Transcript for [Building Good (& Avoiding Bad) Financial Habits I Masterclass with Anastasia Buyalskaya]

Creativity is a social experience. You're not creative alone. >> Despite its struggles, ESG can overcome the criticism and help make companies more accountable towards all stakeholders. Today we're going to talk about things like trust in teams, Bitcoin, blockchain, cryptocurrencies, >> experience-based qualities for leadership development, >> understanding how a productdriven mindset is shifting marketing and marketing traditions. >> Digital advertising is not a niche thing anymore. It's actually the backbone of the online economy. Hi, I'm Anastasia Bukaya. I'm a behavioral scientist and an assistant professor at HC Paris. Welcome to my master class on financial habits. This is a topic I've been thinking about and doing research on for a long time, and I'm excited to share with you some of the insights from behavioral science on how we can turn more of our financial intentions into good financial habits and how we can avoid bad financial habits. Before we get into the subject matter, I want you to take 10 seconds and just think about the last five financial decisions that you made. How many of those, if you're honest with yourself, did you make without thinking, without really conscious thought? Now, this is the question that we asked to you, our LinkedIn audience, a few weeks ago, and I'd like to start by sharing the results of that survey. The number one thing that most of us do without conscious thought at 33% of survey respondents is checking our bank and investment apps. Now, that sounds like me, too. I've got my phone with me everywhere I go, and I'm very guilty of responding very quickly to any sort of notification, even when I don't really want to be checking that app today. The second most common uh financial behavior that you're likely to do at 28% is making small daily purchases that maybe end up being overspending. So these are things like the coffee, a little Amazon purchase, things that feel like very small amounts in the moment but really add up at the end of the week or the end of the month. Now these first two behaviors many of us think of as bad financial habits. Checking your accounts way too often or spending on things that you later regret. But thankfully there's another habit that some of you have at 18% which is saving or investing regularly. Now saving and investing are financial intentions that most people have and it sounds like about one in five of you are able to do that without thinking which is great. And then last but not least, and perhaps most interesting for me, about one in five of you believe that you don't have any behaviors, financial behaviors, that you do without thinking. Now, that's fascinating because the research on habits suggests that about 40% of our behavior is habitual. So, what that means is that very likely you do have financial habits, but perhaps you're not aware of them. So as we go through this course, we're going to build a little bit of metacognition around our financial behaviors. So in other words, thinking about how we um make financial decisions and how we can turn more of those financial decisions into good habits. Now what is a habit exactly? Maybe we should start there. So in behavioral science, we typically think of decisions as coming in kind of two different systems. There's the system two thinking. This happens really in the prefrontal cortex, the front part of your brain, which is responsible for executive function. This is when you're really aware that you're thinking about something and that you're processing information. And clearly some financial decisions are happening in system two. So thinking about, you know, a large purchase, a high stakes purchase, like say buying a car. This is something that is not very frequent. Most of us don't purchase cars that often. And it's and it's a high stakes because it's quite expensive. And so for such a purchase, we're likely to use system two. We're going to process lots of different information around say the costs of the car and then ongoing fuel and electricity or electricity purchases. We're going to think about the potential benefits of that car, places we could go. We're going to maybe compare different models. It's going to be very goal-directed decision-m. This is not a financial habit. This is not a financial behavior done out of habit. Another example might be taxes. Again, this is not something that we do frequently and it's very high stakes and there's a lot of information to process, typically very complex, sometimes overly complex information. And so we going to be making these financial decisions in system 2 mode. We're not here today to talk about those types of decisions. What I want to talk about is decisions that happen in system one. So this is the back part of the brain. These are decisions that occur almost reflexively and very automatically. We think about this part of the brain as the autopilot. These are decisions that you're making without sometimes thinking about them. Some of the decisions that we talked about in that survey. So, we're going to talk about why some financial decisions become habits and how we can better control which financial decisions um are good habits or habits that we want to keep and avoid the behaviors that we don't want to turn into habits or bad habits. So, what are some of the financial behaviors that we might watch out for that might be um habitual? Well, think of lower stakes spending decisions. So, not the car for example, but a lower stakes, less expensive purchase like a regular coffee. This is the kind of