Do not lead us into temptation!
One day, Ibrahim Yücel decided to lock his head in a cage. After his father's death of lung cancer, Yücel had made several unsuccessful attempts to stop smoking. No one except his wife and his daughter had a key for the cage, which was to be taken off his head only for eating. He accepted this in order to finally come to grips with his lack of self-control.
The self-control problem is presumably as old as humanity itself. We fall victim to it when we resolve to cut back on sweets, only to buy some chocolate at the supermarket checkout. Or when we should work out but prefer to spend the day on the couch. Whenever we succumb to our inner demons. Whenever we surf Facebook or attend to tasks we enjoy while postponing or deferring to the Greek calends those unpleasant items on our to-do lists.
More often than not, this makes no sense from a purely rational point of view, as was illustrated as early as the 1960s by Stanford psychologist Walter Mischel in his marshmallow test. He gave children a marshmallow. They were free to either eat it immediately or wait for 15 minutes and get a second marshmallow as a reward. Some of the children ate their marshmallows. The others, those patient enough to wait, were not only rewarded in the context of this test but also did better later in life: According to a long-term study, they reached higher positions in their careers and had more money and stabler families than their peers with lower self-control.
Psychologically speaking, the self-control problem can be explained as follows: In us, two forces fight against each other: the rational planner and the irrational doer. The doer makes impulse decisions. The foresighted planner tries to keep the doer under control—and fails time and again.
In finance, too, we fall victim to the self-control problem. When we use several credit cards and go over their limits. When we make insufficient retirement provisions or none at all. All of these things are bound to have negative repercussions in the long run, and yet we do them.
There are even finance products designed to help you improve your self-control: In the United States, “Christmas Clubs” are highly popular. Their members make monthly or weekly deposits that they cannot withdraw until shortly before Christmas. For a long time, these deposits did not pay any interest. Hence, joining such a club made absolutely no sense from a rational point of view. But people wanted to take precautions against spending their money on things other than Christmas presents. Moreover, there is something called “Save More Tomorrow” in the USA. Under this scheme, you commit yourself in advance to pay part of any future increases in your compensation towards retirement provision. Once you have joined, you cannot reverse your decision.
No matter where in your life you lack self-control, there are some tricks that will help you beat your inner, irrational doer: Make a contract with yourself, ideally a written and signed one. By doing this, your current self (the planner) forces your future self (the doer) to act rationally in a given situation. Take the steps that are necessary to achieve success: For instance, buy no more chocolate or cigarettes; or join the Weight Watchers or a workout group. Set up a standing order to transfer money from your bank account towards retirement provision. These strategies work because the irrational doer is lazy and hence will not do anything that requires things to be changed or reversed. As a stopgap measure, the rational planner can set up simple rules for the irrational doer to follow—such as the investment rule of thumb: “Consume only the dividends, and leave the substance (the portfolio of investments) untouched. This makes it possible for your current self to prevent your future self from repeatedly selling investments in order to have money to spend and from cannibalizing your retirement provisions as a result. Good luck in improving your self-control!
This article was published in the Austrian business magazine GEWINN. Read the original article here (in German).