"Financial Planning ... it's not always about money."

How a ‘Self-Nudge’ Could Help You Make Better Money and Life Decisions

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David M. Brenner, ChFC®, CLU®

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These past 18 months at home, staring blankly into Zoom windows while my dogs stare blankly at me, I found myself pondering that age-old philosophical question: What really is the difference between humans and animals? 



Rousseau said our desire for self-improvement sets us apart from all other beasts. Nonsense, wrote Gertrude Stein: “The thing that differentiates man from animals is money.”

Maybe they’re both right, and the true mark of human hubris is our striving to get better at spending, saving and investing. 

It’s not going very well: We get into too much debt, misjudge risks and opportunities, buy at the peak, and sell just before things turn around. Our mental software seems coded to make us fumble our finances.

Several Nobel prizes have been awarded for proving this point. The subtitle of every work of behavioral economics could be: “How dumb are you? Let us count the ways.” Giants of the field, like Daniel Kahneman and Richard Thaler, have identified hundreds of cognitive biases that trip us up over money and life decisions. I’ve interviewed both of them over the years, and always ask variations on, “what can we do about this as individuals?” Their somewhat pessimistic answer, generally speaking, is not much. 

I am oversimplifying a bit. In “Nudge,” Thaler and Cass Sunstein argued for policies that leverage our various psychological shortcomings to our own advantage. If the mind’s GPS is a lousy navigator, nudgeHow a ‘Self-Nudge’ Could Help You Make Better Money and Life Decisionss like auto-enrollment in 401(k)s aim to reroute us off the path of least resistance and onto the road to prosperity. Making the default a better option is an example of what they call “choice architecture.”

Hal Hershfield’s work suggests that one doesn’t need a DeLorean charged with 1.21 gigawatts to send more wealth back to the future, but the far simpler technology of a pen and paper or Google doc.

Thaler says it is also possible to self-nudge or “snudge” one’s way to better financial outcomes. “For most of us, life can be improved via well-chosen snudges,” he writes in the updated, “final” edition of the book. “People might limit the amount of food in their refrigerators; they put some money they don’t want to spend into a one-year certificate of deposit that has a penalty for early withdrawal.” 

Thaler adds that we can be our own choice architects “by making certain options harder or less fun, or by eliminating them altogether.” But his work, and the book, are much more interested in nudges introduced at the macro level, large-scale interventions that are more likely to make an impact across whole populations.

Self-nudging is now getting nudged into the spotlight, however. Over the past decade, a new generation of researchers has focused much more attention on strategies for behavioral change and self-nudging, leading to some encouraging insights. Katy Milkman, a professor at Wharton, brings a sort of radical optimism to ideas about changing our own habits and behaviors — and not just because her book, “How to Change,” sounds at the outset more like self-help fare than the work of a behavioral scientist.  

“Almost all the tools that work to nudge other people, you can use to change your own decisions,” Milkman told MarketWatch. “As soon as you have insight into these things, you can structure your own life in a way that you’ll have better outcomes.” 

Self-nudging is not going to work for everyone and certainly not in all situations. Changing our behaviors is hard and there are no shortcuts. When we try to be our own choice architects, we may end up just designing castles in the air. But the techniques Milkman and her colleagues describe do add to our arsenal of weapons for facing off against our own worst instincts. 

Here are a few of the key strategies:

Temptation bundling

Like many behavioral scientists, Milkman began by experimenting on herself when she was a grad student. Frustrated that she was not exercising enough, she had an insight that has been proven out in experiments as a strategy for overcoming resistance to the important activities we avoid. 

“So I set a rule and said, ‘I’m only allowed to enjoy indulgent entertainment while I’m exercising at the gym.” Milkman said. This is called “temptation bundling,” combining an activity you’re avoiding with one you actually love doing. Milkman ran temptation-bundling experiments at the gym and found that those who were given audiobooks to listen to showed up for workouts significantly more often — at least for a time. (I’ve written about how audiobooks can change the experience of running, even if the multitasking does slow one’s pace.)

