THINKER'S ALMANAC - September 12

How does our attitude about a found $10 bill reveal our irrational thinking when it comes to money?

Subject:  Financial Planning - House Money Effect 

Event: Economist Richard H. Thaler is born, 1945

If you would be wealthy, think of saving as well as getting. - Ben Franklin

Imagine you are holding a $10 bill in your hand.  Obviously this piece of legal tender is worth $10 no matter how you acquired it.  However, a study by economist Richard H. Thaller, who was born on this day in 1945, reveals that $10 is not always $10, at least in our minds.  Thaler’s experiments showed that people were more willing to risk and spend money if it came from a windfall.  In other words, people are about 40% more likely to risk a $10 bill that they found on the ground than they are to risk a $10 bill that was a part of their monthly earnings.  Thaler dubbed this the house-money effect, adopting the term from the jargon of gamblers who refer to their winnings as “house money.”

Image by Mike from Pixabay

The house-money effect explains why so many lottery winners end up losing their winnings rather than capitalizing on the opportunity to invest their windfall.  It also explains why gamblers don’t quit while they are ahead; instead, they gamble their winnings and end up losers in the long run.  Marketers know the power of the house-money effect.  

Be wary whenever you are given credit for signing up for a membership of any kind.  Companies know that giving you a little can result in them getting a lot more from you.  When you make a gain, celebrate it, but don’t set your rationality aside.  Remember that the house-money effect, like many other cognitive biases, will tempt you to lose both your good sense and your good cents. 

Think about your spending habits.  If you receive a 50 dollar bill in a birthday card from your aunt, are you more likely to spend it than the $50 you earned working mowing lawns?  Rationally, money is money, and if it is in our possession, it shouldn’t matter how we acquired it (1).

Recall, Retrieve, Recite, Ruminate, Reflect, Reason:   How does the House Money Effect influence two possible ways of looking at the same $10 bill differently?

Challenge - Money Talk:  Money is one topic that all of us have on the brain.  Do some research on quotations on money and how we should think about it.  What is one quotation that you think gives the proper perspective on how we should think about money?

ALSO ON THIS DAY:

September 12, 1683:  The Ottoman army of 250,000 troops was defeated in its attempt to take Vienna, Austria.  The Austrian army was assisted by Polish forces, led by King John Sobieski, who came at the request of Pope Alexander VIII.  After a battle that lasted fifteen hours, the Turks retreated, leaving behind weapons, stores of food, and thousands of their dead.  After his victory, the Polish King sent a dispatch to the Pope that read, “I came, I saw, God conquered.”  To celebrate the victory, Vienna’s bakers cooked up a new culinary creation, a crescent-shaped roll that mimicked the crescent moon on the Turkish flag.  Later, in 1770, the new roll was introduced to France when Marie Antoinette, originally of Austria, married the future Louis XVI.  Only then did the roll become the croissant, French for crescent.  A second culinary creation resulted from the large quantities of coffee left behind by the Turkish army as they fled.  Finding the coffee bitter, the Christian soldiers added milk and honey to make it more palatable.  For the name of this new concoction, they turned to a Capuchin monk named Marco d’Aviano, who had been sent by the Pope as an emissary to assist the commanders of the Christian army.  The tasty drink was named Cappuccino in honor of Friar Marco d’Aviano’s order, Capuchin (2).

September 12, 1961:  President John F. Kennedy presented a speech on this day at Rice University, where he said, “We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard.”  His vision was fulfilled with the Apollo Moon Landing on July 20, 1969.

Sources:

1-Dobelli, Rolf.  The Art of Thinking Clearly New York:  Harper Paperback, 2014: 251.

2-Marsh, W.B. and Bruce Carrick.  365:  Your Date with History.  Cambridge, UK:  Totem Books, 2004.

 

THINKER'S ALMANAC - January 1

How is it possible to make New Year’s resolutions more than once a year?

Subject:  Planning/Resolutions - Fresh Start Effect

Event:  New Year’s Day

Every day is a new opportunity to begin again. Every day is your birthday. -Dalai Lama

Each year on this day, people wake up resolved to start the new year afresh, throwing past bad habits into the dustbin and trying on new good habits like a new suit of clothes.  Unfortunately, for most people, New Year’s resolutions fail.  There is, however, good news from the world of science, informing all of us how we can increase the likelihood of sticking with our resolutions.

