Making New Year's resolutions? Keep them small and achievable

 

Here are strategies to consider:

Don’t rely on motivation

"New Year’s is when many people feel motivated to make changes, including making saving for retirement a priority. But motivation can dissipate quickly, as anyone who has joined a gym in January and stopped going in February knows."

Instead find ways to "shrink your goals to make them easier to accomplish."

Keep the bar low

Setting ambitious goals sets you up for failure. Set specific actions, not that you will save more but that you will save $X per month and set up an automatic transfer to that account. 

Stress the positive

Focus on how small steps will add up to something substantial over time. See blog posts on compound interest. 

The easier the task, the better the odds of sticking to it when motivation flags.

Calculate small changes

"Seemingly small reductions in investment fees can also produce big savings over time. According to Vanguard Group, $100,000 invested at 6% a year would grow to $429,000 after 25 years with no fees. With a 1% annual fee, the balance would grow to $339,000."

Experimental approach

Don't cut back on things you enjoy. Instead get rid of subscriptions you don’t use, negotiating discounts with cellphone and cable companies, and save a portion of a tax refund or raise.

Try negotiating a rent reduction, especially if you live in a city where people who can work from home are fleeing the city, leaving empty apartments. 

Don’t get upset by setbacks. “Think of your behavior change (goal, resolution) as an experiment. Figure out why your strategy didn’t work, change your approach, and try again. 

Just take one step

"In contrast to eating healthier or exercising more, retirement savings can be put on autopilot, via payroll deductions to a 401(k) or automated transfers from a savings account to an individual retirement account."  Set up the account today and then set a date in the future to start funding the account.

 Source: Advice from an interview of Dr. BJ Fogg, a behavior scientist at Stanford University, author of “Tiny Habits: The Small Changes that Change Everything,” Ramit Sethi, author of “I Will Teach You to Be Rich” and other behavior experts by Anne Tergesen, writing for The Wall Street Journal, Dec. 29. 2020.

The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy

I haven't read this yet but it seems like a very timely title and approach during these times of drmatic financial market volatility.
According to the Good reads website the book is :

"A detailed guide to overcoming the most frequently encountered psychological pitfalls of investing Bias, emotion, and overconfidence are just three of the many behavioral traits that can lead investors to lose money or achieve lower returns. Behavioral finance, which recognizes that there is a psychological element to all investor decision-making, can help you overcome this obstacle."

"In The Little Book of Behavioral Investing, expert James Montier takes you through some of the most important behavioral challenges faced by investors. Montier reveals the most common psychological barriers, clearly showing how emotion, overconfidence, and a multitude of other behavioral traits, can affect investment decision-making."
https://www.goodreads.com/book/show/6922765-the-little-book-of-behavioral-investing

Want to develop some good habits? Break bad habits?

"Welcome to My Habit Lab. Designed by scientists at the University of Southern California. We draw on the latest psychological research to help you break bad habits and start good ones."

Psychologist Wendy Wood, Ph.D. wrote the book: Good habits, bad habits: the science of making positive changes that stick

Check out this website: http://goodhabitsbadhabits.org/

An interview with the author: https://behavioralscientist.org/good-habits-bad-habits-a-conversation-with-wendy-wood/  

About the book: 

"We spend a shocking 43 percent of our day doing things without thinking about them. That means that almost half of our actions aren’t conscious choices but the result of our non-conscious mind nudging our body to act along learned behaviors. How we respond to the people around us; the way we conduct ourselves in a meeting; what we buy; when and how we exercise, eat, and drink—a truly remarkable number of things we do every day, regardless of their complexity, operate outside of our awareness. We do them automatically. We do them by habit. And yet, whenever we want to change something about ourselves, we rely on willpower. We keep turning to our conscious selves, hoping that our determination and intention will be enough to effect positive change. And that is why almost all of us fail. But what if you could harness the extraordinary power of your unconscious mind, which already determines so much of what you do, to truly reach your goals?"

Time to get real about New Year's resolutions

Behavioral economist Dan Ariely writes in The Wall Street Journal (2/1/20):
"To get a resolution to stick, we need to make the desired behavior automatic. For instance, if you want to exercise more, build a very simple habit: Every Tuesday at 5 p.m., go to a group exercise class after work. Ideally it will be something you find enjoyable and rewarding, so that the habit is more likely to stick. The more you repeat a behavior in the same context at the same time, the more automatic it will become and the less you’ll have to rely on willpower."

"For a good introduction to the research on this topic, I recommend Wendy Wood’s recent book, Good Habits, Bad Habits: The Science of Making Positive Changes that Stick.”

Good Habits, Bad Habits: The Science of Making Positive Changes That Stick

by

Wendy Wood

 

A landmark book about how we form habits, and what we can do with this knowledge to make positive change

"We spend a shocking 43 percent of our day doing things without thinking about them. That means that almost half of our actions aren't conscious choices but the result of our non-conscious mind nudging our body to act along learned behaviors. How we respond to the people around us; the way we conduct ourselves in a meeting; what we buy; when and how we exercise, eat, and drink--a truly remarkable number of things we do every day, regardless of their complexity, operate outside of our awareness. We do them automatically. We do them by habit. And yet, whenever we want to change something about ourselves, we rely on willpower. We keep turning to our conscious selves, hoping that our determination and intention will be enough to effect positive change. And that is why almost all of us fail. But what if you could harness the extraordinary power of your unconscious mind, which already determines so much of what you do, to truly reach your goals?"

"Wendy Wood draws on three decades of original research to explain the fascinating science of how we form habits, and offers the key to unlocking our habitual mind in order to make the changes we seek. A potent mix of neuroscience, case studies, and experiments conducted in her lab, Good Habits, Bad Habits is a comprehensive, accessible, and above all deeply practical book that will change the way you think about almost every aspect of your life. By explaining how our brains are wired to respond to rewards, receive cues from our surroundings, and shut down when faced with too much friction, Wood skillfully dissects habit formation, demonstrating how we can take advantage of this knowledge to form better habits" Source:

https://www.goodreads.com/book/show/43565368-good-habits-bad-habits

The science behind why saving for retirement is hard and what to do about it

"The majority of Americans—59% according to a 2019 study by Charles Schwab—say they live paycheck to paycheck, making saving money a challenge. But beyond the that, there are lots of reasons why people don’t prioritize planning for their future, even though they know they should. It’s here where research in behavioral science can help" writes David Hoffeld.

"One of the primary reasons why we don’t make choices that set ourselves up for a secure retirement is because of how our brains are wired. Each of us has cognitive biases that lead us astray. Yet, by understanding these biases, you can make sure that you do not fall under their influence."

Bias #1: Temporal discounting 
(aka time preference) is a tendency to give greater value to rewards received sooner compared to much larger rewards if one is willing to wait.We are willing to settle for a small reward today rather than wait for a much larger reward in the future.  If you've heard about the "marshmallow test" of delayed gratification with preschoolers, you know what I mean. See: https://www.thoughtco.com/the-marshmallow-test-4707284
Adults who cash out retirement savings when changing jobs suffer from

Bias #2: Loss aversion 
Investors tend to prefer avoiding losses over achieving equivalent gains.
Suppose you decide to move your investments to “safe harbor” accounts (think money markets and CDs) to avoid potential losses in a down market. The longer you stay in these kinds of accounts, the more you risk losing some of your purchasing power to inflation. How do you know when to reinvest in the market?

Bias #3: Recency bias
Recency bias occurs when an investor tends to weigh recent events more heavily than earlier events. They think the recent past will repeat itself in the near future so investors look at what investments did well in the recent past and move their money into those investments at peak prices. See: The Callan Table for a visual example of how investment categories vary over the decades.

Confirmation bias occurs when we favor information that reinforces the things we already believe. It’s a common phenomenon in how we choose our news sources (think FOX vs. CNN), and it’s also common in investing.


Get the details:
https://www.fastcompany.com/90453952/the-science-behind-why-saving-for-retirement-is-hard

OK... now what can you do to address these threats to your financial security?

The Top 3 Blind Spots That Keep You from Building Wealth 

 "DALBAR’s Quantitative Analysis of Investor Behavior study tracks investor returns and finds consistently that the average investor earns much less than market indices suggest. For example, according to DALBAR, the average investor lost 9.42% in 2018, compared to losses by the S&P 500 of only 4.38%. Why? DALBAR attributed the loss to investor behavior ­­— avoiding market volatility by decreasing exposure, and even losing more money by being out of the market during periods of gains."

"How to avoid recency bias: Look for context in long-term trends, not just recent headlines, to provide perspective. If you have worked with your adviser to create a financial plan, stick to it. Jumping in and out of the market places you at greater risk. As David Booth of Dimensional Fund Advisors puts it, “Missing out on big growth has as much of an impact on a portfolio as losing that amount. How long does it take to make that kind of loss back? And how is someone who got out supposed to know when to get back in?”

"How to avoid loss aversion: Focus on your long-term goals instead of worrying about the day-to-day ups and downs of the market. You’ll sleep better and portfolio will continue to grow over time."

"How to avoid confirmation bias: Always consider multiple viewpoints. If you work with an adviser, ask him or her to help you evaluate investments by including the pros and cons of any potential decision."

Temporal discounting

Adults who cash out retirement savings when changing jobs suffer from TD. Do a simple compound interest analysis of how much those dollars would grow if you left them invested until retirement. Teh results can be surprising.  

https://www.valuewalk.com/2020/01/investing-emotional-bias/

Great monnthly newsletter: The Humble Dollar by Jonathan Clements

I became addicted to Jonathan Clements' financial advice and educational columns when he was a weekly columnist for The Wall Street Journal. I looked forward to reading his column every Wednesday and sharing the information with my personal finances classes at Utah State University. His advice is always simple to understand, consumer-oriented, and logical. I invite you to explore Clements' website: http://www.humbledollar.com and to subscribe to his monthly newsletter. Following his advice will improve your financial situation! His books are great too, but I think reading a weekly blog or monthly newsletter is more likely to lead to action than reading an entire book. But his books help to reinforce his financial advice column. Check out The Humble Dollar at http://www.humbledollar.com/ 

Dollars and sense: How we misthink money and how to spend smarter

Behavioral economist Dan Ariely's new book, Dollars and sense: How we misthink money and how to spend smarter, is now available at your favorite bookseller's and library. Logan library will soon have the book, e-book, and audio recording available for loan.
"Blending humor and behavioral economics, the New York Times bestselling author of Predictably Irrational delves into the truly illogical world of personal finance to help people better understand why they make bad financial decisions, and gives them the knowledge they need to make better ones." http://danariely.com/books/dollars-and-sense/
Check out his other books, all very entertaining, revealing and readable: http://danariely.com/books/
Ariely is director of the Center for Advanced Hindsight (not a typo). http://advanced-hindsight.com/
Check out Ariely's website: http://danariely.com/

Our Blind Spots Cut Retirement Savings

"Our personal biases can play havoc with how we handle our finances.
Two such biases have long been suspected as obstacles to saving for retirement. The first is a tendency to procrastinate on decisions that may benefit an individual in the long run, but also involve short-term costs, like saving for retirement – economists call this 'present bias.'
The second bias is a failure to perceive the power of compounding investment returns and how this can build wealth over decades of saving." Read more about "present bias" at http://squaredawayblog.bc.edu/squared-away/our-blind-spots-cut-retirement-savings/

Forget the power of positive thinking!

"Positive thinking is often touted as a key to wish fulfillment: Simply envision yourself achieving your dream—and abracadabra—it will manifest!
The only problem? It doesn’t really work.
Research by Gabriele Oettingen, a psychology professor at New York University and author of Rethinking Positive Thinking: Inside the New Science of Motivation, found that people who fantasized about success—from losing weight to getting a good grade on a test—actually fared worse in the results department than those who didn’t."
"Yes, imagining a good outcome can lower your blood pressure and put you in a good mood, but as a result of feeling so satisfied, you’re less likely to take the action necessary to achieve your goal." "In other words, in order to succeed, optimistic thinking should be paired with practical methods to overcome the challenges you’ll inevitably encounter.
Based on these findings, Oettingen developed a four-step method she calls WOOP (Wish, Outcome, Obstacle, Plan) to help you bring your dreams to happy fruition." Molly Triffin explains more at: http://www.foxbusiness.com/personal-finance/2015/12/22/5-simple-steps-to-heart-happy-retirement-planning/

Investing Should Be Painful!

What??
Alan S. Roth write in the Nov. 2 issue of Financial Planning 
"In the real world, risk correlates with reward.... Our minds, though, are often disconnected from reality, and we view risk and reward as disconnects."
"People base their judgments of an activity or a technology not only on what they think about it, but also on how they feel about it."
If their feelings toward an activity are favorable, they are moved toward judging the risks as low and the benefits as high; if their feelings toward it are unfavorable, they tend to judge the opposite — high risk, low benefit. Of course, the pattern isn’t logical, but it’s how humans think."
"In his 2011 book, Thinking, Fast and Slow, Nobel Economics Prize winner Daniel Kahneman discussed our two ways of thinking:
System 1: Rapidly, automaticly, frequently, emotionally, stereotypically, subconsciously.
System 2: Slowly, effortfully, infrequently, logically, calculatingly, consciously.
Essentially, system one is rooted in how we feel, while system two is, supposedly, rooted in logic. Two critical points, however, are that both systems reflect how we think, and that we typically don’t know which system we are thinking with. We assume we are always using logic when making decisions."
"System 1 feels more pleasure and pain. It views the stock market as high reward and low risk at the height of bubbles, and high risk and low reward at the bottom.
System 2 always considers stock investing to be risky, but leads to the conclusion that stocks are a better buy after a half-off sale than after the price has doubled. Our thoughts also assess the high probability that capitalism will survive. When stock prices reach an all-time high, System 2 knows there is a low probability that stocks will rise indefinitely without the arrival of a bear market."
"Research indicates that System 1 typically prevails in investing. Most data show investor returns typically lag fund returns due to poor market timing. Fund flow data reveal we buy more stock funds near the top price and sell more near the bottom."
"Behavioral finance readily explains how we can think we are being logical while doing illogical things...."

Read Roth's full discussion at:
http://www.financial-planning.com/news/portfolio/investing-should-be-painful-2694659-1.html?zkPrintable=1&nopagination=1

A retirement planning lesson from a bike ride

Steve Vernon (MoneyWatch) explains behavioral finance's applications to retirement planning, like unrealistic optimism and hyperbolic discounting. “I made a few of these common blunders during a recent visit to Amsterdam and came away with a better appreciation of the pitfalls we all face when planning our retirement.” “I was bike riding with my wife in the countryside outside Amsterdam on a beautiful summer day. We faced a choice: Return the rental bikes by 5:45 p.m., or wait until the next day, which had a forecast of rain.” Find out what happens and the link to retirement planning at: http://www.cbsnews.com/news/a-retirement-planning-lesson-from-a-bike-ride/