In reading hundreds of books on personal finance and talking to hundreds of thousands of people about how to change their relationship to money (for the better!), I’ve encountered three unconscious phenomena that are really helpful to be aware of.
“Until we make the unconscious conscious, we are doomed to be controlled by it and call it fate.” – Carl Jung
#1. Sudden Wealth Syndrome
Behavioral psychologists have identified a buying tendency called “induced consumption.” It means that when your level of earning goes up, your level of spending tends to go up right along with it. It has a more fun name: Sudden Wealth Syndrome. It happens to lottery winners, athletes, movie-stars, and if we’re honest, it also happens to us… when we get a new job, promotion, a windfall, a refund check. Suddenly we’re thinking, “it’s time for a new outfit or a new wardrobe” … “drinks are on me.”
That’s what’s so tough — spending impulsively and for pleasure is an easy habit to form. We just stop thinking about it, and we spend it. When we don’t acknowledge this common trap, and instead fall into induced consumption, earning a lot can still end up feeling like not enough. Becoming aware of our habits is the first step, and the next is not to change our behavior, but our thinking.”
Simply by being aware of this tendency, you’ll see train yourself to realize you have another option when your credit card starts conjuring sweet visions of spending like there’s no tomorrow in order to have the best night ever.
#2. Upgrade Treadmill
Also known as perceived obsolescence, the upgrade treadmill is what happens when they take your device, release one with a higher number after it, and suddenly yours feels very different. Less valuable. Less impressive. Almost like it says something about you that you still own it.
What do you do? Do you look at your phone from inside a backpack or purse? Or do you buy a shiny new one and feel caught up with the curve once again? At least until they release one with an even higher number after it.
By never having the newest device, you never have to keep having the newest device.
This may appeal to you or not, but once you’re aware you’re on an upgrade treadmill, at least you know you get to choose what you do next.
An amazing video, The Story of Stuff, describes perceived obsolescence this way:
“Each of us in the US sees 3,000 advertisements a day. We see more [ads] in one year than people 50 years ago saw in a lifetime. And if you think about it, what’s the point of an ad but to make us unhappy with what we already have? So 3,000 times a day we are told our hair is wrong, our clothes are wrong, our car is wrong, we are wrong. Which we can fix by going shopping.
“In the US we spend 3 to 4 times as many hours shopping as our counterparts in Europe do. So we’re in this ridiculous situation where we go to work, maybe two jobs even, and then we come home, we plop down on our new couch and watch TV, and the commercials tell us “You Suck!” so we have to go to the mall to buy something to feel better and go to work more to pay for the stuff we just bought and then we sit on the couch more and watch more commercials and then we go shopping again…and we’re on this crazy Watch-Spend treadmill, and we could just stop.”
Forget treadmill – this is an upgrade hamster wheel, spinning and spinning while getting us nowhere.
#3. Choice Architecture
Let’s talk about marshmallows.
Back in the 1960’s, a psychologist named Walter Mischel and a team of researchers at Stanford University conducted The Marshmallow Test.
They placed a group of four-year-old children, one-by-one, in a room with a marshmallow. They told the children they could eat the marshmallow whenever they wanted, but if they waited till an adult came back they could eat two marshmallows.
First off, I wasn’t aware that psychological experiments could be straight up ADORABLE.
The kids are sitting there, trying not to think about that marshmallow, but you can tell it’s their whole world. One kid starts smelling it before putting it down and putting his head in his hands. Another looks away, trying to pass the time, but his fingers creep over and hold onto the marshmallow, as if to reassure him that his sugary prize hasn’t up and vanished.
Only a small number could wait. The researchers studied both groups of children throughout their life—the ones who waited and the ones who didn’t—and discovered some surprising patterns. The high delayers—those who could wait to eat their marshmallow until the adult came back—were unaffected by a number of risk factors that did affect the low delayers—those who couldn’t or didn’t wait, or in some cases, didn’t even hesitate.
One of the low delayers was a child who seemed to be thinking, “I don’t know why you’re even telling me the rules. I intend to finish this marshmallow before you leave the room.” She didn’t say this, but then again, her mouth was full. One of the four-year-olds was able to wait, and looked by the end like a stressed-out 45-year-old.
Here is what the team discovered about those who were able to wait:
• They struggled less in stressful situations.
• They had less trouble paying attention.
• They had less difficulty maintaining friendships.
• They scored higher on the S.A.T. (by over 200 points).
• They struggled less with their weight.
• They struggled less with actual substance abuse problems.
So when I watch this experiment, and read the research that came from it, it’s pretty clear that the Marshmallow Test is not just about four-year-olds. It’s about us. It’s about our ability to control our impulses and hold out for something better.
I cannot think of a more delightful visual for the money in our pockets, our wallets, and on our phones, than the Marshmallow Test. We are in the room. All around us are ways we could easily spend our money.
There’s one problem though. This test is not about willpower. Willpower is finite, running out gradually throughout each day. This is why it’s easier to resist eating a bag of Doritos at 8am, but at 2pm and 8pm it’s much tougher.
This test is about the impact of your environment on your decision making. It’s called Choice Architecture.
It’s also know as decision design. Lots and lots of research shows you can change your choice more easily by changing your environment. What sights, sounds, and smells are around you when you make a spending decision? Are you hungry? Are you with friends? You can change your environment so that you have other things to focus on beside the thing you want to buy.
Examples of choice environments: your social circle, your exposure to craving triggers, your ability distract yourself. Things like alcohol, friends, and late-night decision fatigue are choice influencers. That’s why some people put their credit card in a block of ice in the freezer. So when they come home at 2am and decide they want to order an entire pizza, they can’t. They already chose wisely, at a time when choosing wisely was way easier.
So you’ll do better by being aware of your environment. Try to avoid shopping when you’re bored, angry, sad, with friends, or when you’re tired. In these cases, you’re combining your fatigue with a variety of emotional environments that will influence your spending. I heard someone say once, “It’s easier to keep out than to get out.” If you don’t go in the store, you are way more likely to not buy anything in that store. And if you spend money online, don’t have your credit card information saved so it only takes a click or two to buy. Make it tougher to choose badly and you’ll wind up choosing better.
The keys to changing a bad spending habit (or any kind of bad habit) is to make the undesired action you want to change more painful and more inconvenient. Put another way, make your desired action less painful and more convenient. Focus on having fun with it, and aim for small wins. This, in tandem with choice architecture, is key to changing your behavior.
Don’t be discouraged – humans are quite brilliant, resourceful, and resilient. For example, when Dr. Mischel told the child ahead of time s/he could just pretend that the marshmallow was not really there, the same child would wait 15 minutes. When the child had been given the power to pretend it wasn’t there or that it wasn’t real, it dramatically changed the child’s behavior.”