How to win friends, avoid impulse buys and influence yourself - using 'Decision Architecture' to optimize outcomes

If you have ever had buyers remorse or felt guilty after eating that bowl of ice cream before bed, Episode 4 of Financial Opportunities Uncovered is a must listen.  Join us as our guest, Dr. Drew Hanks, Associate Professor of Human Sciences at The Ohio State University, explains how we can prevent ourselves from making decisions we might later regret.  From “winning” the bid at an auction, to negotiating for a higher salary, Dr. Hanks shares strategies and concepts like "decision architecture" that help us achieve the results we seek.  Learn how Ghirardelli and others influence our buying behavior, how to maximize the profits on the sale of your home and how you can get a better deal on your next car purchase. 

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations.

It is only intended to provide education about finance, tax, retirement and related planning topics. To determine which investments or strategies may be appropriate for you, consult your financial, tax or legal advisor prior to implementing. Any past performance discussed during this program is no guarantee of future results.

Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

Keeler & Nadler Family Wealth is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Keeler & Nadler Family Wealth and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Keeler & Nadler Family Wealth unless a client service agreement is in place.

Transcript

Andy Keeler Host

The belief that investors are rational is an underpinning of modern portfolio theory. Are we rational when it comes to the choices we make around money, diet or a promotion? About 30 years ago, I attended my first in-person auction. Back in the day, auction houses would print a catalog of items up for bid. An oriental rug caught my eye. I evaluated my choices, arrived at a price I'd be willing to pay and I went to the auction. As bidding began, I found myself bumping up against my upper limit in terms of what I was willing to pay. In the end, my bid was successful, or was it? If winning was success, then yes. If paying a fair price was success, I failed. I paid more than the item was worth. But why around the time of the financial crisis? 

Nova, a PBS channel, featured an episode called Mind Over Money. Early on in the episode, a group of graduate students are asked to bid on a $20 bill. The winning bidder gets the $20 bill, but the second highest bidder receives nothing and must pay the amount of the winning bid. Astonishingly, the $20 bill sells for $28. In episode four of Financial Opportunities Uncovered, we welcome a very special guest to help us understand how we make choices. Dr. Drew Hanks is an Associate Professor of Human Sciences at the Ohio State University. Drew, like me, is the curious type, so this should be a lot of fun. Welcome, Drew. Thanks, Andy, for having me. So, before we find out why smart people can make some pretty dumb decisions, why don't you tell our listeners how your curiosity about such things has led you down this path to professorship at Ohio State? 

Dr. Drew HanksGuest

Sure. So I've always been interested in how people are making decisions and what kind of leads them to those decisions, and really in the realm of food and monies is where I've spent a lot of my time recently. So as an economist, I really appreciate the value of rational thought, as you talked about before, but also recognize that that model, while it is a great way to think about the world and help us understand the way people behave, it misses the point in a lot of cases, like the one you just described, and so that's where this idea of behavioral economics and behavioral finance comes in. 

It's really been interesting and a part of my research since I received my PhD. For example, I spent three years at Cornell studying how displaying and marketing food can influence choice, especially among children, and I currently do some work on how overconfidence can influence financial and health decisions as well. 

Andy Keeler Host

So I'd love to explore the many facets of this fascinating phenomenon. First, what sorts of choices do we make that are mostly internal? That is, our decision making is more hardwired than it is influenced by outside factors. 

Dr. Drew HanksGuest

Daniel Kahneman, a psychologist that recently passed away, unfortunately. Really, yeah, just a couple months ago. He left a big void in the academic world, oh my gosh. 

So he won a Nobel Prize in behavioral economics and his companion, Amos Tversky, would have also won it with him if he hadn't passed away in the 1990s. But he has this interesting way to think about how our minds work, and it's oversimplified, and so a neurologist would probably not completely agree with this. But if we think it's a great way to think about how our minds work and now it's oversimplified, and so a neurologist would probably, you know, not completely agree with this, but if we think it's a great way to intuitively understand how our minds are working, we have what we call a system one mind that is very irrational and intuitive in the way it thinks, and then our system two mind makes those deliberate choices, those very cognitive type choices. Deliberate choices, those very cognitive type choices. And so, as you were talking, when we're influenced by these outside factors, really it's our kind of system one mind kicking in and kind of overriding what we might call our system two, that deliberate thought process. 

