Katy Milkman is the James G. Dinan Professor at The Wharton School of the University of Pennsylvania, host of Charles Schwab’s popular behavioral economics podcast Choiceology, and the former president of the international Society for Judgment and Decision Making. She is the co-founder and co-director of the Behavior Change for Good Initiative, a research center with the mission of advancing the science of lasting behavior change.
Over the course of her career, she has worked with or advised dozens of organizations on how to spur positive change, including Google, the U.S. Department of Defense, the American Red Cross, 24 Hour Fitness, Walmart and Morningstar. An award-winning scholar and teacher, Katy writes frequently about behavioral science for major media outlets such as The Washington Post, The New York Times, USA Today, and Scientific American. Her bestselling book How to Change: The Science of Getting From Where You are to Where You Want to Be is now available.
Today we are so happy to welcome the amazing Katy Milkman to the show. Katy is the author of the impressive and inspiring new book, How to Change: The Science of Getting from Where You Are to Where You Want to Be, and in this episode, we get the inside scoop from her about her work, with specific attention to how it can be applied to investment and finances. Emerging from an engineering background, Katy has a powerful and unique skillset to be tackling the social sciences, and we hear from her about how this path has impacted her thoughts on data quality and the areas she has chosen to research. Our guest shares some very interesting and sometimes surprising information on the idea of fresh starts, commitment devices, and ambitious goals, before we tackle the fascinating subjects of laziness and confidence in relation to our saving habits. Listeners can expect to come away with some renewed reasons for data-driven decisions as well as some new impetus to double down on healthy change. We cannot recommend Katy's book highly enough, so tune in to hear what she has to say and make sure to purchase this amazing read.
Key Points From This Episode:
Unpacking the idea of a 'fresh start' and the ideal times for this. [00:02:26.2]
Instances when fresh starts might be harmful instead of helpful. [00:07:28.1]
Better methods for adhering to goals around saving money. [00:12:04.6]
Commitment devices and how these can aid people in avoiding dipping into savings. [00:19:04.3]
The value of ambitious goals and the impacts of different kinds of goal setting. [00:22:13.7]
Using the power of a new identity in the process of goal setting around retirement savings. [00:26:00.8]
Katy's suggestions for taking responsibility for independent saving. [00:29:58.7]
Thoughts on laziness; utilizing this inherent tendency for our benefit. [00:31:43.6]
Katy's perspective on habit-forming; habit loops, consistency, and triggering certain behaviours through rewards. [00:35:40.6]
Decision-making and confidence; how much it matters and how to increase it. [00:42:11.4]
More productive conversations around advice, assistance, and expertise. [00:46:31.2]
The influence of community on our success; how determinant the people around us are. [00:49:38.6]
Considering the permanence or perpetual struggle of behavioural change. [00:52:20.6]
How accountability and the role of third parties can initiate meaningful change. [00:54:21.1]
Katy's concerns over data quality and how this has impacted the areas of her research. [00:55:24.9]
How Katy defines success in her life: leaving the world a better place and enjoyment. [00:56:49.8]
Read The Transcript:
So let's jump right into some questions. So part of the book that I love so much was relating to your research on fresh starts. So can you describe for everybody what a fresh start is and how people can apply it to financial goals such as retirement saving?
Yeah, I would love to. And I should say that this research came out of a visit I made to Google to give a talk about different techniques we could use to encourage behavior change. And I shared a bunch of different tools for changing behaviors that HR managers care a lot about, because I was speaking with an HR team, things like, how do we get people to save more for retirement? How do we get them to focus more on their health and wellness? And I got this fantastic question, and the question was, is there some ideal time to encourage people to make these kinds of changes in their lives?
If we're going to send out emails with resources or put other efforts behind this, are there better moments than others? And I thought it was such a fantastic question because I'm sure your intuition is the same as mine was at that moment, which is, it has to be that there are better moments than others. But I really didn't know of an academic answer. So I started researching this. I collaborated with my amazing student, Hengchen Dai, who's now professor at UCLA Anderson School, and Jason Reese.
And we started having conversations about our intuitions on this. My first intuition, which they shared, was that an ideal moment would be one that feels like a new beginning, something like New Year's. New Year's immediately jumped out to us because it's this moment when we see all the school setting happening. And of course, there's a lot of reasons for this. We have a social tradition now around setting new year's resolutions, but we wondered if the psychology of that new year, that new beginning might extend to other moments.
And as we started doing digging and collecting data, that's what we found, that there are many moments in our lives, not just the start of a new year, but also the start of a new week or a new month, the celebration of a birthday, the celebration of other holidays that help us mark the passage of time and feel like new beginning. So think more Labor Day and less Valentine's day that give us that sense. We found those moments make us feel like we have a fresh start, we have a clean slate and we feel a little bit more distant from our past failures. We can say, "That was the old me. The old me messed up. But it's a new year, it's a new week," whatever the fresh start gives you a sense of, and you say, "This time I can do it. I have a different identity that I'm carrying with me."
And you're more likely to step back and think big picture about your goals at those moments. So we found that at these times, people are naturally more likely to do things like go to the gym, search for the term diet on Google, set goals about everything including their finances, just naturally. And then on a really interesting field experiment we ran that's super relevant to your question, we actually also found that if you encourage people to start saving for retirement, we sent them mailings, these were 2,000 employees of four companies who weren't saving adequately and we're trying to convince them to send back a postcard with a box checked and their names signed to enroll in a 401(k), putting money aside for retirement that will be not taxed.
What we were able to do is change the date when we invited them to enroll. So we either said, everybody was invited to enroll now, but some people were invited, we said, "If not now, how about after your next birthday? Or it's not now, how about at the start of spring?" And we did that for some people, and others just got invited to start saving and an equally distant future date, but it wasn't labeled. Say their birthday's in two months, we flip a coin, you either get the mailing saying, "Do you want to start saving after your birthday?" Or, "Do you want to start saving in two months?"
