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Thursday, June 30, 2011

Squelch the Want, Promote the Should

Source: Disney
Rainstone Financial has an excellent post on steps to creating a financial plan, with an emphasis on the difficulty of sticking to long-term goals. The post is based on an important paper,  "Harnessing Our Inner Angels and Demons:  What We Have Learned About Want/Should Conflicts and How That Knowledge Can Help Us Reduce Short-Sighted Decision Making" by Katherine L. Milkman, Todd Rogers, and Max H. Bazerman, that is well worth reading.

A big finding is that people plan for things they should do over the longer term but, in the present, do what they want; and the two aren't consistent:  the angel-and-devil-on-separate-shoulders-whispering-in-the-ears scene. An example that most people can relate to is gym membership. On average, people pay big bucks for the long-term membership but could save by paying a fee based on actual attendance. What they want to do in the long run (the "should") doesn't match what they actually do in the short run ( the "want").

The "should/want" conflict melds the disciplines of economics and psychology and is worth thinking about as it relates to the whole investing process. Too often, academic disciplines don't take advantage of each other's work which, IMHO, is unfortunate.

2 comments:

  1. That's why it is important to automate as much as you can!

    I transfer a portion of my paycheck to my Roth every month - if I ever need the cash I can always take it out penalty-free! (This won't happen, but it is comforting to know!)

    If I don't do this, come tax time and I need to quickly come up with a big chunk to max out the Roth limit - much harder to do!

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