Andy Keeler Host

Gotcha. 

Dr. Drew HanksGuest

That we used to be very cognitive and careful and deliberate in our choices. 

Andy Keeler Host

In the auction, for example, the choice was made based on sort of internal beliefs, but also what the other bidders are doing. Is it more based on the fact that I bid too much for a rug or the students bid $28 for a $20 bill? Was that decision influenced by things that were more internal or more external? 

Dr. Drew HanksGuest

As you mentioned, you came to the auction with the idea of this is how much I'm willing to pay. So you're saying that's kind of your deliberate mind frame, that's that's the what the value had placed on this rug. And then, as you saw the bids being placed and you thought about, oh, I want this Oriental rug right. And then as the situation kind of unfolded and the bids were going up, then you, even though internally you had said this is the amount that I wanted to pay, it was the situation, that environment, we could argue, that pushed you up and above that initial upper bound of what you were willing to pay on the rug. 

Andy Keeler Host

That makes sense. So how do we protect ourselves from ourselves? As an example, if I explain to a new client that the most basic tenet of investing is to buy low and sell high, 100% of folks would say, well, yeah, I get that. And yet if the market drops 20% within a month of them investing, they might wanna sell. 

Dr. Drew HanksGuest

That's a great question, and one that I've written about as well. In academic literature. You can think about what Richard Thaler and also a Nobel Prize winner in behavioral economics and Cass Sunstein describe as choice architecture. It's where we arrange an environment or a situation to help us make a better choice. So it's where we preemptively anticipate what we're going to do and then set up a situation so we are going to be successful when the time comes. And so, for example, for clients who anticipate maybe getting really uneasy if the market takes a dip, they can avoid reading statements, they can avoid watching news. Or if they know something's going to happen, they can already say, hey, I'm going to avoid any sort of news that's focused on financial markets so that I'm not tempted. So that's preemptively making that decision preemptively. 

That's a great example. Making that decision, um, and you know, in a non-financial setting, for example, um, one thing I've done, so I'm I enjoy eating. I enjoy eating good food. But if I say I'm going to brush my teeth with my kid after my kids, after dinner, then I'm making a decision that I'm not going to, you know, be snacking the rest of the evening because I've already done that gotcha before. 

So the decision is made before you're in the situation. Because when you're in that situation, like you experienced, you're in the emotion, the, you know. All of that energy feeds into what you're doing. And so if you had brought a companion and you said, hey, don't let me go above this price, then they could have held you accountable in that particular setting. 

Andy Keeler Host

The brushing the teeth before a time when you know you're prone to eat a snack. That's a really good tip and I would think listeners would agree that's something that a lot of people struggle with is eating right before bed. So brush your teeth and you'll be less inclined to do that. So I guess some other things that kind of come to mind here. 

The federal government understands that most people are not great at saving. There's this concept of paying yourself first and some very wealthy people the millionaire next door that's been their strategy. Their secret to success is paying themselves first. But the average Joe struggles with that, and so the federal government and 401k plan design folks have come up with this idea where we will have what's called auto-enrollment and so when you join a company you are automatically enrolled in their 401k unless you check a box, choosing not to participate. And given human nature, most folks just they don't get around to checking the box. They might leave the form on the kitchen table it gets buried, whatever. But you mentioned also convenience for healthy foods, so sort of maybe positioning where those foods are at home or maybe not having them at home at all. 

Dr. Drew HanksGuest

Yeah, exactly so. This 401k example you mentioned, I think, is an incredible illustration of this idea of momentum. So people, you know they follow momentum in their current decisions, and so if your sort of status quo behavior is not to even think about going and signing you know the papers or worrying about checking the boxes for these things or unchecking a box, then having people automatically enrolled in 401k plans really leverages that behavior, as you're saying, and so it's really a pretty interesting and incredibly insightful way to help individuals at least save some. 

Andy Keeler Host

What we've talked about so far is kind of more the internal decision-making process and maybe, as I said, how we protect ourselves from ourselves, knowing how we behave, how we can position things in the home or routines to kind of combat that behavior. But whether we know it or not, we're influenced by external factors every day. So there are these impulse buy racks at the grocery store. To me that's the most obvious example of that. The grocers have certain things that they want you to buy. Maybe it's chapstick, maybe it's gum. I don't know why they put those particular things. I'm a fan of Trader Joe's. They always put the most tempting treats by the checkout line and it's hard to say no to those. 