So this gives us the ability to test if actually highlighting a fresh start, makes people more motivated to pick that as a date to change. And we found that it did work, and we found about 20 to 30% more was saved over the following nine months when we invited people to begin their savings journey on a fresh start date such as a birthday or the start of spring. So those are the findings behind fresh start that I think are most relevant to your listeners.
You mentioned interesting concept there, a new identity point, but you're suggesting it's the date that matters more than the new identity. Is there a way to create a fresh start around that identity? And would that not be as powerful as the actual date like turning 30 or something?
Yeah, no, absolutely. The theory would really be the same. But there would be a date when that new identity began, and that's why we think about this in terms of temporal landmarks. But think about the identity you take on when you start a new job. The day I became a professor and I was no longer a doctoral student was a huge identity shift, or the day I became a mom and I was no longer just a person wandering around with some parents of her own, and I was responsible for this other creature. That was a huge identity shift. Those are dates.
So I'd still called them a temporal landmark that creates a new beginning, but they were identity shifts provoked by those temporal landmarks that are a little different than the identity shift that comes with being a Denizen of 2021 instead of 2020 is not as powerful of an identity shift as non-parent to parent or student to professor and so on.
Are fresh starts always helpful?
Great question. And the answer is of course, no. And as is almost always the case in behavioral science, there are boundary conditions, there are times when things are different. In this case, my amazing former student, Hengchen Dai of UCLA when she was doing her dissertation decided that she wanted to focus, we'd been working together on this research, I've already described about fresh starts, and she wanted to focus on whether there might be moments when a fresh start is actually harmful rather than helpful, which is something we'd both had a suspicion about for some time.
And our suspicion, which she was able to confirm, was that at moments when things are going really well, you actually are harmed by a fresh start, because what a fresh start does is it creates this disruption, this sense that you have a new beginning, it gives you this separation between how things have been and how you hope they will be. But if things have been great and you have a disruption, that's not so good. And she studied this both through very carefully crafted laboratory experiments with games where she disrupts people and looks at disruptions for people who've been performing well versus under performing.
She also really cleverly studied this with Major League Baseball players, and looked at what happens when a player gets traded to a new team, which you could argue, all of them are experiencing a fresh start to degree, but it turns out some trades have different implications than others. So if you're traded across leagues, because there's two baseball leagues, the National League and the American League, if you're treated across leagues, it turns out, your season to date statistics are reset. So if you've been batting really well, you lose your batting average, if you've been batting really poorly, you lose your batting average.
You can see how that would feel really different depending on how it's been going. And then if you're traded within leagues, you hold onto your season to date statistics. So she did this very clever study where she looked at the difference in the effect a trade when you get that reset versus when you don't. So two players who are otherwise basically statistically identical both get traded, one gets to hold on to their season to date statistics and the other gets that reset. And what she found is that it exacerbated basically the fresh start prediction you'd expect in either direction. So if you get a reset and you've been having a great season, you do worse than someone who is traded and doesn't have a reset. It hurts you relative to that parallel player who again also is moving, but just isn't moving and losing their season to date statistics.
If you've been doing poorly, though, it is helpful, that's the classic fresh start effect. If you're doing poorly and you get that reset, well, great, it gives you a sense of a fresh start and a clean slate, but you don't want that disruption when things are going well. And I think the reason that in general we started studying fresh starts and seeing them as a positive force is that when it comes to our goals, most of the time, we could use a little bit of a reset. Most of the time, we're looking to do even better than we've been doing before, but occasionally we're really knocking it out of the park, we've got a great gym habit, or we are really doing well with watching our finances, whatever the case may be, and that disruption is a recipe for disaster.
And so being aware of that and looking for ways that you can set yourself up not to have missteps when you move to a new home and have to create a whole new set of routines or a new job and your finances shift, if things have been going really well, you need to be on high alert to make sure that you carry that forward into this new era with you when you have a disruption.
I've got to ask the obvious follow-up question, what can people do if they are on a good path and they do have a fresh start, what can they do to make sure they don't... or try to avoid getting knocked off track?
Yeah, it's a fantastic question. And honestly, I think the best thing in that case is a very boring answer, but I also talk about this in my book, and it's really important, and that is, be really careful about making some plans. So think through, what's the goal that you want to maintain if it's a maintenance goal, because you've been doing well and you want to not be knocked off track, and then think through, "What are the obstacles that could get in my way to stay on track? And how am I going to avoid them? When am I going to execute on my plans? Where will I do it? How will I do it?"
Get really into those fine-grain details of how you're going to maintain, because you might not anticipate. A lot of what happens is it's obstacles that come up that are new in a new environment, in a new role that can take you off track. But if you do that planning to try to anticipate what could go wrong and ensure that you have strategies set up in advance, they won't catch you off guard and you'll be able to ensure things transition smoothly. So that's my number one piece of advice on this one.
That's great. Are there ways to make things like saving money? We talked about saving for retirement, that's the kind of the thing that offers long-term rewards, but at the expense of instant gratification because you're not spending that money. Are there ways to make things like that or maybe just saving money itself easier to adhere to?
Yeah, it's a really, really great question. When it comes to maintaining and adhering and engaging and things that offer long-term benefits but not so much short term satisfaction, we always face an uphill battle because we are wired to overvalue instant gratification. We get more from that instant gratification dramatically, we over weigh it, it's called present bias, relative to imagining a comfortable retirement or the home you'll be able to buy for your family if you keep growing that nest egg. Whatever it is, those things, they're discounted heavily and we overweight that to the warm, fuzzy feeling we get from spending on a trinket.