                                                                    Image by Dorothe from Pixabay 

Katherine Milkman, Professor of Operations, Information, and Decisions at the Wharton School, published a much-cited study in 2014 about what she calls the fresh start effect. Milkman’s research shows that it’s not just the beginning of a new year that inspires us to establish new, positive habits; instead, any specific date -- such as a birthday, an anniversary, the start of a new school year, or even the beginning of a new week or month -- can provide us with the fresh start we need to take on the challenge of changing our behavior.  Milkman documented the fresh start effect by collecting data on the frequency with which people search for the term “diet” on Google as well as documenting how often and when people visited gyms.  As Milkman’s data shows, a new year is not the only temporal landmark that offers a fresh start; instead, other special occasions or end dates motivate people to take action toward achieving their goals.

Of course, more fresh starts don’t necessarily mean more success, but Milkman also has helpful suggestions on specific things that people can do to increase the likelihood that their new behavior will stick.

First, it is important to record a concrete plan.  In one study, for example, people who physically wrote down their plans to get a flu shot on a specific date and time were 13% more likely to actually follow through and get the shot than those who didn’t write anything down.  Furthermore, people are more likely to follow through with changes if there is money on the line.  For example, you might put money aside and stipulate that if you don’t quit smoking for at least two months, you will forfeit the money.  This is also the principle behind the Ulysses Contract (See THINKER’S ALMANAC - April 3), where a person sets up deliberate, painful consequences for themselves as motivation to reach their goal.  If you were trying to lose weight, for example, you might stipulate that if you don’t lose at least ten pounds at the end of six months, you must contribute $100 to a cause or organization that you loathe.

Milkman also advises to “bundle your temptations” by combining one of your guilty pleasures with something that is necessary but not as much fun.  For example, you might limit yourself to only watching Netflix while riding your stationary bike.  Finally, Milkman advises you to not go it alone when it comes to pursuing your goals; instead, seek out the social support of a mentor.  One study, for example, showed that “patients with poorly controlled diabetes were paired with patients who previously had poorly controlled diabetes but had since achieved mastery over their disease. The improvements in glycemic control achieved by those mentored in this study were larger than those produced by many leading drugs” (1).

January 1 comes just once a year, but the fresh start effect should remind us that there are many more temporal landmarks that provide us the opportunity to start anew.  And by following at least some of Milkman's best practices, we can nudge ourselves towards a higher probability of following through with our goals.

Recall, Retrieve, Recite, Ruminate, Reflect, Reason:  What is the fresh start effect, and what is the best way to ensure that you keep your resolutions?

Challenge - New Year, New Start:  Write out a plan employing some of Katherine Milkman’s tips.  What is a resolution or goal that you would like to achieve this week, this month, or this year?  How might you use deliberate planning and sound psychological principles to help you achieve it?

ALSO ON THIS DAY:

-January 1, 1962:  On this day, The Beatles traveled from their homes in Liverpool to London for a New Year’s Day audition with Decca Records, one of the two major record labels in Britain.  They played 15 songs for Dick Rowe, Decca’s talent scout, who later wrote a letter to The Beatles’ manager Brian Epstein saying, “We don’t like your boys’ sound.  Groups are out; four-piece groups with guitars, particularly, are finished.” 

-January 1, 1972:  Paul Janis’ study on groupthink (Victims of Groupthink: A Psychological Study of Foreign-Policy Decisions and Fiascoes) was published on this day.  Janis explored how groups of intelligent people sometimes make bad decisions, such as the Kennedy Administration's failed Bay of Pigs invasion in 1961.  The failure resulted from Kennedy allowing his subordinates to tell him what he wanted to hear rather than encouraging them to question and criticize the invasion plan.  Fortunately, Kennedy learned from this failure and applied lessons learned in October 1962 during the Cuban Missile Crisis.  By encouraging debate and the airing of multiple points of view, Kennedy was successful in getting the Soviets to remove their missiles from Cuba.

-January 1, 1986:  One of the most successful slogans in history premiered on this day.  During the television coverage of the 50th Annual Cotton Bowl Classic football game, a television advertisement ran featuring Stevie Ray Vaughn, singing the “Eyes Of Texas.” The ad ended with the line “Don't Mess With Texas!” (2).

Sources:

1-Milkman, Katherine L. and Kevin G. Volpp.  “How to Keep Your Resolutions.”  The New York Times 3 January 2014.

2-Heath, Chip and Dan Heath.  Made To Stick:  Why Some Ideas Die and Others Survive.  New York:  Random House, 2007:  196.