purchase that you might make uh relatively frequently. You might actually make it at the same location and so it's perfectly ripe for becoming habitual. Let's say you pass by the coffee shop, you know, you smell the great coffee, you decide to go in, you purchase the coffee, and you get the reward of, you know, delicious coffee and maybe a nice conversation with a barista. If you've made that decision many times, your brain learns that this is a decision that you make frequently. And our brains want to help us. They want to save us time and energy. And so it moves that decision from that system 2 goal- directed part of the brain to more of the system one autopilot. And so now instead of really having to process complex information, now all that happens is there's a Q. In this case, the Q will be the coffee shop or maybe the smell of the coffee. That Q triggers a behavior. In this case, the behavior is going in and purchasing that coffee. And then there's a reward and it's a predictable reward. So there's a Q which leads to the behavior and then there's a reward. And if we see that um sequence multiple times, then that behavior is much more likely to become habitual. Let's take another example. Um, perhaps you've downloaded an investment app recently and you get the investment app sending you a pop-up notification that there's a price notification about a stock. Let's say the first time that you download that app, you get that notification. That notification triggers you to open up the app and perhaps buy that stock. And let's say you make a profit the next day. Let's say you get into the habit then of seeing the cue of the digital prompt, the pop-up notification that then triggers the behavior of opening the app and trading. And then in the beginning, let's say there's a reward. You're making profit. So that sequence is also likely to become habitual. Now, the tricky thing that's important to know with habits is that although it takes some time for habits to build, and I'll talk about that in a little bit, once something is habitual, it's actually very difficult to break. So, let's go back to that coffee shop. Once you have that Q behavior, reward, even if the reward changes, um you might still execute the behavior. This is what we call reward devaluation insensitivity. So habits are not sensitive to changes in reward value. So let's say you've had coffee at home today exceptionally. You might still purchase a coffee and then only realize afterwards, actually I didn't need this today because I already had caffeine at home. We're much more likely to have those sort of slips. We call them habit slips because we're executing a behavior automatically without a lot of conscious thought. The same with a trading app. Let's say that you start actually losing money on the trading app. Well, the habit literature would um suggest that you're still likely to trade for quite a while because those cues have reinforced the behavior of opening the app and trading. So, it goes back to this point of really needing to be aware of the behaviors that we let become habitual and make sure that we are okay and happy with those behaviors to become habitual because once we've developed those habits, they are really, really hard to break. Okay, so let's talk now in practical terms of how we can build some good financial habits or more specifically how we can take some financial behaviors and turn them into habits. The first thing I want to say is that most people have really good financial intentions. Most of us want to save money. Most of us want to invest for the long term. But there's something called the intention behavior gap in behavioral science. That means that while most of us have good intentions, we also struggle closing the gap, actually implementing on those intentions. And so we're going to talk about some of the tricks that we can use based on behavioral science research to close that intention behavior gap when it comes to financial decisions. The first thing we can do is leverage the power of defaults. So defaults are essentially a one-time decision or a one-time commitment which then works for you for a really long time. So let's take the example of saving. One thing that you can do is autoenroll into some sort of savings plan. A lot of workplaces have retirement plans and the best time to do this is when you start a new job, although you can do this anytime. You go in and you opt in to save a portion of your paycheck every single month. What that means is it's a one-time decision. It's a big decision when you make it, but then it happens for you in the future. So, you're saving without really having to go in and do anything. And we also know that you can save even more smartly by associating future salary increases with increases in the savings rate. So we learned this from research u by Richard Thaylor and Schlommo Bonzi which uh shows that people that actually tied an increase to their savings rate um were obviously able to save longer without really experiencing a decline in living standards. So to make it really concrete let's say in your first job you're only able to save 1% of your paycheck. That's very common for most of us when we need the money to pay for rent and and fund our lifestyle. But let's say you get a 5% salary increase. What you can do is you can commit to now saving 2% or even 3%. So now you're automatically increasing how much is going to savings every single month. Um and at the same time you're still taking home more than you did before the salary increase. So think about all of the financial decisions which you can default where you can make one big decision and then