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.
References
- Holland, K. (2015, February 4). Fighting with your spouse? It's probably about this. CNBC. https://www.cnbc.com/2015/02/04/money-is-the-leading-cause-of-stress-in-relationships.html
- Newcomb, S. (2016). Loaded: Money, psychology, and how to get ahead without leaving your values behind. Hoboken, NJ: Wiley.
- Rosenberg, M. B. (2015). Nonviolent Communication: A Language of Life (3rd ed.). Puddle Dancer Press.
- Needs inventory. (2005). Center for Nonviolent Communication. https://www.cnvc.org/training/resource/needs-inventory. Website: www.cnvc.org. Email: cnvc@cnvc.org. Phone: +1.505-244-4041.
About the Authors
Laurel C Newman, Ph.D.
Laurel Newman is a social psychologist and an applied behavioral scientist. She began her career as a psychology professor and department chair at Fontbonne University, leaving academia in 2018 to help create a behavioral science function at Maritz. Laurel consults, conducts research, and delivers corporate behavioral science curricula. She writes articles and books on topics such as employee engagement and how to build a behavioral science function within an organization. Laurel has a Ph.D. in Social and Personality Psychology from Washington University in St. Louis. She works in the Experience Center of Expertise at Edward Jones and is co-founder and advisor to the employee loyalty startup Whistle Systems.
Michael Callahan, B.Sc, CFP®, CIM, CHS
Michael Callahan is a Senior Strategist for Edward Jones Canada, where he develops advice and guidance for Canadian investors. Prior to joining Edward Jones in 2022, Michael worked with several wealth management firms and education providers. Michael is passionate about behavioral finance and economics, and his philosophy is to focus on investor behaviour as the dominant determinant of real-life investment success. He earned his bachelor's degree from Memorial University of Newfoundland, and holds the Certified Financial Planner (CFP®), Chartered Investment Manager (CIM®), and Certified Health Specialist (CHS) designations.
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