Maybe you didn’t have a big enough carrot. Or strong enough stick.
If you made a resolution to lose weight this January, by now, that gym you signed a contract with is probably laughing all the way to the bank. You’re not alone. More than 88% of resolutions end in failure according to psychologist Richard Wiseman.
I recently read post about economist Richard Thaler’s Nudge over at Weakonomics the other day. One of Thaler’s recommendations is that employers switch to opt-out 401(k) plans from the current opt-in system. You see, employees who are given the chance to opt-in tend not to. It’s much easier to keep the status quo when you’re confused by what a 401(k) is let alone how to choose investments within it.
That’s why right now, 58% of mid-sized to large companies auto enroll their employees into the company 401(k), a dramatic increase from the 34% that did two years ago. You can quibble about the specifics: Auto-enrolled employees tend to save a small percentage of their income, and the default investment options aren’t sometimes appropriate. But all in all, auto enrollment has made a bunch of people much better off than they would have been had companies not tried it.
But here’s the real question: Why don’t most employees save for retirement without a nudge? After all, the consequences of not saving—working until you die—seem pretty severe. That in itself should get our butts moving.
You don’t care what happens tomorrow. You care what happens now.
If I were to create my dream brain, it would trigger pleasure any time I took an incremental step to achieving a long-term goal and pain whenever I took a step backward. With immediate consequences, I might better feel the reward that seems so perfectly clear with reason.
But alas. Retirement is more than a decade off. The perfect body is at least a hundred sessions at the gym away. My Pulitzer Prize in blogging will take about as many years to achieve as…well…it will take them to create a Pulitzer Prize in blogging. In the meantime, cupcakes taste good now. (Also, I will wring your neck if you take the $5 I spent on the oversized cupcake, compound it at 10% over 50 years, and explain to me that it really cost me $587. Compound interest. We get it.)
You can’t be afraid of consequences when you don’t understand how they feel.
Call this the “hand on the stove” theory. If you’ve never been burned, it’s hard to be afraid of that glowing red, spiral thingy. Likewise, you might not be afraid of retiring with no money because you don’t know what it’s like to be 65 with no nest egg. I mean, sure, you say you’re afraid, but you don’t feel it in the same way you get nervous when pulling food out of the oven.
Unfortunately, many of our resolutions are specifically designed to thwart consequences that we’ve never experienced before. You’ve never retired (until you have). You’ve never had cancer or diabetes. You might have never lost a job (“Gosh,” you say, while eating another bowl of ramen noodles. “So this is why I should have built that emergency fund.”). As long as consequences remain in the abstract, your brain treats the incentives to save money, stop smoking, and eat healthy as academic.
Your brain can only handle so much at once.
Why stop at getting fit? Why not get your financial house in order, start a side job, study for the GMAT, and give up coffee while you’re at it?
Problem is, your brain is like a puny muscle. It can only lift so much, before giving up and dropping everything. Marketing professors Baba Shiv of Stanford and Alexander Fedorikhin of Indiana University once ran an experiment with two groups of undergrads. One group was given a two-digit number to remember. The second group, seven digits. Then they were to walk down a hall, and at its end choose either a piece of cake or bowl of fruit to snack on. The seven-digit students chose the cake more than twice as often as the two-digit students.
Why? Well, Shiv and Fedorikhin think it’s because the seven-digit students were spending so much of their brainpower managing their long number that the brain couldn’t muster the energy to deny their natural impulse for the high-sugar, pleasurable food.
You get the message. Try to do it all, and you’ll end up doing nothing. It’ll take enough focus just to achieve one of your big goals. So better to get that done before tackling something else.
A solution: Make the incentives really BIG.
Steven Levitt, the Freakonomics guy, likes to posit solutions to social problems that go something like this: “Hey, do you really want to stop drunk driving? The solution would be simple. Have police immediately shoot dead anyone who fails a breathalyzer test.” Then he goes on to talk about how that’s not socially acceptable, etc., etc.
But he has a point. The incentive to not drive drunk would be both immediate (you get shot at the scene) and gigantic (you’re dead).
Another economist doesn’t quite take things that far, but he’s developed a tool to help people keep resolutions that certainly makes the consequences of failure big. A few Yale professors started an online service called StickK that lets users make “commitment contracts”. You hand over your credit card information and set a penalty (say, to lose $1,000), make a goal (say, to lose 30 pounds by June 30th) and designate a friend as referee to verify your progress. If you hit your goal, you lose nothing. If you don’t, your credit card gets charged and your friend or a charity gets the money.
I love this section from the FAQ:
Q: I know myself, and no amount of money could possibly make me change my behavior or reach my goals.
A: Never say “never.” Let´s imagine you can’t stop eating candy bars. Try committing to eat 3 or less candy bars a week, and penalize yourself $100 every time you go over. Essentially, that fourth candy bar will now cost you $100! Would you eat a $100 candy bar?
I’ve never tried something like StickK before. But as I find me and my colleagues tripping up on the same old resolutions year after year, it’s not so inconceivable to me that a system like that would work and be worth it. And so what if you fail and lose the money? I’d gladly pay $1,000 for a serious shot at avoiding cigarette-induced cancer…or ramen noodles.
{ 4 comments… read them below or add one }
I think it’s also necessary to have the important people in your life support your goal. For example, I’ve been trying to get myself to exercise for a couple years, but I’ve found it difficult when I can’t get my wife to exercise with me. I don’t know how my wife would feel about me risking $100+ for not getting my exercise done either.
I entirely agree with the points made in the blog entry.
I don’t think it is so important that there be big penalties for failing to engage in the desired behavior. Small penalties probably work just about as well. But the penalties need to be applied quickly. It cannot be something that is going to happen 30 years down the road. We are just not built to worry about what is going to happen 30 years down the road.
Rob
I don’t think that people innately do not care what happens tomorrow. This is not hard wired into our brains. This is learned behavior.
People who grew up in the 1920s and 1930s saved for a rainy day. Frugality was part of the culture. There was no such thing as government handouts. Only those who didn’t need it could get credit. My parents were part of this generation. They paid cash for everything. They didn’t even own a credit card until the mid 1980s.
Spending everything we earn, and even going into debt to buy things when we don’t have the money to pay it back, has become part of our culture. College students who earn no income get multiple credit card offers. College administrators actually let these companies on their campuses to promote this imprudent debt.
It hard to swim upstream against predominant cultural attitudes. But since spending everything you have is learned behavior, it can be unlearned, and replaced with new behavior.
I save for retirement. But I have my doubts about putting my retirement savings in my 401K. In speaking about government deficits, Lord Davies, British Minister of Trade and Investment, has said, “The big prize would be to set aside part of the long term pension industry and get them to invest.” The FDIC is in the process of transferring the US bank balance sheet debt bubble onto the books of public pension funds.
When government officials describe private savings as a big prize, and actually go after pension money, it is time to watch carefully over whatever is left of our nest eggs. Our 401Ks could be next.
I’m using StickK right now for the exact reasons you talk about. I wasn’t reaching any of my goals and was trying to do too many things at once. I knew I would be more cranky about losing money (and face), especially if I chose an anti-charity, so I picked one goal to focus on and I signed up. And so far, it’s working. I didn’t make the penalty huge, but I made it enough to motivate myself to keep the commitment week after week.