Katy Milkman: How to Change your Financial Habits (EP.161)

Episode Summary

Executive Summary: In this episode of the Rational Reminder Podcast, hosts Benjamin Felix and Cameron Passmore interview Katie Milkman, author of 'How to Change.' Milkman, a Wharton professor with an engineering background, discusses behavior change science, focusing on fresh starts, commitment devices, habit formation, and overcoming biases like overconfidence and present bias. She provides actionable strategies for financial goals, such as using temporal landmarks for savings, automating contributions, and leveraging social accountability. The conversation emphasizes that lasting change requires ongoing effort and tailored tactics, not silver bullets.

Main Topics: Fresh Starts and Temporal Landmarks (Priority: 5/5): Milkman explains how moments like New Year's, birthdays, or the start of a week create a sense of a clean slate, making people more open to change. Research shows highlighting these dates can increase retirement savings by 20-30%. Commitment Devices and Automation (Priority: 5/5): Discussion of tools like locked savings accounts (which increased savings by 80% in a Philippine study) and auto-deductions to overcome present bias and procrastination. Milkman emphasizes the power of making savings automatic. Habit Formation and Flexibility (Priority: 4/5): Milkman challenges the idea that rigid routines are best for habit formation. A study at Google found that flexible gym habits (varying workout times) led to more consistent long-term exercise than rigid schedules. Overcoming Procrastination and Forgetting (Priority: 4/5): People underestimate the need for reminders and concrete plans. Milkman suggests using calendar alerts, accountability partners, and commitment devices to ensure follow-through on financial goals. Social Influence and Advice Giving (Priority: 3/5): The impact of social circles on behavior is significant. Milkman discusses how giving advice can boost the giver's own motivation and performance, and how role modeling can be more effective than unsolicited advice. The Role of Laziness and Myopic Loss Aversion (Priority: 3/5): Laziness can be beneficial in finance (e.g., not checking portfolios frequently reduces trading and losses). Milkman links this to myopic loss aversion, which explains underinvestment in equities. Data Quality in Social Science (Priority: 2/5): Milkman, with an engineering background, prioritizes objective, measurable outcomes (e.g., gym swipes, savings balances) over self-reported data to ensure research reliability.

Key Arguments: Fresh starts (e.g., birthdays, new year) create a psychological clean slate that increases motivation for change, especially when things have been going poorly. Commitment devices, like locked savings accounts or public pledges, help overcome present bias by making it harder to give in to temptation. Automation (e.g., auto-deductions from paychecks) is the most effective way to ensure consistent savings without relying on willpower. Flexibility in habit formation (e.g., varying workout times) leads to more robust habits than rigid routines, as it adapts to life's unpredictability. Giving advice to others can boost the giver's own confidence and performance, as it forces them to articulate and commit to strategies. Myopic loss aversion (frequent checking of portfolios) leads to excessive risk aversion and underinvestment in equities; less frequent checking is better. Behavior change is not a one-time fix; it requires ongoing maintenance and adaptation of strategies because human impulses don't disappear.

Data Points: Increase in savings: 20-30% - When people were invited to start saving on a fresh start date (e.g., birthday) vs. an equally distant non-fresh date. Increase in savings with locked account: 80% - In a Philippine bank study, offering a commitment savings account (no withdrawals until goal) led to an 80% increase in savings among the entire group offered the account. Increase in smoking cessation: 30% - When smokers were offered a commitment device (money on the line), quitting rates increased by 30% over six months. Percentage of workouts at regular time: 85% vs 50% - In a Google gym habit study, one group had 85% of workouts at a consistent time (rigid), the other 50% (flexible). The flexible group had higher long-term attendance. Number of daily logins: 7 times per day - Average daily user of Robinhood logs in seven times a day, illustrating frequent portfolio checking.

Pivotal Quotes: "If you can auto set everything up so there's an auto-deduction from your every paycheck, every time it lands in your bank account, some of it's sent off immediately. You don't even see it, you don't interact with it, it just goes straight to a savings account or retirement account. That's great." — Katie Milkman: Discussing the power of automation in overcoming laziness and present bias for savings. "The less frequently you check, the less you trade, that might mean the more satisfied you'll be. ... The more we trade, also, the more we burn in fees. And generally, we're not that good at picking stocks. In fact, we're basically no better than a monkey throwing darts." — Katie Milkman: Explaining myopic loss aversion and why frequent portfolio checking is detrimental. "I want to wake up in the morning and feel like the day ahead of me, the things that I have on my plate are making the world a better place in some way. I'm going to enjoy doing them while I'm doing them." — Katie Milkman: Milkman's personal definition of success, emphasizing impact and enjoyment.

Implications: For investors and advisors, this episode underscores the value of automating savings, using temporal landmarks to initiate changes, and avoiding frequent portfolio monitoring. It also highlights the need for flexible habits and social accountability to sustain financial goals. The research suggests that simple, low-cost interventions (e.g., commitment devices, reminders) can significantly improve financial outcomes.