So then the question is what to do, as you said. The classic answer that I focus on in the book that so much research of late has really supported is finding ways to actually bring some of the reward forward in time so that it's instantly gratifying to do what's good for you. So it's easy to see how to do this with something like going to the gym, studying right by associating it. I use a technique I call temptation bundling where I only let myself binge watch my favorite TV shows, for instance, at the gym, or listen to my favorite podcasts while doing household chores, and that makes it fun in the moment.
But that's hard to think about, how do you temptation bundle with saving? I have heard of some clever strategies that people use to try to make saving more fun. For instance, you could imagine making sure your accountant is someone you really, really like, bringing a bottle of wine, having a regularly scheduled meeting or having a nice restaurant. So there's something you look forward to about that interaction that will help you do your financial planning and setting aside. So there are ways to make it social, which is a way of making things fun to adhere to your goals, or to save yourself a small treat, some small reward, whether it's a donut from your favorite shop or other a favorite TV show you save or a movie you watch once a year only after you've done your taxes.
So there may be ways, but I'd say it's probably going to depend on the person. And really the principle is, try to think of how you can make sure it's not all delayed gratification when you do the things that are good for you. Because if it's all delayed gratification, we tend not to persist on our goals. Even though we think we will, we have this misperception that I can just push through and do the thing that's right. If it's not fun, we don't tend to persist. And so anything you can find that will make the financial planning fun, whether it's doing it with friends or family, bringing in treats, it's worth considering and trying to do.
That was a really interesting ideas.
One of the anecdotes in your book talked about the bank, I believe it was in the Philippines, that offered a savings account. These savings account did not offer a higher rate of interest, but offered some locking mechanism to make it like, I think you called it a commitment device. And a study found that people that saved in this account saved more, even though you earned no greater interest and you had fewer features and less liquidity-
One of my favorite studies, I'm so glad you brought this up-
What can we learn from this in our profession and people that are saving for their futures?
It's one of my favorite studies because it flies in the face of what standard economic theory would expect people to do. It gave people a choice, they were offered either a standard account with standard interest rate or this locked account, which was truly identical in terms of interest rate, but worse in a standard format in that you put your money in and you're not allowed to take your money out until a predetermined date you choose or until you reach a predetermined savings goal you choose. So you get to pick what kind of lock you want to put on the account. It's destroying liquidity, and there's no compensating benefit given to you because the interest rate is the same.
So standard economist would say no one will want this, but when it was offered in a random assignment trial, half of customers were given the offer of either this account or a standard one, the other half just got the standard account. And 30% of the customers who had access to this account said, "Ooh, yeah, I want that. That will help me because I'm going to be tempted to dip into my savings and spend it. I'm going to want to splurge, I'm not going to save as much as I could otherwise. If only I had some way to bind my hands. If I could prevent myself from giving into that temptation."
So this account was attractive. And then as you mentioned, what's truly incredible is how effective it was. In this study, the researchers knew they couldn't just look at the 30% who adopted the account because there might be something weird about the kinds of people who choose an account like this, and how would you do an apples-to-apples comparison? So they offer it to say 100 people. And there's another control group that is randomly assigned, another 100 people who aren't offered the account. 30 of the 100 then say, "I'll take it." And they compare the full 100, offered the account with the full 100 who were in a control and say, "Let's look on average, is savings higher when you have access to this tool?"
What they found is an 80% increase in the whole group. Again, remember only 30% are even using this tool, but an 80% increase from just having access to that account. So there's two lessons, one, it's really potent. And the other is, the more people we could get to use it, probably the better. 80% is what you get with 30% adoption, imagine what you'd get with 90% adoption? So I think it's a really interesting, powerful insight that we appreciate too little how hard it is not to dip in. Something always comes up and how hard it is not to dip into savings. And probably too few of us recognize the need for constraints to keep us away from our savings, whether it's opening a second bank account and then chopping up the debit card associated with that and trying to forget the password and stuffing some of your money aside there and never checking it, just letting it grow.
What can you do to put it out of sight, out of mind, so those temptations won't come up and it'll be harder for you to dip into the money you really want to let accumulate?
So what can you do? Do you put into account that you don't have electronic access to, for example, where you actually have to go and do withdrawal?
I've heard of lots of people doing different things, that's one way of cutting up the debit cards. You can think about a CD as a slightly less liquid investment vehicle that has as one of its assets, that it's a little harder to spend out of it. And there, you also get a little bit higher interest rate than you would on a standard account. I think it depends on the person what the best way is to put it out of sight, out of mind. Maybe there's someone you really trust and you want them to literally open it for you. There's other issues there because now you really have to trust this person that they're not going to take it. But you can think about ways that you can create this structure that was available in this experiment that I described with the Philippine bank that was done by Dean Karlan and collaborators.
That seems like a pretty extreme commitment device, literally locking the money up. Are there other ways to put a commitment device in place?
Yeah, there are. So there's softer commitments, like you tell someone, make some public statement or public announcement about what you intend to do. And this is easier in a work setting often with like a boss who you're saying, "Oh, I'm going to tell you, I'm going to get this to you by this date." I know it doesn't formally have a deadline, but I'm going to turn in this project report by this date because it's important for me to get it done. And I want you to giving me a hard time if I don't." That's a really easy thing to do. It's a little harder with savings. Who are you going to tell? How are they going to monitor it? But it is possible to do that, especially if you have a partner, for instance, who's involved in your financial planning and can help you with those sorts of things. So publicity is one way to create small costs.
There are what I call them cash commitment devices, but that's a weird thing to do with your cash, but I'll tell you how they worked anyway. A cash commitment device involves putting money on the line that you'll forfeit if you don't achieve a specific goal in choosing a referee who will hold you accountable. So you're basically increasing the price of your vice. And it makes a lot of sense with things like, "I want to go to the gym this many times this month." Or, "I want to make it to all my Spanish classes this month." Or, "I want to study for my CFA exam, at least this many hours this month."
