Why we make bad financial choices even when we know better Your Money and Your Mind
Transcriber:
“Always wear sunscreen.”
“Eat a balanced diet.”
“A penny saved is a penny earned.”
You probably all learned
these lessons as a kid,
maybe from your parents,
or if you grew up in the ’80s,
on the public service announcements
at the end of every episode
of the G.I. Joe cartoons.
But chances are, despite knowing this,
you still stepped outside
without putting on sunscreen,
devoured an entire bag of chips in one go
or spent way more of your paycheck
than you anticipated.
So why is that?
[Your Money and Your Mind]
with Wendy De La Rosa
A few years ago, two Yale professors
coined the term “G.I. Joe fallacy”
to describe this very phenomenon.
It’s the mistaken idea that
knowing is half the battle.
But as it turns out, in most situations,
just knowing something
is not nearly enough
for you to put it into practice.
Information doesn’t
always change behavior.
As a behavioral scientist helping families
make better financial decisions,
I’ve seen people struggle to save money,
to cut back on their expenses
or to manage their debt,
even after they’ve taken
a financial literacy class.
And the reality is that
people fundamentally know
what they need to do to improve
their financial situation.
We all do.
The equation is simple:
they need to save more and spend less.
But the thing is, that’s
just really hard to do.
It’s easier said than done,
and I’ve been in this boat as well.
So for example, I had
a magazine subscription
that I knew I should just cancel.
I never read the magazine,
and every month, money was
coming out of my checking account,
and every time I reviewed
my budget, I saw it,
I knew I had to cancel it, but I didn’t.
It took me two years to cancel
that magazine subscription.
And I’m sure I’m not alone.
You probably have
some type of subscription
that you know you should cancel.
So the critical piece in all of this
is to get rid of this belief
that financial security is just
a problem that we can teach away.
In the US, for example,
we spend nearly 700 million dollars every
year on financial education programs,
yet a team of researchers have found
that these programs explained
only 0.1 percent
of the variance in financial behaviors.
Not zero, but pretty close to it.
Meanwhile, 20 states mandate
financial literacy classes in high school,
but studies have found that unless
these programs are well-implemented,
they are unlikely to have any effect
on a student’s future credit score
or their likelihood to invest.
A more significant predictor
of how well you manage your finances
is your general ability to do math.
From all of this, I’ve learned
that behavior change
is not an educational pursuit.
It’s an environmental one.
If you are struggling,
it’s not because there’s something
fundamentally wrong with you.
It’s most likely because
there is something wrong
with how your environment is set up.
Look around you.
The cues to spend money
have gotten smarter,
faster and more efficient.
Targeted ads are becoming
more personalized,
corporate content is
becoming more engaging,
and everything around you
is focusing on spending.
So let’s change that.
You can reshape your environment
and how you interact with it,
and I can guide you through it.
Over the course of this series,
I’ll take you through a step-by-step look
at how you can change your environment
and regain control of your finances.
At the end of every episode,
I’ll share practical tips
based on research
on how to spend less
and save more today –
not tomorrow, but today.
And your future self will thank you.