not worry about it and then the difficult work will be done for you. Another example is automatically investing. So very similar to opt-in savings, we know uh that in investing, time in the market beats timing the market. It's a very common phrase among investors. And what that means is that you're much better off allocating small amounts of money on a very regular basis than waiting for one big market dip that might never come. So to the extent that you can work with your brokerage account and set up some sort of automated investment such that some percentage of your savings goes into let's say your ETFs or your mutual funds, whatever it is you hold. Um that's going to be a really good decision to make sure that you're benefiting from compounding uh from as early as possible. But you can say default is not really financial habits, is it? Because it's a one-time decision. And what we're talking about is repeat behaviors. So let's think about situations in which we need to execute the behavior on a regular basis and how can we make those habitual. So in the case of savings, sometimes it's not possible to autoenroll. For example, with discretionary money where we can only save after we know how much we've spent at the end of the week or at the end of the month. um it can be very difficult to save that sort of discretionary money because savings is quite an abstract thing. We might be saving for some really far away period for something that we're not really sure um we know we're going to spend that money on in the future. And spending can feel very concrete. Walking by your favorite store, seeing in the shop window everything that you can spend money on is really concrete and really tempting. So, even though most of us have that good saving goal, it's really requiring a huge amount of willpower and a huge amount of self-control to not walk into that store and purchase something. Um, and we know from behavioral science research that relying on your willpower is not a strategy because willpower is not unlimited. And especially at times of day, let's say at the end of the day when you're exhausted, you've used a lot of your willpower, it's going to be much harder to rely on not giving in to those temptations. So what can you do? Well, first of all, you can make the savings goal much more salient and much more concrete. So rather than some abstract savings goal, uh think about what it is you're saving for. Are you saving to visit a friend? Are you saving to make a large purchase? Are you saving for a holiday? And you can actually think about making that a visual cue. So rather than something very abstract, you can put, let's say, an image of the place you want to go or the item that you wish to purchase. And ideally, you might put it next to a piggy bank. So what happens now? You've created an environment in which you come home every day and you're cued. you have this visual cue uh which reminds you of your savings goal and it makes it much more attractive and much easier to then put away any discretionary cash um or coins into that piggy bank. So the key is always not to rely on motivation. All of us, most of us have that good motivation, but really structure your environment in such a way that you're much more likely to execute on the behaviors that you want to execute on. Let me give you another example of a behavior that you can turn into a habit, which we typically think of as a good habit. Think about when you check in with your money and your personal finances. If you don't want to be doing that mindlessly on the metro, when you're not really in a position to make changes, but perhaps on a monthly basis when you can really think deeply, you can go into that goal- directed mode and make important decisions. you might consider setting up something like a monthly money check-in. If you're like me and most people and don't think of that as a really exciting way to spend your time, um I would encourage you looking at Katie Milksman's research on temptation bundling. So, her research shows that we can take something really enjoyable and tempting, let's say there's a restaurant that you love, but it's a little bit far away or a little bit more expensive, and we bundle it with something that's hard to do. So, in other words, you're going to treat yourself to that restaurant or whatever it is on a monthly basis, but you know that when you get to that restaurant, you're also going to do your money check-in. So, it makes it much easier to follow through on a difficult behavior. And even better, you can put it in your calendar. You can use the power of defaults to have a regular reminder. Let's say the first Saturday of every month is your monthly money check-in, and you're going to go to that tempting restaurant. You're going to reward yourself, but you're only going to leave when you've done that check-in, when you've made sure that your spending is in line with what you planned for the previous month, when you've budgeted for the month um ahead, and perhaps swept any additional income into your savings account. So, making sure that your financial health and your financial books are in order. So, those are some of the ways that we can build good financial habits. We can automate them. we can make them as easy as possible to execute. And of course, um it's important to also think about how to avoid bad habits. So all of us have behaviors that we wish we did less often. And the key here is really to add friction. Make those behaviors harder and harder to implement. So let's go back to our trading app example. Let's say in the beginning you were making a profit and it was really doing good for