It's a little harder to convince yourself you want to spend money to make sure you don't fail to save money, but you could do the same thing, and you can also use this kind of platform... And it sends money to an anti charity or charity of your choice. So it might be something for some people to consider that they value the savings so much, they're willing to put money on the line to make sure the double fine will hit if they don't accumulate their savings. So that's another possible tool.
And do commitment devices work for everyone?
That's a great question. I don't know of anything that works for everyone, but mostly what we find when we do research on all these different tools of behavior changes, on average, they work pretty consistently across contexts and that there's no specific types of people where it's not like these seem to work for women and not for men or for 20-somethings and not for 60-somethings. So the research on commitment devices is very consistent that they are useful tools, whether the goal is to quit smoking or exercise more regularly, regardless of what the goal is, we see very consistent results that they're helpful, and there's no particular populations they seem to fail.
But we can't say they work for everyone. Of course, there are some people, for instance, I'll give you an example. On a smoking cessation study, 30% more people quit smoking when they had money that they put on the line and would have to forfeit if they failed to quit in six months. They weren't forced to put money on the line, but they were invited to, and having that invitation increased quitting by 30% over six months. But that's not everybody quit, that's 30% increase. And so you can see it doesn't work for everyone, but it's probably a worthwhile tool to consider for everyone.
I'm really curious, someone's in a bookstore, they see the cover of your book, How To Change. So that means, I guess, implicitly, that someone has a goal to change, and that's where we're talking about commitment devices. How important is it to have a big, ambitious goal? And is that statement useful?
Yeah, it's a great question. There is excellent research on goal setting by the key scholars in our field, Latham and Locke, who've written about this and study that for decades, showing that having a goal that isn't super easy to achieve is important in terms of motivation. If you have an objective to change your behavior, you don't want to set a goal that's like, "Well, I'm just going to sail right over that every time," because it isn't as motivating as a goal that's a little bit of a stretch. So that's certainly true. If it's too much of a stretch, it actually can be de-motivating because you may really hit a lot of road bumps and fail.
I think one of the mistakes that's made in terms of behavior change is to think, "All I need is a big, audacious goal. And if I have one, then I'll get there." Believe it or not, I hear that quite frequently, the focus is all on the goal setting and not nearly enough on the practicalities of understanding, "What are the stumbling blocks standing between me and that goal? What is my plan for overcoming them?" And tailoring my strategies that I'm going to develop to get me from here to there. So I do think we should have a goal, we need a guiding light. It shouldn't be too easy. If we want to make a change setting, an objective is important. It should, by the way, be something that you break up.
So if your goal is just big and audacious and distant, like I want to have 70% of my income at retirement. Like that is way too far off, you need a goal that's more like, "This is what I'm going to set aside every week." And it might be that you can back it out from your big goal by just dividing it over time, that's often the case, but you need to do that breaking up of the big goal. And then, again, the tactics, you need to get into the tactics, not just the statement of the goal.
It's interesting you tipped into retirement there because I had a specific question. Just imagine that you're say, 10 years away from retirement and you're not saving enough, which also means your lifestyle may be too great. So not only do you have to say more, but you have to ratchet back your lifestyle to save more and also keep it lower so that the savings that you accumulate in the next decade for the retirement you want, but there's a lot of things going on. Are there there strategies that you can think of that could enable someone to really stick to that? Because it's so easy on a subject like this just to defer and kick it down the road.
Is so easy to defer and kick it down the road. And this is certainly an area where having some kind of commitment device tool could be useful because you'll probably recognize... The interesting thing about human psychology is we know we shouldn't kick it down the road, but we think, "I'll deal with it in six months." And then six months comes and we do it again. But right now, you're willing to deal with it in three to six months. And so a commitment device can allow you to lock in that motivation so you can say, "If I don't deal with it in three months, I'm going to penalize myself. I'm going to find myself $1,000, I'm going to send it to this charity that I hate," because you can choose a charity that you disagree with.
There's a lot of these websites that help you create commitment devices, let you choose. They have charities on either side of a hot button issue, or you can bet a friend, tell a friend, "I'll owe you a fancy dinner at this restaurant," maybe that's not enough of a... You don't get to go. So a commitment device is a nice tool we can use to try to end that loop of procrastination. And it works in that, "I know I want to do this later, but I'm worried I might delay. I can convince myself to do it now, but I can lock in my intention to do it later." So that would be one suggestion.
Is there anything you can do around, going back to your earlier comment, imagine a new identity that you're, instead of being a typical working person, maybe you consider yourself a pre-retiree or something?
Yeah, that's a really interesting question. You could certainly choose a date that feels appropriate to you if you're going to make this commitment and think about the future. I mentioned earlier that birthdays are moments when people are particularly open to beginning of savings, working towards a savings goal. I think part of that is fresh start, part of it may actually have to do with the salience of aging that kicks in around birthdays and we associate aging with retirement savings. So it might be that you'll be able to convince yourself to put some teeth into a commitment around a birthday, which comes with an identity shift. There's some interesting research that's been done by Shlomo Benartzi and Richard Thaler around dates when you typically get an income increase.
Well, some people are lucky to work at jobs where once a year, they get at least a little increase in salary. Those are dates when people are particularly open to beginning to save more because you already see your paycheck is going up in size. So these dates, when we get a raise, even if it's small, we see a paycheck coming home that is increasing in its size to us, and it can be a little bit more palatable to imagine deferring some of that. It feels like, "Oh, that was extra income." And so people are more willing to start sending money to a savings account at that time. So they did this study called Save More Tomorrow where they invited people to start saving after an upcoming raise.
And then they automatically would increase how much you were saving at a regular interval. And in this way, made it feel fairly painless because everything was a future commitment, the first future commitment kicks in at a moment where you already getting a raise, so it's not going to feel like what you see sliding into your bank account changes very much. This was a really effective tool for helping people ease into that a difficult savings mode where it might feel like you're normally belt-tightening a lot.
