New Year’s Resolutions – A View from Behavioural Economics
Personal Finance

“January is always a good month for behavioural economics: Few things illustrate self-control as vividly as New Year’s resolutions. February is even better, though, because it lets us study why so many of those resolutions are broken.” Sendhil Mullainathan, Harvard University.

January is normally the time when we look for areas where we can make positive changes for the New Year. In our imagination, there is an old self who we will leave behind on New Year’s Eve, and we will welcome our new 2019 self who is wiser, healthier, and most importantly, happier. We come up with a list of resolutions to be achieved for the New Year – and sometimes we simply bring forward the lists from the previous years that have been hanging around a pile of unfulfilled plans to eat healthily, go to the gym, and manage our personal finances.

We tend to think that in 2019 we are different and we will have a different behaviour around resolutions. However, empirical evidence shows that we have about 81% – 92% chance of defaulting on our resolutions. Despite this evidence and what we know from our past experiences, extreme optimism about following through the resolutions is very common – and standard economic models can’t properly explain this behaviour.

Economic models predict that humans can easily and meticulously add up the costs and benefits of their resolutions (choices), and stick to them firmly, no matter how long-term or short-term they may be. However, this is not what we see in the real world – as partly highlighted above. Unfortunately, the field of economics only equips us with fantasized ideas of what perfect decisions should look like, while extremely weak at explaining and predicting the actual decisions that humans make.

Behavioural economists (coming from an alternative field of economics premised on how humans really make decisions in the market) have created alternative models for describing the dual nature of self – which is also backed by brain imagery findings from neuroscience. The description revolves around the dilemma caused by the internal tension between a long-sighted self (planner of New Year’s Resolutions) and a short-sighted self (doer whose self-control on the resolutions is threatened by ‘things of life’). The solution to this dilemma may require disciplining the short-sighted self on behalf of the long-sighted self.

Here are just a few behavioural economics tips to help you get started with your resolutions for 2019.

  1. Get defaulted into a savings plan: If your resolution is to increase your savings this year, sign up for an automatic monthly transfer from your bank account into your savings account or pension account. There is strong evidence across countries showing that default plans result in increased saving behaviour – in most cases beating standard economics predictions by wide margins.
  2. Pre-commit: Make a bet with your friends or family members, so that every time you are caught eating something unhealthy or missing a gym session, you will be punished by a specific amount of money, or getting to donate the money to your enemy (maybe your ex or a political party you strongly oppose). Luckily, nowadays there are mobile Apps that help to bind “commitment contracts” of many kinds, such stickk.com/, was developed by Yale University behavioural economists, Dean Karlan and Ian Ayres.

 

Happy New Year!!

About the Author

Stanford Cheelo Mujuta is a Behavioural Economist,  Expert Consultant (Public policy, financial & businesses services and NGOs)

Contact: stanford.mujuta@fizambia.com

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