for your finances, but over time you realize that you're not very good at timing the market or perhaps you're not good at picking stocks. The best thing to do is get rid of the queue. So rather than relying on your self-control to avoid the digital cue that there's something interesting happening in the markets, you could delete the app altogether. So deleting the app will remove the queue which then inevitably would trigger the behavior that you might end up regretting. So the key again is to introduce more friction into the environment to reduce the temptation and to minimize and perhaps eventually get rid of that bad habit altogether. Research that I've done looks at the power that investment apps have over us. And those apps are increasingly gified. Um, and what we found is that that gamification can lead people to really drift away from their investment goals. And so if you're one of those people, you might not be, but if you're one of those people, it might be a good idea to add friction and to instead set aside time in which you can open your investment accounts when you do have full willpower um to make long-term investment decisions. Another example, of course, which also comes from our survey, is our bad habit of overspending. It's very easy to spend on small purchases, some of which we might later regret. And in some of my work uh on payment methods, you know, we find that payment methods are getting less and less painful. It used to be quite painful to count out cash and coins and you were very aware every time that you were spending money and that's less and less the case. More of us are, you know, tapping with our phones. We're not even paying attention sometimes to the prices of some of these small purchases. And so, one thing you can do is again add more friction. One option for a lot of payment methods is to add two-factor authentication. So instead of automatically being able to pay for something, you essentially get a little follow-up which is saying, "Are you sure?" And for a set of purchases, which really are impulse purchases um that you might not necessarily need in the moment or that you are at risk of regretting, that could be a really good idea. So think about ways to add friction. And I'll just leave you with this habits. It sounds like they're really simple and we should be able to take these great motivations and turn them into good behaviors um overnight, but I want to warn that it will take some time. So, in research that I did with uh co-authors at the Wharton School and Caltech, we find that there's really a range of time for people to um turn a behavior into a habit. For some simple behaviors, so something that might be kind of a motor behavior, doesn't require a lot of time and is frequently executed, you might be able to turn it into a habit in a number of days or weeks. But more complex behaviors, things that require time and planning, they might actually take months. So be patient with yourself as you build these good habits. And remember that sometimes you will have habit slips and that's totally normal and totally part of the journey. So I'll just leave you with this which hopefully makes it easier to remember. Try to automate as many of the A behaviors, the behaviors that would receive an A on your financial report card like saving, like long-term investing. These are all good behaviors that most of us want to do. and then add friction to the F behaviors. The behaviors that you would fail on your financial scorecard. Overtrading, overspending. These are the things that we know we do, but we want to do less of. And if you continue to automate and to add friction, then over time you will have a set of good habits and hopefully not too many bad ones. Thanks for tuning in and I'm excited to take your questions. We have lots of wonderful questions. I have them in front of me. I'm going to answer as many as I can and anything that I don't answer, I'm happy to answer on LinkedIn right after this master class. So we're going to start with a question which I've heard before which is what are the common behaviors of people who successfully build large fortunes. So in other words people that become very wealthy is there anything that they do differently from the rest of us. Well first of all I would emphasize that these are people that are very likely to be aware of their financial behaviors. These are not people that are likely overspending or making decisions that they later regret. But one important thing which I should say which is kind of a precursor to all of this is developing financial literacy. We know that there's a range in terms of financial literacy across the population. Some people don't have high financial literacy which means that they don't understand the basics of compounding, why it's so important to set money aside early, why it's so important to invest it over a long term. So the first thing I would say is really developing financial literacy. become comfortable understanding financial information. And once you have that financial literacy, it'll be easier to implement all of the good habits that we talked about today. But in general, the common behavior that that people that build large fortunes is that they save and they invest more than they spend. It's as simple as that. But being able to execute that really does rely on financial literacy. Great question. All right, the second question we have is what percentage of our income should we allocate to saving and investment versus spending? This is a great question and the answer will really depend on you, your lifestyle, where you are um in terms of your age and the goals you