It sounded like there is some automation in there. Given a strong commitment, more generally speaking, not in the example that you just gave, but given a strong commitment, are people good at actually remembering what they have to do to accomplish the thing?
No. I know you want a longer answer to that, but I just want to start with no, we're not very good at remembering and follow through. And we think we're fine at it. Actually, I think one of my favorite chapters in the book I wrote is about the forgetting problem. But when I have conversations, I think it's the one that people get least excited about because no one thinks it applies to them. They think it's trivial, and, "I won't forget." And that's really actually borne out by research. What we see as people undervalue the importance of reminders as tools, they don't invest in them enough and they forget things, and we all do it over and over again. And if it's not in front of my face, if it's not memorable and if it's not something I can put on autopilot, then huge numbers of things falls through the cracks.
So a beautiful thing actually about the financial domain that I wish we could pour into other settings, I study like medication adherence and exercise, and healthy eating, an amazing thing about our financial decisions is there are things that can be put on autopilot so that we don't have to remember. And the more we can outsource from our memory to automaticity the better. I truly wish that we could have it in all aspects of our lives. And we're so lucky we have it with our finances. If you can auto set everything's up so there's an auto deduction from your every paycheck.
Every time it lands in your bank account, some of it sent off immediately. You don't even see it, you don't interact with it, it just goes straight to savings account or retirement account, that's great. And if you can auto escalate the amount, even better if you're trying to boost your savings, having it go up at some regular interval. So it's painless, you can make the decision now even though it's going to hit you later and pre-commit to it, that can be really, really effective.
What would you suggest for somebody who does not have the ability to do those, like the auto-enroll, increase in savings and that kind of stuff? If someone does not have that through their employer, what would you suggest?
It's a great question, and obviously, an important one because not everyone does have that luxury. And so what I would suggest is a few things. First of all, banks do provide that offering. You don't have to have an employer that will do it for you. You can set it if you have a bank account, almost every bank account will let you set up auto deductions, but you may not know the frequency at which you're going to get a paycheck. So if you are getting irregular paychecks and you're nervous about an auto deduction that might cause you to overdraw, what you might do instead of an auto deduction is set calendar alerts that are regular frequency, maybe with small penalties, if you don't actually follow through on going into your account at that time.
And again, I'm talking about a commitment device, it could be a separate tool. Make a plan with someone else who's in a similar financial situation, and make a promise to each other, a pact on the first say, Saturday of each month at 9:00 AM., we'll check in with each other, make sure we've looked to see, is there something I can contribute to savings this month and made a deduction and made a payment to it? So I would just make sure it doesn't slip off the calendar and off the radar. And by making a concrete plan, when will you do it? Where will you do it? How will you do it? Is there someone who's going to hold you accountable?
Those kinds of plans make it much more likely we'll follow through on our actions. They reduce the likelihood of forgetting because it's now concrete. You've got a cue that's going to remind you to do it, maybe it's literally on your calendar. You can create this accountability to someone else. Once you make a firm commitment, even if it's only to yourself, you don't want to slip up and back off on that. We don't like being internally inconsistent. So the more concrete the plan, the better in terms of the likelihood of follow through as well.
I have a question regarding laziness, and I link it to a story in the news this week, which with Robinhood going public, there's some data that was in their filing talking about how many of their users log in daily. I think the average daily user logs is seven times a day. So that behavior is anything but lazy. However, I think you can make an argument that being lazy with your portfolio can often have benefits because you're not second guessing things and overtrading etc. So are people lazy, and can laziness be used for good, especially in the financial area.
Such great questions. Yes, and yes. So people are inherently lazy, and I don't mean that as an insult, I actually think it's a feature, not a bug. It's a really useful feature, just like you want your algorithm to be lazy, you want to find the fastest solution to a problem using the least memory, humans are wired the same way. We try to get to an outcome using as little energy as possible. It's efficient. And so often it works, but sometimes it can be a drawback if it means we prefer to sit on the couch rather than take action on something that's important for a goal.
It's many good things, it's a negatively valence word. It could be harmful in terms of goal pursuit, but it can also be used, can turn it into an asset and finance as you said. So this is one of the reasons I love the auto deduct. If you're lazy, you never going to think about it again, and then boom, you have a retirement nest egg and it accumulated without you noticing, you just made one decision and there it was. So laziness is a boon in many settings. In the context of checking portfolios, this is also making me think of some really interesting work by the same people who studied the idea of linking an increase in savings to a paycheck.
This is again, Shlomo Benartzi and Richard Thaler, two of my collaborators and heroes, they're wonderful. They did some research on the equity premium puzzle. The puzzle is that even though equities have generally gone up much more than say, treasury bonds, there's an underinvestment in equities relative to things like T-bills. And why would that be? And what they basically found in some really interesting analyses is that it might be explained by the fact that we see more volatility.
And obviously, it's explained by some by risk to some degree, but the puzzle is, the risk aversion you'd have to have to prefer T-bills to equity by the amount we see in terms of people's investment portfolios is like outrageous. It's impossible that people are that risk averse. But if people evaluate their portfolios frequently, and if people find it painful to just see that it's gone down since they last looked, then that can exacerbate our risk aversion so much that it could actually potentially explain this.
So, if every time we check and we experience a psychological loss that we see it was down from the last time, we know people hate losses, they loom larger than gains, this is a fighting for prospect theory by Danny Kahneman, maybe that can explain the whole thing. And so what they found is the less frequently you check, the less you trade, that might mean the more satisfied you'll be. So it's really good to actually not be in there all the time. The more we trade, also the more we burn in fees.
And generally, we're not that good at picking stocks. In fact, we're basically no better than a monkey throwing darts, unless you have some inside information, which you shouldn't legally unless this is what you're doing professionally and you're really doing great research on basics, blah, blah, blah. Or you have some amazing algorithm, but most of us don't, most of us are just monkeys throwing darts. So trading just burns money. So anyway, the less frequently we look, the less frequent we trade, the more lazy, the better. That was my really long... I used to do whole day on this in my Wharton class, they could see. I think this is a really interesting topic.
