Why We Don’t Act In Our Best Interest

As human beings, we too often don’t act in our own best interest–and it’s perfectly natural, says behavioural economist Dilip Soman.

Speaking at the Financial Planning Standards Council’s Vision 2020 Symposium last month, Soman outlined the key reasons as to why our behaviour often doesn’t fuel good financial outcomes.

We don’t keep the end result in mind

Human behaviour is very goal-focused, said Soman. Because of this, it’s important to always keep the goal of your savings in mind. In an experiment conducted in India with low-income residents, it was found that putting pictures of their children on blank envelopes for cash savings doubled the amount of money put aside. While it’s easy to have good financial intentions, it’s common to let those ambitions fall to the wayside as time drags on. Although realities such as retirement or home ownership may seem quite far off, try to get yourself in the habit of thinking of them as concrete happenings. After all, time has a way of flying by whether or not you are prepared for your end game.

We spend in narrow frames

best interestToo often, people automatically do their own mental accounting, which they falsely assume to be correct. Salaries usually go towards paying bills, bonuses go towards buying yourself a special gift once a year and tips may go towards buying beers, said Soman. At the end of the day, it’s the same money regardless of the source. Treating it as such may make a big difference in your overall bottom line.

We give ourselves too many options

Contrary to the popular belief that plenty of options is a positive, this all-too-often ends up confusing consumers. Mortgages are a good example of where this can happen. Keep it simple by narrowing your choices to down to a couple good choices and then making a decision. In the same way that it’s often easier to simply pick something quickly from a long menu at a restaurant, you don’t want your financial choices being made based on frustration as opposed to some sober second thought.

We will make the right decision–so long as it’s in the future

You want to volunteer, you want to start working out, you want to start saving; these are all goals we can relate to. But there’s no time right now for these things, we tell ourselves. The notion of pre-commitment is about committing to a desired act in the future while it’s still a long ways off. Essentially, a locking mechanism will do the job just fine, said Soman, whereby your future financial goals must be fulfilled by way of having no other option.

Stickk.com is an example of a pre-commitment device found online that may steer you in the right direction. After listing the goal you’re trying to achieve, the website keeps you accountable and asks you to donate a certain amount of money depending on the importance of your goal. If users don’t stick to their original goal, the money is donated to charity–not of your choice–but of someone who is the opposite of you. Vis a vis: You likely won’t like the charity. How’s that for incentive?

Knowledge is power

So maybe it’s not natural for human beings to be good financial savers. Maybe it’s just human nature for us to be irresponsible with our money, when really, we think we’re doing a great job of money management. But if we want to succeed financially–whatever the definition of success is to you–it’s up to us to take charge of our finances, figure out what we’re doing wrong and continue along the right road to financial progress.

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Comments

  1. says

    It’s sometimes hard to accept that we aren’t acting in our own best interest. We all have a thousand reasons why we ARE, when more often than not we’re doing ourselves a disservice. It’s good to pinpoint exactly why we aren’t, in order to change things.

  2. says

    Nice answer back in return of this question with firm arguments and explaining
    everything concerning that.

  3. says

    Great article! Also a big factor is that spending and buying are very emotional. As well as being able to distinguish what do we need vs. what do we want.

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