Making Best Use of Your Behavioral Biases:

How To Trick Yourself (Part 1)

With some 95% of its activity occurring subconsciously, your brain can be quite tricky. With every spontaneous signal, our cerebral synapses expose us to countless behavioral biases, duping us into making misguided money moves long before our rational resolve kicks in.

As investors, we leap before we look. We stay when we should go. We cringe at the very risks that are expected to generate our greatest rewards. All the while, we rush into nearly every move, only to fret and regret them long after the deed is done.

Since many of our most powerful biases are based on reflexive rather than reflective thinking, it’s not enough just to be aware of them. We must also learn how to defend against them. Or better yet, turn them to our advantage. How do you do that? By tricking your brain right back.

Biasing Toward Better Behaviors

To illustrate, here’s one “trick” that has worked incredibly well for retirement plan participants.

When companies started offering 401(k) retirement saving plans in the 1980s, employees were traditionally invited to participate, but were not automatically enrolled. In other words, you had to take deliberate action to get started, as well as to increase your contributions over time.

Today, you still get to decide if, and how much you’ll contribute to your company retirement plan. But instead of requiring you to opt into participating, many companies now auto-enroll you unless you deliberately opt out. Your employer also may automatically increase your contribution rate to the maximum allowable amount over time, unless you say no. By requiring action to avoid saving for retirement, you can trick yourself into saving more than if you had to take action to start saving. Thus, we recruit our tendency to favor inertia, using it to improve on, rather than detract from retirement plan participation.

Auto-Save Yourself

In their aptly entitled book, “Nudge,” Nobel laureate Richard Thaler and co-author Cass Sunstein refer to this sort of trickery as a “nudge.” As they describe it, nudges should not replace your free will; they should just make it easier for you to make your own best choices.

Nudges don’t have to come from outside influencers, either. You can nudge yourself.

For example, we’ve long known about putting your personal saving habits on auto-pilot. In 1926, when George Clason first published his timeless classic “The Richest Man in Babylon,” he described this as learning to “pay yourself first.” By forming lifelong “pay yourself first” habits, you can replicate within your personal accounts the same saving success found in the retirement plan world. Leveraging what Thaler and Sunstein refer to as our “yeah, whatever” bias, the trick is to shift away from saving what’s left after spending. Instead, set aside your savings before spending the rest. In so doing, you’re once again using inertia to your advantage.

At Mejlholm Wealth Management we help set our clients up for success through education and structures to help harness your own biases and help you achieve your goals.  Stay tuned for part 2, learning how to make the best use of your behavioral biases!