That was really interesting. That's myopic loss aversion, I think, explaining part of the premium puzzle I had not heard that before. That's really neat. Can you talk, Katy, about the most important things that people need to know about forming habits?
Yeah, absolutely. By the way, I should say I cover habits in a chapter of my book because they're such an important part of behavior change, but they're not the whole part, but there've been some other wonderful books that were exclusively about habit that I really like, and they get a lot of this right. There's some extra research that a journalist don't know about, and that's been done recently that I'm able to build in, but if you read a book like The Power of Habit or Atomic Habits, you mostly have the model right of what it takes, which is this habit loop.
What research shows is that in general, we want to associate an environment or a cue that we consistently use to trigger a behavior and then we reward it so that we consistently associate a reward with this pattern of, whenever I wake up in the morning and to get out of bed, I will brush my teeth and then I'll smile and feel them into freshness. That's my reward, and I'll do it again. And you do it enough and it goes on autopilot. And even if the reward is taken away, you would still probably keep doing it fairly mindlessly. And this applies not only to things like tooth brushing, it also can apply to popcorn eating at the movies.
It also applies to exercising, checking your financial statements that have high frequency and so on to the extent that it's not causing you to trade. So you may not want to have it in that context, which is funny, maybe you want to break habits. But when it comes to building habits, that's the basic formula and it's been proven. It started from animal models and then it's been proven to be largely true in humans as well. If you, for instance, pay people to go to the gym eight times over the course of a month and compare the likelihood they'll go after you stop paying them with another group that you've only paid to go once, you see that there's sustained behavior change because some habit seems to develop just from that short period.
One principle that's missing from a lot that I've studied and found fascinating, and frankly, I would have gotten wrong five years ago if asked this question, what we've found is that there is a benefit of flexibility in forming those habits that we under appreciate. The formula I just gave you, which is find it to a consistent routine that you use that triggers the behavior and reward yourself for it. Do that repeat repeat, repeat, and then that's how you form a habit is generally true, but we thought maybe we can really instill habits efficiently in people if we try to get them to be extremely consistent in the performance of an activity.
For instance, in one study, we looked at Google employees, I'm taking you back to Google, same relationship I talked about the led to the fresh start effect work, we're trying to partner with them to help employees kickstart a gym habit. With 2,500 employees we basically rewarded them for a month for exercise. And we tried two different ways of doing that. One was trying to build really, really consistent routines. So you only get paid for going to the gym if you go within the same two-hour window every day that you pick, it's the best time for you, but that's the only time you can earn money.
And the idea was, "Let's really inculcate a routine, let's really get that in there and you'll be consistent. And then after this month period, you'll keep that habit." We had another group that we rewarded no matter when they went to the gym. And so we still encouraged them to go at a fairly consistent time, but we were trying to build a bit more randomness, I will say, into the pattern. And the idea there was, "Well, we thought probably routinization was better, but maybe it's important to have some flexibility."
Both groups go at the same frequency by the end of the month, one group, 50% of their workouts are at this regular time, and the other group, 85% are at the irregular time. So which group has a more consistent habit? Well, we thought it was going to be the group that lasts, I should say. We stopped paying them, we watch what happens, who's still going to the gym? We thought it would be the group that had this consistency and it turns out we were wrong. So the group that goes more is the group that had actually gone at less consistent times that had varied their approach more.
And the reason, what was really interesting, we weren't wrong, the people who had gone at a routine time were a little bit more likely to keep going. So if they had been a 7:00 AM workout person, they're a little bit more likely to show up than other 7:00 AM people who had been less consistent in their pattern. They're a bit more likely to show up at 7:00 AM, but if they don't go at 7:00 AM, they don't go at all. They had built these really brittle habits. The other folks had built more of a no matter what pattern of behavior. And so that just highlights I think a really important thing about habits, which is we need some flexibility and adaptability if we're going to do something in the most consistent way possible.
If we form really, really rigid and brittle habits, then when life gets in the way, you can't make your usual 7:00 AM, you don't go at all. But if you have some flexibility in your habit, like I'm normally a 7:00 AM meditator or exerciser, but when I can't squeeze it in at 7:00 AM, I find a way to do it at lunch, then you are more robust to what life throws at you and more consistent in the behavior.
Is there a lesson in there for financial advisors or investors about flexibility?
I think there's a lesson about probably most related to, if you try to consistently look at your finances in a way that's not productive, I realize I'm saying this, I keep now caveating, and after our conversation about like, you don't want to check every day or six times a day as the Robinhood data suggested people do, because that can be counterproductive, but say you want to check once a week and make sure nothing crazy is happening, even once a month, and make sure that you can feel comfortable with where things stand that if you have new paychecks coming in, that you've allocated them appropriately, that you don't want to be too brittle in the way you schedule yourself.
You want to have backup plans and fallback plans for that as well. I think that's what I would say. And then I guess the other thing, it probably relates a little bit to breaking bad habits because sometimes what gets us in trouble with our finances is having bad habits. I'd say the good news is, to the extent that those bad habits are at all brittle, it maybe more breakable if you can adjust something, like put a hurdle in a way. If you have a bad habit of every morning of spending in a certain pattern, it may be that if you could just put up a roadblock to a very specific time and date when you tend to spend, that will be enough to break the bad habit.
So we often talk about overconfidence as a big issue in decision-making, I'm curious if under confidence is an issue in making changes?
It is, but I also want to just double down on what you said and say, overconfidence, I think matters so much and investing particularly is such a pernicious bias. So I don't want to undersell the problem of under confidence. I do think under confidence is also an issue, and where it becomes an issue is when you just don't believe that you have what it takes to achieve some goal. And so you don't push to start or you don't make the plans, you don't try at all. And it's not the challenge for everyone.