have ahead of you. As I said, when you're starting out with a new job, um it's likely that you're not able to put a lot of money towards saving and investment. you probably need a huge part of your paycheck just to fund your lifestyle. But as you get older and you're able to put a larger percentage into saving an investment, it's a good idea to do so, especially if you anticipate needing money for a home, perhaps for children's education, perhaps for caring for older family members or siblings. When you have that in front of you, uh then it's a good idea to put more money towards saving. Of course, when you're towards the end of your life and you've accomplished all of those large financial goals, you might again put more of a percentage on spending because then you really want to enjoy the the income that you have left and see as much of the world as possible and make sure that you're accomplishing all of your own individual goals. Okay, another great question that I see here. What financial mistakes do young entrepreneurs tend to make? So, this is a really good question and I've had the pleasure to work with a lot of entrepreneurs who make a lot of really good decisions to be clear. But one decision that I've seen them make which which tends to be a bit of a financial mistake is to remain too concentrated in the business that they've built. So, when you start out as an entrepreneur, you tend to put all of your money and really everything into your business. Now, there's good reason to do that and it's something that investors quite like to see. It means that you're dedicated to the business. You want to see it successful. But over time, if that business does gain success and you're able to take some of your money out, it's a good idea to do so. So, one of the basic rules in terms of personal finance is to diversify your money. And if you have it all concentrated in one company, that could even be a public company stock, it's considered incredibly risky. So, to the extent that you can diversify some of your money and put it in maybe um a broader ETF or a broader mutual fund, it's a really good idea to do so. Okay, speaking of ETFs, I have a question here. What do you think about ETFs? So, ETFs, for those of you that aren't familiar, is essentially a fund which tracks uh an index. So, you have an S&P 500 ETF. This is going to give you um exposure to all of the companies in the S&P 500 index. This is very different from an active manager who's picking stocks. So, he or she is trying to identify companies that are going to outperform that index. The ETF is giving you broad exposure. Now, the nice thing about ETFs, they're called passive instruments, passive investments, is that um first of all, the fees tend to be lower than active, which is already a good sign. And secondly, they're more diversified and typically a little bit less risky than a more concentrated fund. So, I'm generally a big fan of ETFs, but of course, do your research and make sure that you choose one um that has a good track record that seems well diversified and is in line with what your risk and return expectations are. Okay, I think we have time for for maybe one or two more. So, you mentioned that 40% of human behavior is habitual. Is that a lot? That's a good question. and our habits mostly helpful or harmful in our daily lives. So, as I said, the brain is really there to help us make more efficient decisions. So, the reason that something like 40% of our behavior becomes habitual is because the brain has noticed that these are behaviors we make on a regular basis. Of course, they're not just financial behaviors. There's things like brushing our teeth or commuting to work. These are things that we do really regularly. And instead of taking a lot of cognitive energy to execute these behaviors, it turns them into habits. So yes, the vast majority of habits are there for a really good reason, but the brain doesn't distinguish between the habits that you think are good or bad. And so it's up to you to really be mindful of those behaviors that you don't want to turn into habits and make sure that you don't do them too frequently or that you change your environment as soon as you see yourself doing them really in an automatic way. Okay, one last question because I I I can't resist. This is a question about my executive masters and finance course. And so this is a course that I do on the cognitive biases in investment decision-making. So today we've talked a lot about spending and saving and it turns out that there's a really interesting behavioral science about investing and the question is what are some of the most common biases that investors fall into and how can non-experts learn from them for their own financial decisions? I would say that some of the most common biases that experts fall into are things like overconfidence, not actually doing the research, not developing the financial literacy that you need to make good financial decisions. We see overconfidence even among experts. They might go into an asset class or invest in a company where they haven't really done the proper research. So, what you can do is make sure you avoid that overconfidence, develop financial literacy, always read the small print, and really understand what you're investing in. If you don't understand it, better not to invest in it. Thank you for all of these wonderful questions. I will keep answering them on LinkedIn. And I encourage you, if you're interested to learn more, to read Wendy Wood's Good Habits, Bad Habits. There will be a link to the book as well as my research on habits in the notes. Thank you for joining my master class.