One book that I found fascinating with respect to this idea is Nudge by Richard Thaler, who you referenced, and it's interesting he was also one of the folks that contributed to that Nova episode, Mind Over Money that I mentioned earlier. Another book that will bend your brain a bit is called Predictably Irrational. So, Drew, what are some examples of ways that were nudged toward a particular decision? 

Dr. Drew HanksGuest

I think the example you gave in Trader Joe's is a great example. How you know, we're at the end of the checkout line and we've made all these purchases and and there's that snack that only costs $1.50, $2. And oh, I'll just throw it in. Just throw it in, it's not a big deal. Not a big deal, but it ends up maybe adding more calories or whatever that you didn't really want or need, and so that's one way we're nudged. It reminds me of a time when I was in San Francisco and went to a Ghirardelli shop. 

Andy Keeler Host

I can see where this is going. 

Dr. Drew HanksGuest

I don't know if you've ever been in one. (I have) You walk in and the aromas are kind of out of this world and there was somebody walking around giving free samples of their chocolate and of course I walked out of there with a bag of chocolate I could bring home to my family. But if you think about it, that's the principles of nudge at work in that particular shop. What's interesting about Nudge in Richard Thaler and Cass Sunstein's book is they talk about using these principles to help us make what we might consider better decisions. And so reverse engineering, if you will, the Ghirardelli shop, so that we're actually setting up maybe our home environments, so that we're making healthier choices for brushing your teeth before you know, right after dinner. 

Or, as you mentioned, this idea of convenience you know kids are home for the summer. They're going to want snacks throughout the day, chopping up apples or carrots or you know other healthy snacks. They can open the fridge, pull those out, they're easy, quick and putting the other snacky, you know. You know calorie dense types of snacks. It's not that you can't have them, but just putting them in a cupboard where they're harder to access. 

Andy Keeler Host

That makes sense. So my father grew up during the Depression and money was scarce at the time, and he was raised by his mom and his two sisters, and so food for him was sacred and you didn't waste it. And so I went through high school, went off to college, and by about 30, I had a double chin and a spare tire, a gut, and I wasn't happy with myself, and so my first strategy was to leave food on the plate, and had my dad been there, he would have said you're wasting food. And I looked at that food that I was quote wasting as an investment in my health. I figured, let's say that that was $5 worth of food that I didn't eat. I threw it away. That's $5 less. I'm going to be paying for prescriptions or healthcare later in life, and so I. 

That was my starting point to trying to get healthy. So there's this other interesting phenomenon you go to the BMV and one of the questions they ask you is do you want to be an organ donor? And so I don't know what the statistics are, how many people opt to become organ donors, but what I understand is that in some European countries they actually reverse that scenario and they more or less assume you're going to be and you have to opt out. So how does that work in practice? 

Dr. Drew HanksGuest

No, that's exactly right. So here in the United States you are automatically a non-donor until you check the box, as you said. That leverages once again this idea of the status quo like just like with the 401k, where if I'm not enrolled, then I'm going to stay unenrolled because I'm not going to bother. If I'm enrolled, I'm going to remain enrolled because I'm not going to bother. The same principle applies here with organ donations, and we see that in these other European countries where people are automatically enrolled and you have to check a box, there are a few other things you have to do in order to disenroll. But it's pretty similar where you're checking a box and saying I don't want to do it, and going through that process disincentivizes people. So we're seeing organ donation rates over 90% in Europe, whereas in here I don't know the exact statistics, but it's much lower. 

Andy Keeler Host

It's less than that. Okay, much lower here. Yeah, that makes sense. And so Thaler had this other concept called Save More Tomorrow, can you talk a little about that? 

Dr. Drew HanksGuest

Yes, another brilliant concept out of Thaler. So the idea of Save More Tomorrow is where you, once again, you're using this decision before you actually arrive at the situation. So you're saying, okay, once I get a raise, I am going to save a certain percentage of that raise and then I'll keep the rest to spend however I want. And the idea is that you don't even see that money, you're not making the decision when that check is deposited into your account, to take money out of the account. Exactly, it's already taken out. And so you, first of all, you've made that decision ahead of time so that you don't have to make the decision once you see the money in the account. And then you're avoiding this feeling of, oh, I've got to take it out when I really want that boat or this other thing that I'm thinking of purchasing, and so it leverages multiple principles of behavior and is really a brilliant concept to help people increase their savings every time they get a raise. 

