Welcome to Behavioral Finance Friday
Firewords are the hallmark of the Fourth of July. We can thank John Adams for this patriotic tradition. On 2 July 1776, Adams penned a letter to his wife, Abigale. In the letter he wrote:
“The Second Day of July 1776, will be the most memorable Epocha, in the History of America,” Adams wrote. “I am apt to believe that it will be celebrated, by succeeding Generations, as the great anniversary Festival…It ought to be solemnized with Pomp and Parade, with Shews, Games, Sports, Guns, Bells, Bonfires and Illuminations from one End of this Continent to the other from this time forward forever more.”
Letter from John Adams to Abigail Adams, 3 July 1776, “Had a Declaration...” [electronic edition]. Adams Family Papers: An Electronic Archive. Massachusetts Historical Society
And as in July 1776, we still flinch when we hear the boom of fireworks. So, what in the world can this teach us about money?
Flinching at the boom of fireworks and all loud noises is a human instinct intended to keep us alive. It happens in milliseconds – no thinking required. Instincts and emotions are complex feeling-brain events.
Way back in human history, our ancestors learned (the hard way) that a loud noise was generally a harbinger that something terrible was about to happen. It could be any number of sounds, like lightning, a rockslide, a giant hungry predator charging at you from a cave, or even the snap of a twig on a quiet night.
Our brains evolved to keep us alive and pass on our genes. Therefore, those who reacted fastest to “sounds of danger” and set an emotional marker of the experience (Caution, caves can be dangerous.) survived and multiplied. So what’s this have to do with money and spending?
Your brain biology is pretty much the same as that of your ancient ancestors. So, when you hear the boom of fireworks, you instinctively flinch. But, here’s the money part. Say you forgot to buy chips, ice, and bottled water for a picnic before the fireworks. So, you decide to stop at your local grocery store on the way. No big deal, right? What could go wrong? A lot.
First, chips, ice, and water are generally not consequential purchases. You have a picture in your mind about what you want and where to find it. So there is no need for a detailed web search or even a list. Second, it’s a holiday, and you are thinking about the fun day you have planned, not money. Finally, your feeling brain is in charge and primed to spend.
You pack up your car, round everyone up, and leave for the store. As you enter the parking lot, your feeling brain alerts on the sights, sounds, and smells, and the dopamine starts pumping. It’s too hot to stay in the car, so you take the entire crew with you. And the fun begins.
You grab a cart and enter the door on the right side of the entrance – because that’s what we do. Immediately the ingeniously clever design of the store starts attacking your wallet – and you don’t even know it.
- Lots of festive holiday baked goods, picnic food and supplies, and high margin red, white, and blue stuff. So you grab some cookies for the ride to the picnic.
- Next is the deli. There’s a sale on “limited supply” brisket. It smells so good. Why not?
- You turn the end cap and remember you need sunscreen. Yep.
- You don’t see anything interesting in the baked goods, but the display for new flavors of condiments catches your eye. You remembered you wanted to try the stuff from a commercial. Besides, they are “buy one, get one free.” A sale!
- You finally reach the bottled water, find your favorite brand, and drop a couple of cases in your cart. And head to the checkout.
- You hear someone yell, “Hey, they have fireworks.” And you make room in your cart.
- The line is long, so you start perusing the magazines. The headline on one magazine cover says you can lose weight by eating only eggs for a week. Another expounds on the future of bitcoins. You start thumbing through the article on bitcoins, and when the line moves, you toss the magazine into your cart.
- You are a bit surprised that your quick stop cost over $100.00, but it’s crowded, a holiday, and the rest of the day will be fun.
- At the car, you realize you forgot the chips and ice. So you pivot and tell everyone, “I’ll be right back. I forgot the ice and chips.”
It’s okay. It wasn’t your fault that you spent so much on stuff you did not intend to buy. Your biology, beliefs, and culture made you do it.
Know That Your Brain:
- Is inherently lazy.
- It is wired to have a short-term, dopamine driven “instant gratification” bias.
- Defaults to “easy,” even if the alternative has greater long-term benefits.
- Often needs someone or something to nudge you toward the “correct” behavior.
- Needs expectations and accountability to succeed – difficult to do alone.
- Requires time to make a new behavior a habit and the new “normal.”
Over time reading my posts, you will discover how you naturally feel and think about money and how your money behavior determines your financial wellness and security.
My goal is to help you become a better steward of your money by helping you create a one-size-fits-YOU money mindset.
Think about, or better, write down in a journal or on a piece of paper your answers to the questions below.
- Have you ever done this?
- Why do you think this happens?
- What can you do to prevent this?
- Always shop from a list.
- When you enter a supermarket, enter through the left exit door and turn left. Then proceed directly to the first item on you list.
- Understand how store design and the design "tricks" used to prime you into spending.
Ted McLyman, Author, MPA, MS
Author | Entrepreneur | Business Owner | Speaker | Trainer | Lt Col, USMC (Ret) | Ironman Triathlete
Over 30 years of award-winning experience, helping individuals and organizations achieve peak performance.
Founder MyApexx Behavioral Solutions Group and Pathfinder Coaches Academy; Director, Behavioral Finance, and Advisory Board Member at www.DreamSmartAcademy.com; retired financial advisor/agent; economics instructor, US Naval Academy; Aide to the Under Secretary of the Navy for Financial Management; Head, Marine Corp Training Management Division; Commander, USMC Financial Management School; artillery officer; Executive Office, Battle Assessment Team, Operation Desert Storm.(www.tedmclyman.com www.pathfindercoaches.com @tedmclyman)
BA Social Relations, Colgate University; MA Public Administration, Pepperdine University; and MS Performance Technology, Boise State University.
Authored three books on behavioral finance, money temperament, and spending behavior. Ted's author site: www.TedMcLyman.com