A big message of my book is that it's important to understand what you're up against, what is holding you back. I think it's really important to note, not everyone lacks confidence, a lot of people are overconfident and this is not going to help them. This is not the thing to work on with them, but for people where they just don't believe, "I don't believe it's possible for me to reach that." "I don't believe I can actually put this much in savings." "I don't believe it's possible for me to have a comfortable retirement at a comfortable age. I think I'm going to have to work forever." Helping build confidence might be part of what it takes to help them achieve their goals.
And there's a lot of different ways. One of the ways that we can increase confidence that I find really fascinating has to do with putting people in the position of an advice giver rather than what we usually do when someone is struggling to figure out how to achieve a goal. What we normally do when we see someone who's flailing a little bit, is we put our arm around them, offer them some unsolicited advice perhaps about, "Hey, if I were you, this is what I would do." And it turns out, this is an insight from Lauren Eskreis-Winkler, a professor at the Kellogg School at Northwestern, really brilliant psychologist, that can be demotivating.
If you think about it for a second, you're like, "Yeah, I don't love it when somebody gives me unsolicited advice about something that I've been working on, it makes me feel like they must think I'm a shallow and I can't figure this out for myself." And she wondered if actually maybe we have something flipped, maybe we got this backwards that maybe another way we could approach encouraging people and helping them when they're struggling, particularly if competence is a barrier in their case, might be by actually asking them, what advice would you give someone else who was in a similar position? Maybe literally putting them in the role of a mentor.
Because what she realized doing that would trigger was a few things. First, it says to you, "I think you've got smarts. I think you've got what it takes to figure this out. I'm going to put you on a pedestal rather than talking down to you." So that is a confidence boost. The second thing she realized is when she was talking to people, she did a lot of interviews for her dissertation work who were struggling to achieve their sales goal or students who weren't achieving as much as they wanted to in school.
She realized when she asked them questions, a lot of them had a lot of insights about what wasn't working and what might work better, they just weren't used to articulating it or thinking through it. And if you put someone in a position of advice, giver or coach, they have to start dredging up those insights, but maybe they already have, they're really personally relevant because they're based on their own experience, articulating them, recognizing, "Oh yeah, this is a strategy that I actually believe in. I think this would work."
And once you say it to someone else, it's likely that you'll realize, "Well, this could work for me too, and you'll fill your hypocritical knots to take your own advice." So there's all of these benefits from putting someone in the role of an advice giver or a mentor. And Lauren's research, some of which I've had the pleasure of collaborating on, shows in random assignment trials experiments that when we invite someone to advise others, it actually improves their own motivation and performance.
And she's shown this in a lot of the different contexts of study we did together, looked at high school students and found that when we randomly assigned about 1,000 students at the beginning of their third quarter of the academic year to coach or give some mentoring and advice on how to study more effectively to a younger student, and they did this all digitally, so no actual social interaction, just a 10 minutes of survey that is going to go to younger students, how can you do better in school? It actually improved those students' own grades.
The advice givers grades went up significantly as a result of giving that study advice to their peers.
The people that are listening to this podcast will tend to stand out as more financially savvy than their peer groups typically, if they see one of their friends making a financial mistake, as you just said, they maybe you shouldn't give them unsolicited advice. How would you see that conversation going to be more productive rather than giving unsolicited advice?
Yeah. This is a tricky one because if you do have expertise, and I think one of the things Lauren's work looks at is challenges that have to do with motivation, confidence, but not expertise, where she would never say, if somebody needs to learn calculus, they should just teach someone else calculus. She would say like, "You should go to a class to learn calculus," because there's information that you don't have, you can't just dredge up insights from inside and figure out. Well, maybe some people can, but most people can't.
So I think it's really important to distinguish between the power of advice giving and contexts where it's a motivational barrier and the importance of still teaching people information when you have different knowledge basis than they do. That doesn't mean it isn't still important to recognize that there's an ego threat when we offer advice to someone else. I don't want to say if you have knowledge, you shouldn't share it. It's more when you're thinking about a challenge that someone else probably could figure out for themselves, stepping back a moment before you just give.
If you're not really an expert and you just start sharing advice that's unsolicited, it can be really demotivating and you could a better job. In a case where you have knowledge, I do think you have a responsibility to try to be helpful to someone, especially if they've indicated an openness or an interest in your opinion. I think the best thing to do is just try to get them to solicit your advice. Solicited advice is valued. It's great. One thing that also can be a way to do this without insulting someone by saying like, "I think you've got it wrong, let me tell you how to do it," you can also approach it by just role modeling.
So we are very influenced when we observe our peers taking an action. It's very likely that we'll end up recognizing, "Oh wow, that that could be an action that would make sense to me too." When we see everyone around us doing something, we're much more likely to follow suit and do it as well. Another way of conveying information can be through your own actions rather than through your words. So you might say, instead of saying, "I really think you shouldn't invest in that one individual stock," you might say, "That's so interesting. I'm really interested to hear about that."
And then you might say, "My portfolio is different, I've made a choice to invest in the S&P and I like index funds because I realized I might not know a lot." But you're not telling the other person what to do, you're just conveying what you do and say, "And I know a lot of other people who do that too." I found it really satisfying. So that's another way is you convey the information without it being aggressively advice giving, it's just sharing. So anyway, I think there's a lot of socially smart things we can do, and there's other probably more empathetic and clever thinking about this than I am. Just the awareness that that unsolicited advice can be demotivating and hurt ego, I think is a big step.
I want to go deeper on that line of thinking there, for someone who's trying to change themselves or achieve a goal, how important is the company that they keep to getting the outcome that they want?
