After enjoying a well-deserved Christmas holiday, the annual dose of hope and determination returned for many, epitomised by the setting of New Year’s resolutions.
Gyms suddenly reached capacity. The streets were full of eager runners, freshly equipped with new shoes and luminescent clothing. After all, “this year is going to be different.” Whether it be getting fit, advancing professionally, saving more - you name it, someone has probably set that as their New Year’s resolution.
Whilst the ‘New Year, New Me’ attitude is genuine, for many it is as much of a yearly tradition to renege on these new habits. Despite the promises made just weeks ago, gym class attendance falls, weekly budget targets are missed, and the new running shoes start collecting dust. You might have even heard of the term “Quitters Day” referring to 19th January, the day on which most people abandon their resolutions according to research by the exercise tracking app Strava.
Part of the reason that abandoning New Year’s resolutions is so common, is the temporal difference between costs and benefits – achieving goals often requires incurring an emotional, physical, or financial cost in the short term, that will yield a benefit in the long term. As the initial rush of motivation fades away, continuously choosing the unpleasant option day after day becomes difficult, especially as the reward remains far in the distance. Instead of relying on motivation and willpower, the solution may be to change the incentives involved. But what would this look like in practice? And how can companies help change these incentives?
An economic approach
Economic theory assumes that individuals make decisions by maximising their ‘utility’ - the value placed on an outcome that measures its perceived benefit. Because choices rarely involve costs and benefits that are simultaneous, another common assumption relevant to New Year’s resolutions is that future payoffs are discounted – i.e., £1 now is better than £1 in a month, or a year. Health-improvement resolutions are often motivated by a perceived future health benefit that could take months to materialise. Budgeting and savings goals are justified by larger financial rewards in the future. And if it wasn’t bad enough already that the rewards for sticking to new habits lie far in the future, the benefit of abandoning is often immediate. The combination of immediate rewards for quitting and delayed future benefits of sticking, seems to be a recipe for failure.
But it’s not all bad news! Now you know that abandoning will become increasingly appealing as the initial motivation boost fades, you can do something about it!
One solution is to change the financial incentives of the decision to decrease the temptation to abandon, tipping the scales back in favour of sticking. Stickk, an app created by two Economists from Yale University, allows users to enter into a commitment contract with themselves that introduces a financial penalty for abandonment. These contracts involve four components:
- The goal (e.g. I will attend 3 gym classes a week);
- The measurement metric (e.g. I will share my location as proof of my attendance);
- A referee (e.g. a friend or relative, who is able to verify attendance);
- The stakes (e.g. for each week missed, I will lose £50).
As the final step before the commitment begins, the user decides where payments will be sent if they miss their commitment. Options include a person of their choice, a charity, or, the economists’ recommendation, an “anti-charity” - an organisation that supports a view that you strongly oppose. Designed to cater for all beliefs on even the most controversial issues, the choices include political parties, campaigns for and against hunting, abortion, and gay marriage, as well as the Arsenal, Chelsea, Liverpool and Manchester United Fan Clubs.
The knowledge that missing this week’s gym class or exceeding your weekly budget will lead to a £100 donation to a cause you passionately disagree with may be enough to tip the balance. The necessary size of this penalty will vary from person to person but by signing up for such a contract whilst motivation remains high, individuals can influence their future decisions to increase the likelihood of sticking even after motivation begins to dwindle.
A behavioural approach
So far, we have discussed how increasing the ‘cost of abandoning’ can influence decision making, but there is an alternative – reducing the ‘cost of sticking with it’. Unlike in the previous example, financial incentives are difficult to leverage here (unless you can find someone willing to pay you to stick with your resolution). But thanks to behavioural economics, all hope is not lost. Whilst the financial penalty was a key factor of the commitment contracts discussed above, part of their success comes from leveraging optimism bias – the tendency to overestimate the likelihood of future positive events – by ‘locking in’ users at their most optimistic. Identifying and harnessing behavioural tendencies provides another powerful way of impacting decision-making that can lead to similar success.
Companies and policymakers often create mechanisms that leverage the common behavioural factors that hinder our decision-making, referred to as nudge policies. One way of doing this is reducing the cognitive effort required to make a decision. In situations where the best choice is unclear, people have a tendency to rely on heuristics – mental shortcuts and rules of thumb that inform us how to act. This crops up time and time again in the world of nutrition. Eating healthily requires many daily decisions to be aligned, with thousands of possible food combinations that can lead to success. Yet often, it is simple and memorable concepts that are most successful in generating consistent behaviour change, like the 5-a-day campaign, low-fat/low-carb/high-protein dieting, and traffic-light labelling on food packaging.
Harnessing behavioural phenomena has also proven effective for companies looking to incentivise their clients and employees to save more, one of the most popular New Year’s resolutions. A seminal example is the Save More Tomorrow framework, developed by the economists Shlomo Benartzi and Nobel Prize winner Richard Thaler, that over 15 million Americans are enrolled in. Their programme included a simple feature – each time employees receive a pay rise, their contribution to their retirement savings increases by 3%.
The theory behind this policy design focuses on several behavioural concepts:
- Loss Aversion – preferring avoiding losses to acquiring equivalent gains
- Present Bias – preferring smaller payoffs to larger payoffs in the future
- Inertia – a preference for inaction, independent of the outcome
Firstly, increasing the contribution before the pay rise reduces the influence of loss aversion, as net monthly salary never decreases. Secondly, by signing up for the programme before any pay rise is received, present bias is avoided as no immediate payoff is available if the individual decides not to enrol. Thirdly, once enrolled, inertia will not be damaging as the contributions increase without any action. And finally, the 3% rule serves as a heuristic, freeing the employee from having to decide what the right amount to save is.
Banks are also focused on finding ways to help their clients save more. For example, a major bank in Spain has launched a scheme that provides users with a personalized savings goal according to their financial situation. Alongside this, to reduce the ‘cost of sticking with it’, customers can: schedule automatic transfers to another account when the balance exceeds a certain level; round every purchase to the nearest euro and transfer the remainder to a savings account; and set a savings rule as a percentage of the client’s payroll monthly income.
The British bank Barclays has gone even further by introducing a feature that allows users to set limits on certain kinds of spending – e.g. setting a monthly budget for restaurants, bars, or betting sites. Allowing customers to set such controls can further simplify day-to-day spending decisions and allow them to stick to savings goals more easily.
So whether you’ve already given up on your lofty New Year’s resolutions, are teetering on the edge of abandoning, or are still going strong, why not see if these economic tools can help you reach your goals? After all, apart from a £50 donation to a rival football team or political party, what have you got to lose?