Though a great number of her studies involved fitness, which Milkman said is the behavioral science equivalent of experiments on fruit flies — temptation bundling can be applied to a wide variety of financial chores we dread, too: setting budgets, doing taxes, filing expenses. Since reading Milkman’s book, I put this to the test: Letting myself listen to music at work only while I am doing the most tedious administrative tasks on my to-do list. It’s like getting the reward for doing something while it’s in progress instead of afterward. My temptation bundling does seem to alleviate the pain, at least a little.

Commitment Devices

The science of self-nudging comes down to a process of elimination of bad choices. It is a tactical reduction of your own freedom. An extreme and effective version of this is called a commitment device, and it isn’t really a new idea at all. 

The most famous example of a commitment device is in Homer’s Odyssey. If you remember, the Sirens’ sultry, but deadly, singing would entice sailors to smash their ships into the rocks. Our hero, Odysseus, wanted to stream their song without dying, so he had his crew put noise-canceling wax in their ears and ordered them to tie him to the mast and promise not to release him no matter how much he begged. If that seems masochistic, it is—in fairness, this was a guy who had a 10-year commute.

Commitment devices are not always so epic or BDSM, though. In an experiment economists ran in the Philippines, a bank offered some customers a standard savings account with interest, while others had the option of a commitment account that locked their money up for a time with no additional benefit. “They found that the people with access to this special new kind of account ended up saving 80% more year over year,” Milkman said. 

Here’s the cool thing about money: It is also a form of time travel. It is a technology for transferring value across time, and you can use it to Venmo between the two most important people in your life: You, and the vaguely you-like person you’ll become in 10, 20 or 60 years. 

When she tells her students about this experiment, they are baffled, Milkman said, because from a rational economics perspective, no one should agree to such constraints. “It’s better for the bank, they say. But it turns out for some customers, it’s better for them, too.”

There are apps, such as Stickk, that streamline the process of creating your own commitment device. You set up your goals and put real money on the line, which you can designate for a charity you hate, if you fail to follow through. A friend or enemy can be chosen as a referee to keep you honest. I set up a commitment device in the app to make progress on a writing project I can’t seem to get moving on. The jury’s still out on whether it will work, or whether a certain charity will get 250 of my hard-earned dollars.

Time Travel

It’s impossible to get better at money without getting better at time first. Time is money, as the guy on the $100 bill says. And yet, humans may be even worse with time than they are with money. Even those of us whose hearts beat as steadily as a metronome, who seem to move with effortless grace and rhythm across all of life’s dance floors, have trouble reckoning with past, present and future hours, years and decades. 

Here’s the cool thing about money, though: It is also a form of time travel. It is a technology for transferring value across time, and you can use it to Venmo between the two most important people in your life: You, and the vaguely you-like person you’ll become in 10, 20 or 60 years. 

Hal Hershfield, a professor at UCLA, conducted a series of fascinating experiments on our perception of our future selves. His work suggests that one doesn’t need a DeLorean charged with 1.21 gigawatts to send more wealth back to the future, but the far simpler technology of a pen and paper or Google doc.

By regularly writing letters to our future selves, and by making this older version of us a real, three-dimensional character, we can do a better job in balancing the trade-offs between our present-day hedonism and our future well-being (or hedonism). 

“There’s always some tension between what I want to do right now, and what I think is best for my future self,” Hershfield told me. “Having this sort of self-conversation may make it easier to recognize the benefit of something like enrolling in an automatic savings account.”

In writing these letters it also pays dividends to map out how you will respond should the S&P 500  plummet 50%, your Tesla  shares rocket to the moon. This is a form of self nudge in the sense that you are strategizing with a cool head, rather than waiting for your emotions to take the wheel in the heat of the moment, Hershfield said.

