It’s gonna be a two-parter so watch this space!
“Go back 25 years, and double-digit savings rates were the norm. As recently as 1994 the savings rate was nearly five percent. But by 2006 the savings rate had fallen below zero – to negative one percent,” writes Dan Ariely in his 2008 hit book, Predictably Irrational: The Hidden Forces That Shape Our Decisions. He goes on: “Americans were not only not saving; they were spending more than they earned. Europeans do a lot better – they save an average of 20 percent. Japan’s rate is 25 percent. China’s is 50 percent. So what’s up with America?”
Ariely, a professor of psychology and behavioural economics – and a founding member of the Center for Advanced Hindsight – at Duke University, knows exactly what’s up. Having spent decades researching and explaining the beautiful, dark, twisted world of human decision-making, it’s safe to say he knows us more than we know ourselves.
The coronavirus crisis, of course, has just added more fuel to the burning question of over-indebtedness and the lack of financial discipline all across the globe. Most prominently in the United States, where citizens carry an average personal debt of $90,460. It also reminded me of a key dilemma Ariely puts forward in his book. Two, actually. First, why is it so hard for people to save money? And even more importantly, if we’re wired to make dumb financial decisions, should someone else make them for us?
As to the first question, Ariely has one word for you: procrastination. Something he, as a university professor, is no stranger to. “At the beginning of every semester my students make heroic promises to themselves – vowing to read their assignments on time, submit their papers on time, and in general, stay on top of things,” he writes. Spoiler alert: they never do. “In the end, they wind up impressing me, not with their punctuality, but with their creativity – inventing stories, excuses, and family tragedies to explain their tardiness. (Why do family tragedies generally occur during the last two weeks of the semester?)”
So one semester at MIT, he and his colleague, Professor Klaus Wertenbroch, decided to do an experiment and get to the root of the problem. And, because they clearly had a sense of humour, Ariely’s students in his class on consumer behaviour became the guinea pigs.
During the first class, the students learned that they would have to submit three main papers over the 12-week semester that would constitute much of their final grade. When asked about the deadline, the professor told one group of students that they could set their own deadlines but will be penalised for late submission. Another class was given no intermittent deadlines other than the end of the last class, while a third class was set a strict schedule for handing in papers in the fourth, eighth and twelfth weeks.
The winner? Group three with the rigid schedule. And what does this say about us students? Ariely explains: “First, that students do procrastinate (big news); and second, that tightly restricting their freedom (equally spaced deadlines, imposed from above) is the best cure for procrastination.”
Too bad that when our salary hits our current account, no one’s there to impose any rules on us. Of course, people often promise to save money when they are in what Ariely refers to as a “cool state”. But then they see that new car, new phone or new pair of shoes that they must have, “the lava flow of hot emotion comes rushing in.”
Which brings us to the second dilemma: is there a way to curb impulsive spending? And who should help consumers build healthier financial habits?