For Better Spending Habits, Focus on Needs, Not Strategies

Working for a major financial firm, we were recently asked, “What single behavioral science principle is most harmful to people’s financial behaviors?” While there's a lot of competition on that list, we think the top spot goes to present bias. 

Present bias, also known as hyperbolic discounting, is our tendency to focus more on immediate rewards, experiences, and consequences than on those in the distant future. A cousin of immediate gratification, this bias helps explain why we put off creating an estate plan, don't think we need life insurance while we're alive, and make impulsive purchases we subsequently regret. 

It's this last point about regret that we want to explore in more detail. We’ve all heard that money is a leading cause of friction in romantic relationships.¹ This friction typically comes from a mismatch between spending patterns and priorities among partners. For single folks as well, most of us could use some help spending more mindfully. With inflation running high and the markets low, it’s a great time to look to behavioral science research for ideas on how to spend more wisely. As a first step, let’s start with what the research shows us doesn't work.