts parents' financial security at risk. Second, it teaches children that there will always be a last-minute money superhero to save the day. Skip the heroics and practice a little tough love.

6. Treating yourself

Phrases like "I'm going to treat myself" (and its cousin, "I deserve it") are used to justify a host of financial missteps. Sure, treating ourselves can be a genuinely healthy motivator and we may even "deserve" whatever it is we want to buy. The danger of these justifications lies in their overuse. Remember, it's not a treat if you do it every day. And the thing you deserve most is to live a financially secure life. (See also: The High Cost of the "Treat Yourself" Mindset)

7. Being an early adopter

New technology is expensive. Rushing out to buy the latest smartphone, gaming system, or ultrathin TV not only means you're paying top dollar, but it also means you're much more likely to charge it. Take a breather. Wait for competitors to enter the market and drive down prices with comparable products. (See also: 8 Reasons Why You Shouldn't Be an Early Adopter)

8. Ignoring personal finance

The fundamentals of personal finance don't go away just because you ignore them. If you're not living by a realistic budget, avoiding consumer debt, spending less than you earn, and investing for retirement, you're likely being controlled by your money instead of controlling it. Without a few basic personal finance skills under your belt, debt doesn't become just a possibility — it becomes a scary inevitability.

Like this article? Pin it!

This article is from Kentin Waits of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Terrible Things Science Says You Do to Your Kids

Marla Walters — Thu, 30 Jul 2015 17:00:20 +0000

In all likelihood, you are probably already a pretty good parent. I'll bet you limit video games, provide healthy meals, get your kids to scheduled doctor's visits, help with homework, and the like.

New science, though, thinks you can do a little better. Do any of the six parenting subjects, below, ring a bell?

1. You Don't Let Your Child Self-Soothe

Have you tried teaching your baby to self-soothe? It occurred to me to research this concept after my friend, a grandmother, related how her daughter has to lie down with her two-year-old to get her to nap, and then again to get her to sleep at night. Among my co-workers, neighbors, and friends are women whose children sleep with them in their bedrooms, on cots, or in their beds. They also sleep with their children in their children's rooms. My neighbor's daughter has a charming room, but she will only sleep on the living room couch. The phrase (and I know this is harsh) "the inmates are running the asylum" comes to mind.

"We, as parents, think our job is to make sure the baby is not crying," says pediatric nurse Jennifer Walker, RN. "That's because we associate crying with the fact that we are doing something wrong and we need to fix it," she says. "Babies are designed to cry. They can be perfectly diapered and fed and still cry like you are pulling an arm off..."

Many parents are vehemently opposed to the practice of self-soothing, calling it a myth, or "harmful." And, you know it's not fun. Even if you know your baby has been fed, burped, changed, and is in comfortable bedding, listening to them cry is extremely upsetting. We used the Dr. Greene method and yes, it was extremely difficult, but it worked.

"The difficulties begin when the child's sleep patterns begin to interfere with the lives of the other members of the family unit. For example: when the mother is ready to return to work and needs to sleep, herself, or when marital tensions arise because of a lack of privacy in the bedroom," says Dennis Rosen, M.D. "At that point, it's absolutely reasonable to reconsider the existing patterns, and to find a different way of doing things that works better for everyone else. And that usually means redefining, and setting limits, which is a normal part of parenting."

2. You Don't Insist on Your Child's Recess

I'm an adult, and I could barely manage to sit through a boring hour-long webinar last week. Fortunately, I could get up and take a walk afterwards. But what if you are a kid who feels fried and fidgety? Who ever thought parents needed to be concerned with their children having recess? Guess what: Recess is disappearing.

Even pediatricians in the American Academy of Pediatrics recommend recess. Dr. Robert Murray, a pediatrician and professor of human nutrition at the Ohio State University, stated that "Children need to have downtime between complex cognitive challenges." Interestingly, structured time (like a gym period or an organized game) is not a substitute, because it is still considered to be instructional time.

Childhood obesity rates have more than doubled in children, and quadrupled in adolescents, in the past 30 years. The American Academy of Pediatrics recommends an hour a day of exercise for children. If your child's school has reduced or eliminated recess, how will that help this issue?

It may be time for you to get involved in a discussion about the benefits of recess at your child's school, and how you, as a parent, can help. And if the school won't change, perhaps you ought to consider supplementing their play time with some daily "at-home" recess.

3. You Aren't Insisting They Do Chores

Your own parents and grandparents probably insisted on chores, and so should you. Psychologist Richard Rende is the author of soon-to-be-published Raising Can-Do Kids. His research indicates that "...various types of housework are correlated with better academic performance and social relationships, increased professional goals, and good mental health in adulthood."

4. You Stopped Reading to Your Kid

Many parents read to their babies, toddlers, and school-age children, and that's great. However, according to educator Jim Trelease, you shouldn't stop reading.

"People often say to me, 'My child is in fourth grade and he already knows how to read, why should I read to him?' And I reply, 'Your child may be reading on a fourth-grade level, but what level is he listening at?'

A child's reading level doesn't catch up to his listening level until eighth grade. You can and should be reading seventh-grade books to fifth-grade kids. They'll get excited about the plot and this will be a motivation to keep reading."

5. You Don't Let Them Experience Failure

It's so hard to see your child feeling sad, or disappointed, when things don't go their way. I really think it's just as painful for the parents. My mother used to tell me, "well, life is full of disappointments," and she was right, it is. However, if you don't allow your child to fail, feel sad, and deal with things on his or her own, the child doesn't learn how to build resilience. Being able to roll with the ups and downs of life is a necessary skill, and they can't learn that when "everybody gets a trophy." Sometimes you fail, and you feel bad. What happens next? You lick your wounds, gather strength, pick yourself up, and try again. Kids need to learn that, as painful as it is for the parent.

6. You Don't Let Them Suffer the Consequences for Wrong Actions

Kids are going to make bad choices occasionally. They want to test boundaries, try the "easy way," or prove their independence. When they are caught, though, it isn't up to the parent to "fix" that mistake.

"Parents tend to worry about their child's ability to cope with life's natural 'negative' consequences," writes Mendi Baron, CEO of Evolve Treatment Centers. "In fact, today's parents, in an effort to be helpful and involved, actually impose themselves to minimize natural negative consequences so that their teen can avoid the subsequent discomfort, pain, and shame of his actions."

Readers, do you agree, or disagree, with any of these suggestions?

This article is from Marla Walters of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: