No regrets! Using cognitive bias to achieve your goals
One of the most famous ways human beings are fundamentally irrational is our reaction to the possibility of regretting a decision. We really hate the idea that we might have future regrets. So much so that shops only have to put up a “sale” sign or mark something “limited edition” and we rush to buy in case the items we want become unavailable. Never mind that these items are often extremely generic and easily found elsewhere, or soon to be out of fashion and abandoned. Yes, I am speaking from experience.
So, regret aversion, as this phenomenon is called, has a bad name in the personal finance community. We’re encouraged to step away from the sale goods and give ourselves 24 hours to reconsider whether there’ll really never be another reasonably priced plain white t-shirt or if we’d actually find life meaningless without an avocado slicer like the one that influencer uses. (What even happened to avocados? Are they still a thing? I’m too old to know.)
I think, however, there are ways to make regret aversion work for you. Don’t get me wrong, it’s possible to make many silly choices from trying to avoid the possibility of regret. It’s a major cause of procrastination as we try to reconcile mutually exclusive options. Done right though, regret aversion can be harnessed to help us get motivated in the face of fear, self-doubt, boredom, frustration and plain old slog.
I have an image on the desktop of my computer that says “Turn ‘I could have’ into ‘I did’”. It’s there to remind me that I don’t want to look back on my life with regret. I don’t want to say “I had these gifts and opportunities and I didn’t use them”.
You can use this method for all sorts of goals including financial ones. Tell yourself “It might suck giving up my time to budget and meal plan, but if I can’t afford to spoil my partner on our anniversary, that’s going to suck even more”. Or perhaps, “I might feel uncomfortable negotiating my salary, but I’ll regret feeling I could have earned enough to save a deposit for my own home”. Or even, “It may feel awkward to ask the adviser to explain my pension to me yet again, but I don’t want to get to retirement and find I’ll be living on beans on toast instead of ”.
This is why it’s important to be really clear about your goals. The more you can visualise what you’re working towards, the more you can use the potential regret of not getting it to motivate you.
Exercise:
Imagine one of your personal goals very clearly, something you think you could do, with a bit of effort. Go on. I’ll wait.
Now picture the regret you would feel if you didn’t do everything you could to achieve it.
It feels horrible right? So, what can you do to make sure you never feel that way? What steps can you take towards that goal?
Comment below, what do you not want to regret?
"Bad with money" is a fixed mindset
After writing my post about why I don’t think there’s any such thing as being “bad with money” I was curious what other people thought.
I didn’t want to have to explain my whole blog post on social media, so I thought I’d just do a quick LinkedIn poll and see what came back.
Image shows a screenshot of a LinkedIn post and poll by Martha Lawton.
The post says:
“I'm getting increasingly annoyed with the phrase "bad with money". So many people say about themselves "I'm bad with money" and just shrug, as if that's all there is to it.
I don't blame individuals, because this is a common idea, but I think it's super unhelpful.
We can all grow and the label "bad with money" cuts people off from that growth.
What do you think?”
The poll question is “Are some people just “bad with money”?”
The answers are:
“Some people are bad with money” 23% of the votes
“Everyone can improve” 72% of the votes
“Other (please comment)” 5% of the votes
In my previous post I talked about how saying someone is “bad with money” or “good with money” is simplistic and disguises all the many different skills needed to manage money well.
This poll highlights another damaging part of the “bad with money” label. As with almost all labels, it promotes a fixed mindset. For those of you who aren’t familiar with fixed/growth mindsets, I’ll give a quick explanation.
A person with a fixed mindset believes that our skills and abilities have inherent limits beyond which no amount of practice, study and effort can take us. A person with a growth mindset believes we have infinite capacity to develop our skills and abilities as long as we practice, study and work.
A fixed mindset says that talent is everything, you’ve either got it or you haven’t. A growth mindset says that we all start from different places, but where we end up is a combination of our own efforts and the resources available to support us.
It’s worth noting that a growth mindset doesn’t say anything about the rate of progress, only that progress is always possible. Slow improvement still counts. It also makes it very clear that resourcing is important, this isn’t a viewpoint that says the world is a pure meritocracy and there are no structural advantages or disadvantages.
If you say that some people are just “good with money” and others are just “bad with money” and that’s all there is to it, you’re expressing a fixed mindset position about money. The trouble is that it’s a self-fulfilling prophesy. If someone is just “bad with money” why should they try to manage it? They are doomed to failure and might as well give up. Similarly there’s no point is trying to teach or coach anyone to get better with money if it’s just in their nature to be “bad with money”.
One of the people who commented on my post said something similar.
Image shows comment from Penny Delve
“The danger with labelling yourself is that you become that label. Our language is very powerful and our subconscious is always listening 👂.
We all create our own experience so there is a choice. So I voted ‘everyone can improve’ because we always have that choice to change Martha Lawton 🙌”
Not only that, but even people whose fixed mindset puts them in the “good with money” category, can end up very anxious about their money skills. This is because if your ability with money is fixed and you make a mistake or have a financial setback then a fixed mindset says that’s because you’ve reached the limits of your money ability. There’s no way to correct for the mistake in future. A fixed mindset may even tell you that you’re not as ”good with money” as you thought, perhaps even “bad with money” after all.
Worse yet, because in a fixed mindset every skill or behaviour is a fundamental unchanging characteristic of who you are, any time things go wrong that’s a sign you’re a lesser person than you thought. This means that a person with a fixed mindset who gets into debt will either see themselves as a helpless victim and expect someone else to fix the problem for them, or will be too ashamed to ask for help because it feels like exposing their fatal flaw.
It’s an insecure position to be in.
On the other hand, a person with a growth mindset around their financial skills will be actively seeking to improve and will perceive a setback or loss as a chance to learn. They can think clearly about whether they made a mistake or whether they just had bad luck. Neither answer is a threat to their sense of their own value as a person. If something goes wrong with their finances, even a serious debt issue, they will be ok asking for help and will hope that their adviser can help them understand how to fix things now and avoid similar problems in the future. People with a growth mindset tend to be open about their shortcomings because they see themselves as a perpetual work in progress. Today’s failing is tomorrow’s strength.
As you might guess from all of this, people who have a growth mindset about an activity, whether it’s money management, acrobatics or playing the bassoon, tend to achieve more in the long run, because they will usually be more persistent and creative in their approach to developing their skills.
The good news is a fixed mindset can grow into a growth mindset, it’s just a matter of talking about yourself and others slightly differently. Instead of saying “I’m bad with money” or “I’m good with money” (fixed permanent personal traits) you can say “I’m making a habit of tracking my spending, but I don’t do it every day yet” or “I’ve made a plan for my financial future and I’m happy with how well I’m sticking to the plan” (actions and outcomes).
You’ll find you feel more in control with a growth mindset and it will help you to a more secure financial and emotional future.
You can learn more about fixed and growth mindsets and Dr Carol Dweck who did the research around them in this episode of my podcast, Squanderlust.
No one is "bad with money"
One of the ideas I see in people who struggle to deal effectively with their finances is that they are “bad with money”. I hate this phrase. It leads to so much hurt, shame and frustration, and worst of all it’s tosh! There’s no such thing.
The idea that you can be “bad with money” or “good with money” comes from a simple assumption: that managing money is a single skill and you are either good at it or bad at it.
All-or-nothing.
Binary.
Simple.
Nonsense.
Financial success involves using a wide range of skills together, along with a measure of luck. If you tell yourself there is just one money skill and you don’t have it, you deny yourself the credit for all your existing strengths. This attitude will prevent you from realising what’s really going wrong in your money management and how to fix it. The vague undefined nature of being “bad with money” causes a sense of general helplessness that will always undermine your efforts to improve.
OK, so, what are some money skills?
Self-knowledge - so you understand what you really want, what you really don’t want and what you are and are not prepared to do to get to your goals.
Realistic goal setting - so you know where you want to go and whether that’s possible.
Collecting and analysing data - e.g. what do my bank statements say about my current spending patterns? Where might those have come from?
Planning - what, specifically, do you have to do to achieve your goals?
Research and selecting reliable sources of information.
Prioritising - making effective comparisons.
Negotiating - whether that’s a raise at work, settling a complaint or a getting a better tariff for your bills.
Assessing risk and being comfortable with uncertainty.
Monitoring progress and adapting plans to changing circumstances.
Reading comprehension, ability to identify key information in a lengthy document.
Numeracy skills e.g. to compare value for money from different deals.
Assertiveness - willingness to ask professionals awkward questions; willingness to say “no” to friends or family members when their plans don’t work with yours.
Proactive problem-solving - spotting issues and resolving them quickly.
Organisation to keep on top of your paperwork and avoid missing deadlines.
Communication skills and empathy to navigate conflict around money with people close to you.
Tenacity - for when things are unpleasant or challenging.
Moderation and self-care - so you neither overspend your way into debt nor burn out trying to be over-frugal or hustling too hard.
This is not at all a comprehensive list, but hopefully it gives you a hint of the ways that managing money involves a range of skills in balance with each other and how you will use different skills at different times.
Once you see managing money this way, the idea of being '“bad with money” makes no sense at all. You might be missing some key skills, or not applying them to your finances, because you didn’t realise how they applied. I’m sure you have at least some of them though and once you start thinking of money management as the combination of the right skills at the right time, you can work out how you need to improve.
It all just becomes much more manageable. You can do this. One step and one skill at a time.
For more on all-or-nothing thinking and how it can mess with your finances check out this episode of my podcast Squanderlust.
Understanding the poppadom effect
Who loves poppadoms? I know I do. Crunchy savoury appetisers are my favourites.
You know who else loves poppadums? (Or olives or prawn crackers or bread baskets or whatever…)
Restaurants. You know why?
Because they cost almost nothing compared to the sale price and almost everyone orders them, even customers who intended not to.
In fact, we quite often order little extras we hadn’t meant to buy. Going to the till with a new sweater we see some earrings that would go with it and think we might as well have them. We get a screen protector to go with our new phone. We buy the upgrade, the insurance, the add-on.
Why?
The poppadum effect.
Once you’re already paying for a whole meal, the cost of poppadoms seems trivial in comparison, so why not? The poppadum effect is a type of mental accounting; a way our brains trick us into making unwise decisions by using a cognitive shortcut that doesn’t take us where we really need it to go.
Once you’re committed to purchasing a new tablet (say), adding the cost of a case seems negligible. Shops know this and they play on it. Salespeople are trained to offer the extras after you’ve decided to buy and there are always tempting small items at the till.
The truth is these little extras are often the poorest value for money in the store and if we were thinking clearly, we wouldn’t have bought them at all, but in the moment of purchase we’ve already overcome the resistance to spending and the part of us that always wants more can take its chance and add to basket.
Being aware that this is a common phenomenon can help you make better decisions. I, for example, will always want poppadums, but only one, thank you.
Take a minute when a shop offers you an extra or an add-on and remember you almost certainly don’t need to make a decision about it straight away. Say you’ll think it over, because nine times out of ten you can come back for it. You might even get a discount.
I did a podcast episode on our weird irrational responses to prices. You can listen here.