Andy Keeler Host

The title of today's episode is how to Win Friends and Influence Yourself. We've talked a lot about how we arrange things in our home to achieve a specific outcome or avoid a specific behavior, but I want to explore a little bit about how we, some people would say, win friends, but how we influence others to our benefit. I work with high net worth clients and while some of them built wealth, simply by being frugal and employed, the concept of paying themselves first sort of that millionaire next door strategy Others are savvy, assertive and persistent, maybe even stubborn at times when it comes to the way they arrange their choices to others. Drew, can you discuss how anchoring, framing or positioning can be used to one's benefit?

Dr. Drew HanksGuest

Consider you're interviewing for position and you know, or requesting an increase in salary. The idea of anchoring can be really powerful here, and instead of going to your boss and saying I would like a raise, you do your research, find a salary for positions similar to yours and say I would like a raise to this amount. You've announced that particular amount and so there's an anchor point for your boss from which the decision will then be made, as opposed to just leaving it open, and then your boss sets the anchor amount. So if you're able to set that anchor amount, then you're able to influence that particular outcome. 

Andy Keeler Host

That's powerful. And you know when I talk about folks being assertive, you know there are the folks that go to go to a car dealership and the sticker price says X and they more or less say, okay, I want that car. Price says X and they more or less say, okay, I want that car. And then there are the folks that say let's do better, I want 5% under invoice or whatever, and the salesperson says well, I can't do that, I need to talk to my manager. But the person that is in the negotiating position continues to push and push, and push and what I've found, as I said, there are the folks that are just natural savers. They're scrimpers, they're living well below their means. And then there are the ones that, just at every decision they make when it comes to money, they're pushing that envelope. What has been your experience in that regard? 

Dr. Drew HanksGuest

I remember the first time I went with my father to buy a car and he said, before we actually went in and started talking to them the sales manager, the salespeople he said you know, now this is my father talking. He said if you don't see them choke on their cigar, you haven't gone low enough. 

And the second thing he taught me was if you can't walk away from the situation, then you've already lost. If you go into it thinking I've got to get this car, then you know you may bring it down a little bit, but they've got you. 

Andy Keeler Host

Sure, yeah, that's kind of a classic struggle between right brain and left brain. The right brain wants that red car. They like the wheels, they just have to have it. The left brain says it's not a fair price, they're not negotiating, they're not choking on their cigar, so move on. And sometimes it's hard to get those two things in check. So the housing market's super hot right now. If you were listing your house, what are some strategies you could employ to maximize your profit? 

Dr. Drew HanksGuest

I would say, if we think back to some of the principles we covered today, you know you really want to focus on the parts of your home that tend to capture the most attention, and generally it's kitchens, bathrooms and some of those places that you've remodeled in your house that are looking the most up to date, that are looking the best in your house, and so you're, you're framing right that, that sort of environment, and showing the people what you know, the pictures you want them to see of the home, and you know, of course, they can come and look at your home. So you're not being deceptive in any way, but you're just highlighting those key aspects of your home that that really they really tend to sell. And I think something also being aware of the prices of homes around you, the features of those homes and how quickly those homes sell, also give you a sense of, okay, what might be the right price to ask. 

Andy Keeler Host

So, Drew, it's been a pleasure. Thanks for joining us and, as always, we thank our listeners. Be sure to tune in for episode five, where we learn about the fear asset gold as an investment. I'm Andy Keeler, and this is Financial Opportunities Uncovered brought to you by Keeler and Nadler Family Wealth. If you have any questions on anything you heard in this episode, find out more on our website, keelernadlercom. 

Announcement

The opinions expressed in this program are for general information purposes only and are not intended to provide specific advice or recommendations. It is only intended to provide education about finance tax, retirement and related planning topics. To determine which investment strategies are appropriate for you, consult your finance, tax or legal advisor prior to implementing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always, please remember, investing involves risk and possible loss of principle. Please seek advice from a licensed professional. Keeler and nadler family wealth is a registered investment advisor. Advisory services are only offered to clients or prospective clients where keeler and nadler family wealth and its representatives are property licensed or exempt from licensure. No advice may be rendered by Keller and Nadler Family Wealth unless a client service agreement is in place.