Battle Strategies for Rational Behavior

Our brain’s limbic system is emotional; focused on now; and fears loss.  Our brain’s rational cortex system is logical and does not put emotions on time frames. Therefore, successful strategies to overcome our limbic system’s emotional influence on decisions where we need to be rational do one of two things:  1) change the rewards and penalties in future decisions; and/or  2) change the number of “decision points.”

Giving Ourselves Rewards and Penalties

What kinds of rewards might we set up for future decisions?  They don’t have to be financial. More success comes from social rewards.  Charities tend to use this fact. For example, most fundraising events revolve around the social rewards of belonging to a group, and supporting a good cause.  So before heading out to the event, we can write our check in advance for the amount we wish to give.   In another realm of behavior and choices, rather than attempt a diet solo, we can agree with a group of friends to commit to a weight-loss plan.

What kinds of penalties can we set up for ourselves?  In the financial world, we can make funds unavailable. Christmas club accounts; requesting excess tax withholdings; and pensions accomplish this.  We can choose products with actual penalties, like CD’s and annuities.  We can choose investments with high costs to buy and sell, like real estate, or a business.

Other penalties we want to avoid are “felt losses.”  We feel a loss when we have to pay to work out or take a yoga class.  To increase the likelihood of doing the desired behavior, we can prepay for “painful” behavior changes.

Professionals who charge by the hour could change to flat-fee arrangements to avoid making their client incur a “felt loss” every time they meet with them.

Decision Points

Another way to trick ourselves is to manage “decision points.”  We should increase decision points for options that are hard to resist, and decrease decision points for options that are hard to do.   Here are some examples:

  • In one study of the “hard to resist” kind, people ate less than half the number of cookies when they had to individually unwrap each one.  The act of unwrapping added a decision point to the process of eating the cookie.
  • In the “hard to do” category, successful savings and investment programs are often automated, eliminating the decision point of manually making a transfer from a spending account.
  • Debtors can request a credit freeze through reporting agencies, forcing them to go through a “thaw request” in order to get more credit.
  • During the 2008 stock market meltdown, Dan Ariely, a Duke psychologist who studies behavioral finance decisions, knew he might be tempted to do something rash in his investment account.  So, he purposely input the wrong password three times so that he would be locked out.  This kept him from selling into the downturn.

Think you’re above your limbic system?  Studies find that the cortex consistently overestimates its abilities.  In fact, winning the cortex/limbic battle isn’t about willpower.    It’s about acknowledging our emotions and fears, and planning around them.

Holly Donaldson

Holly Donaldson, CFP® runs an hourly and fee-for-service financial planning practice virtually from her Tampa Bay, Florida office. She also works with clients throughout the U.S. (except Texas) interested in retirement and tax planning advice without product sales or investment management. Holly is the author of The Mindful Money Mentality: How to Find Balance in Your Financial Future (Porchview Publishing, 2013) and publisher of the award-winning monthly e-letter, "The View From the Porch."

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