How we frame money and time can also improve our financial behaviors. In one experiment, Hershfield gave people the option to invest $150 a month, $35 a week, or $5 a day. Which would you pick? 

Well, they all add up the same thing, and yet people found committing $5 a day far more palatable. This is kind of a reverse of “skip the latte,” that most cliched and needlessly decaffeinated bit of personal-finance advice. 

“That advice gets mocked because most people aren’t going to have a well-funded retirement just by saving $5 a day,” Hershfield said. “But just signing up represents that first barrier, right, and so, $5 a day makes it easier to go from nothing to something, and then from something to something more.”

Time can also be a valuable tool in jump-starting new habits, Milkman’s research on “fresh starts” suggests. The calendar can turbocharge change, because the start of the school year, a birthday, new year or even new month seem to help us frame the end of a bad habit and the start of a new one. Well-chosen fresh starts can be just the self-nudge we need to get going.

Wear your retainer

Habits are hard to start, and even harder to maintain. New Year’s resolutions rarely make it to Groundhog Day. We’ll make changes in our diet and spending, but our waistlines and wallets seem to eventually revert back to their old stature. Anyone who has ever had braces knows that if you don’t wear your retainer, those hard-earned straight teeth don’t stay straight for long. 

“This is why I’m more optimistic when it comes to nudging ourselves to make longer-term changes,” Hershfield said. “And, I’m somewhere between agnostic and pessimistic about changing the day-to-day ones.”

Thinking about whole categories of decisions or making one-time set-it-and-forget-it moves are more likely to succeed because daily spending is much more like eating: Online there is temptation to buy “a little bit of everything all of the time,” as the comedian Bo Burnham puts it. 

A retainer is basically proof that braces alone don’t really solve the problem. Crooked teeth may be a chronic condition. And given that so many of our troubling behaviors are also chronic conditions, “we need to think of persistent solutions rather than going for a one-and-done fix,” Milkman said.

Retaining behavioral change over the long haul is an area researchers are now giving much more attention. Hershfield said he’s interested in how that dialogue between present and future self could help drive habit change. 

Milkman said one experiment she did suggests that rigid habits don’t always make the strongest habits: Which of these two habit changers is more likely to succeed: Someone who commits to exercising at the same time every day or someone who commits to exercising at some point every day? It surprised me to hear that in Milkman’s experiment, flexible habits worked better for many.

Habits are essential to getting ourselves to change for the better, but there is such a thing as too much autopilot. 

Don’t eat the stale popcorn

Academic papers don’t normally keep me up at night, at least not since I was a college student. But one I read last month sent me spiraling into a low-level panic. It wasn’t about the pandemic or climate change or any of the 14 other calamities all the Cassandras and Jor-Els keep warning us about. It was a study on popcorn.

Look, I love popcorn. Or at least I thought I did. But Wendy Wood, a psychology and business professor at USC, has me questioning everything. In an experiment she conducted about a decade ago, half the subjects at a movie screening were handed boxes of freshly popped kernels, gloriously salted and buttered. The other half got week-old stale popcorn with the texture of rubbery cardboard.

Here’s what gave me a mild case of existential dread: Among the moviegoers who reported they always ate popcorn at the theater, freshness and taste proved irrelevant. They consumed roughly the same amount no matter if they were served the fresh stuff or the stale cardboard. The act of inhaling popcorn at the movies was so automatic, they didn’t seem to notice or care they were snacking on something like Amazon packing materials.

Nothing in life can be achieved without habits. We need them just to get through the day. But think about how much time and money we waste or while away consuming the equivalent of stale popcorn. 

I don’t know about you, but I would have definitely eaten the stale popcorn. So would my dogs. So perhaps the difference between humans and animals is that while we are both creatures of habit, humans get to feel guilty about it — and maybe, with a little luck, we can actually do something about it.

Write to editors@barrons.com

This article originally appeared on MarketWatch.

David M. Brenner profile photo

David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
Schedule a Meeting