I am so glad you went in that direction because it's really important, and I think we under appreciate this as well. One of my favorite studies that I mentioned in the book is one showing that the roommate you're randomly assigned to in college affects your college grades. You do better when you end up with a roommate who perform better on the verbal SATs than someone else. And I think in general, we're tremendously influenced by the people around us. If everyone around you is studying hard, you're likely to study hard too. If everyone else is saving, you're likely to want to save too. If everyone else's buying fancy luxury cars, you're going to feel like you're not going to fit in.
If you don't have your own. And the goals of the people we surround ourselves with start to rub off. We feel like we won't fit in, and there's also information, we figure they must know something we don't know. So you can be deliberate and shaping your social circle in a way that will help encourage the kind of person you want to become. If they're people who you know who have achieved things that you'd like to see yourself achieve or working towards similar goals, spending more time around those people is likely to both teach you things because the good habits they have, you can observe and try to deliberately copy and paste them, which by the way, is another strategy we under invest in, we've shown in our research if you just tell people.
Try to actually deliberately use strategies, other people are using to succeed, believe it or not, not everyone's already figured out that. That's a great idea and it can help just to have that little trigger in that prompt. So that's another way your social circle can help if you deliberately look for ways to copy and paste, but it will also just rub off, the things that they value will rub off.
I'm thinking about in work from home COVID era where so many relationships are digital. Is there a way to benefit from that copy and paste in a digital virtual world where you're part of a community like our online community, for example, or if you're part of your advisor's community?
Yeah, absolutely. It certainly is. You have to be a little bit more deliberate about it. For instance, the idea of copy and paste, it's just really seeing people who, and it cannot literally be seeing them, it could be, "There are other people in this community, I know they exist who have achieved goal X." And you can ask them, "What are some of the hacks you've used? It's really understanding how do other people get where you want to be, how did they get there? And you can be deliberate about seeking out that information from whatever community you're in, whether you can do it in person or not, you can ask those questions to solicit the information.
We've talked about all kinds of different behavior changes, such as temptation, forgetfulness, laziness, overconfidence, under confidence. So tell us, are behavior changes permanent, or is this like a perpetual struggle to keep making the change that your book talks about?
Well, the way you just said it makes me makes it feel like that's a sad answer to give that it's a perpetual struggle, and perpetual struggle sounds so negative. I think we make a mistake often and thinking if I just work at this for a month, I can build, it'll magically propel itself forward, I just have to get the right stuff. And again, in the domain of savings, the magic sometimes is there, because again, if you set up that auto deduct, it really can just carry it forward. But for most of life's challenges, whatever barriers are holding us back, can't be put on autopilot.
And that means that whatever hacks strategies we use to make it more fun to achieve our goals, to make sure we don't procrastinate too, build habits, thinking of them as a one and done is wrong. It's the wrong approach. It's too often the approach people take. I got it wrong early in my career, I was looking for that silver bullet. And what we found over and over again in studies is, it really requires continual maintenance using these strategies over and over because it's not like to our impulses ever go away, or our desire to procrastinate goes away or preference for a path of least resistance goes away.
That's human nature, it's with us forever. And so once we understand what are the things working against us, we just need to develop strategies we can use consistently over time to overcome those challenges. It gets easier, it definitely gets easier, and you build the routines and you get used to planning and using reminders, and scheduling the social activities that reinforce the positive outcomes. It's always the startup costs are higher, but you can't just put things on autopilot for the most part and assume they'll work forever after.
What do you think about the role of the third party? Like in our case, we are financial advisors for investors that try to help them with some of this stuff. What do you think about the role of a third party like that in initiating and maintaining change?
There's definitely lots of research supporting that accountability as an important component for some people in the change process. If you are accountable to someone it's essentially a price, if you disappoint them. And so having others who can observe how you're doing, and also by the way, provide solicited advice and information, those things do often add value. Not for everyone, it's not something everyone needs, but accountability does help with goal pursuit, particularly for people who worry they might procrastinate or their impulse is going in another direction, this pushes in the direction you want to be going.
It can be essentially a form of commitment device if there's someone you're accountable to. And again, the solicited advice, it's a peer who is more knowledgeable and can help encourage, can add value.
You come from an engineering background, as I understand, so do I. Do you ever worry about or think about the... Obviously, you're not studying physics, we're in social sciences studying people. Did you ever worry about the quality of the data that you're able to collect when you're doing studies?
It's my number one concern. And I will say that I study a subset of topics in social science that are interesting where the data quality issues are less serious. For instance, I've never studied happiness. It's really hard to get quality data on happiness. And I study things where there's a hard objective truth because the engineer in me can't stand it any other way. So there's a reason that gym attendance is often an outcome variable and a habit study instead of what did you eat, for instance. I probably care a little bit more if I could study anything in the world, but gym attendance is measurable.
People swipe into gyms, it's an objective data points. I have to trust you and believe you if you tell me what you ate, for instance. Savings accumulation, there's a hard answer to that, so we can collect that data. So I choose topics where I think the outcome variables are important to the world, but also where I can measure it in a reliable way. And that's paramount important. And some people in my field, I think worry less about the measurement, I think the engineering in me forces me to be big problems where I know I can get that high quality data.
That's an awesome answer. Thank you.
Last question, Katy, how do you define success in your life?
Oh, wow. Since you asked about me, I will give you a very personal answer. This is not a definition of success for anyone else, I don't think. Well, maybe a couple of my peers who have similar goals, but I want to wake up in the morning and feel like the day ahead of me, the things that I have on my plate are making the world a better place in some way, I'm going to enjoy doing them while I'm doing them. Those are the big things, that I'm leaving the world a better place and having fun while I'm doing it. So success for me looks like, as many days as possible, those things line up.
There's few things that I find torturous and there's many ways that I can make a positive impact through science, which is, that's how I'm trying to make a positive dent in the universe.
What a fantastic answer. And this has been a great time. I'm so happy you agreed to come on, and it's been really great to meet you. Thank you.
Thank you for having me. This was really fun. I really enjoyed it.
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