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Consistent saving: Why our problem starts in the cluttered basement

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In 1955, the American Robert Henry Stotz published an essay in the Review of Economic Studies, claiming to be writing about a problem “which I believe has not yet been analyzed”. After the war, Stotz had been in Berlin as an officer for a short time and had the task of calculating how much food would have to be exported to Germany in order to feed the Germans. He later returned to the United States and studied economics in Chicago.

In the 1950s, as a young doctor of economics, he again traveled through Europe, the Netherlands, England and Sweden, and it was in those years that the idea of ​​developing a theory as to why people are wasteful or frugal – and whether we behave at all, matured can control.

About his essay he wrote a quote from Homer’s “Odyssey”, in which Odysseus asks his comrades to tie him to the mast so as not to succumb to the sirens’ singing. “And if I ask you to untie me, double the ropes.”

The quote gave the direction of Robert Stotz’s theory: “The optimal plan that we forge today,” he wrote, “is one that we do not follow.” Either we become thoughtless and wasteful – or we make our plans so, that we are already factoring in our weakness and disobedience. So you just have to forge the best plan that you can actually follow. A finding that is fundamental to the topic of saving and investing.

Whether sport or savings book – when do you start?

For decades, economists have puzzled over why we are putting things on the back burner or throwing our plans overboard. In 1968, for example, the economist Robert A. Pollack wrote an essay entitled “Consistent Planning”, and in 1999 the study “Doing it now or later” appeared in which the authors Ted O’Donoghue and Matthew Rabin asked an interesting question.

It goes like this: Imagine you have to do something that you don’t feel like doing, for example tidying up the basement. It’s September 1st, and you can do it within seven hours on October 1st – or within eight hours on October 15th, two weeks later. Everyone would say: Sure, I choose October 1st and the seven hours. Now imagine it is October 1st and you have the same choice, seven hours today or eight hours two weeks from now. What do you do? A lot of people choose the eight hours in two weeks. Because we postpone tidying up or other unpleasant activities such as tax returns or weight loss. But why is that so?

Most research concludes that our life always offers new options. The question “Should I really tidy up?” Crosses with the question “Or should I rather watch the new season of Games of Thrones‘ come to an end ..?

What does this have to do with money and savings accounts? Saving is like cleaning up: we don’t like to start. And we’re quickly throwing our plans overboard.

The bug in our brain

“Procrastination” is a very human phenomenon. It is, so to speak, a bug in our brain that we are all prone to. And we always succumb to it when it comes to making a decision on a complicated matter that does not directly change our lives. This is especially true for life insurance and old-age provision. It’s still a long time before you’re 70 years old! Even if we have made up our minds to finally solve this question, we postpone it as soon as something comes up – for example when a friend asks whether we want to come to Mallorca for a week.

If we were completely rational beings, we would compare the long-term decision (“I have to save for the future”) with the short-term one (“I am so ready for a vacation”) and then find out: As we get older we have more money in our account every month would pay off more for us in the long term than an extra week of vacation that we spend now.

However, both are possible: You just shouldn’t start to forego vacations and hoard everything for old age. There is a middle ground. It is like this: we would like to be so forward-looking, but we cannot. Why is that? Researchers can also explain that: Humans only have a poor ability to imagine the future. And because we have such a hard time imagining the future, we still cannot really gauge how 100 euros more a month would feel when we are 70 years old. Behavioral economies call this phenomenon “hyperbolic discounting”, or the sparrow-in-hand paradox.

Are you a satisfier or a maximizer?

Now you might be asking yourself: How susceptible am I to “procrastinating”, be it on the subject of saving, sport or health? You can find out with a simple question:

How long have you been looking for a new series on Netflix? Or: How do you shop in the supermarket? Are you always looking for the best choice? Do you compare long? Or is it often enough for you if the new series is good enough? Then you belong to the group of so-called satisficators. They usually only use certain data for the decision, make decisions faster and are less prone to procrastinating. They usually do not regret the quick choice, are rather optimistic and satisfied.

On the other hand, if you are someone who is always looking for the best; who still needs more information – then you belong to the group of maximizers. Such people are more prone to perfectionism, and they often feel insecure and stressed as a result. You are the one who, soon after taking out insurance, read three more comparisons and you are certain: I took out the wrong one! No equity fund will be good enough for them even after a few months. And it becomes even more problematic when buying a house.

But there are tricks, especially for the maximizers, on how to prevent yourself from becoming a long-term procrastinator. There is also a nice experiment by the well-known American behavioral economist Dan Ariely:

Three of his student classes should each hand in three seminar papers over the course of a semester. The first group was free to choose when to hand in the work. The second group had to set the submission dates at the beginning of the semester and the professor said: “For every day you hand in later, you will get a point deduction.” And the third group was simply given three fixed submission dates by the professor. Which group do you think did the best? And not only in terms of punctuality, but also in the quality of your work?

When it comes to saving, only outside pressure helps

It was actually the third group with the tough specifications that did best. The second group with the self-set dates was second best. And what about those who were free to choose anything and had nothing to fear? In this first group, many students wrote all three papers at the same time at the last minute at the end of the semester. And that will look familiar to all of us if we’re honest.

Dan Ariely concludes: The best remedy for procrastination is external pressure. As the quote from the Odyssey above Robert Stotz’s essay expresses it.

But who should put this pressure on us to save? If we don’t necessarily pay off a house – and the bank is on our backs because of it – we don’t have this pressure. But what helps just as well – we have just learned from the self-determined group of two students: We just have to commit to a procedure and rules beforehand. Then it will be much easier for us to keep it.

This can easily be applied to saving, for example like this: Most of us receive a salary on a regular basis. We usually wait until the end of the month to see how much money is left – and then there is often none left. The trick we use to trick ourselves is simple: at the beginning of the month, on the day the salary is received, part of it is automatically transferred to a savings account. Simply by standing order. Then it’s gone. The lesson from all this research and studies is amazingly simple: We not only have to know the product, but ourselves.

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