Gene Hackman and Dustin Hoffman on Mental Accounting

Richard Thaler won the Nobel Prize for Economics this year for his pioneering work in Behavioral Economics. Of course, he promptly said he would spend the prize money “as irrationally as possible”. Here’s a light-hearted Q&A from the NY Times. Linked was a funny example of mental accounting, told by Gene Hackman about Dustin Hoffman. (Warning: There is a single f-bomb.)

Well, Hackman says when they were both young actors he was over at Dustin Hoffman’s house and Hoffman asks him for a loan.

Hackman goes into the kitchen and sees all these Mason jars with labels — “entertainment” and “books” and “rent” — and they all have money in them. Except for one, the one that says “food.” So he says to Hoffman: “You have plenty of money, why do you need money?” And Hoffman says, ‘There’s no money in the food jar. I can’t touch the other money. ”

They laugh, they go on, it’s funny but you know, it’s serious. Because we all do that.

If you can’t see the embedded video, here is the YouTube link.

Headwinds/Tailwinds Asymmetry, Gratitude, and Relationship Advice

freakradio

Freakonomics Radio has a podcast called Why Is My Life So Hard? where they talked with Tom Gilovich of Cornell and Shai Davidai of the New School for Social Research about the concept of headwinds/tailwinds asymmetry:

Most of us feel we face more headwinds and obstacles than everyone else — which breeds resentment. We also undervalue the tailwinds that help us — which leaves us ungrateful and unhappy. How can we avoid this trap?

Here’s a more specific example:

GILOVICH: The idea should be familiar to anyone who cycles or runs for exercise. Sometimes you’re running or cycling into the wind, and it’s not pleasant. You’re aware of it the whole time. It’s retarding your progress and you can’t wait until the course changes so that you get the wind at your back. And when that happens you’re grateful for about a minute. And very quickly, you no longer notice the wind at your back that’s helping push you along. And what’s true when it comes to running or cycling is true of life generally.

This psychological bias relates to all kinds of things in life, including why you think your parents were easier on your siblings than you or why everyone thinks their sports team is always treated unfairly.

Personally, this reminded me of some relationship advice that I was given years ago. Here’s are the basic observations:

  • You are accurately aware of every single good thing you do for your spouse or partner.
  • You are not going to notice every single good thing your spouse/partner does for you.

Simple logic leaves you with the following conclusion:

Your goal should be to feel like you are giving more than you receive. Even if in reality both of you are doing equal numbers of good things for each other, you should still feel like you are doing a bit more because you missed things. Alternatively, if you don’t feel like you are giving at least a bit more than you are receiving, then you probably aren’t doing enough. This concept could also be applied somewhat to professional work relationships.

A similar idea is that when you visit a or national park or campground, try to leave it cleaner than you arrived. You might have left some bit of garbage that you didn’t even notice.

If someone promises to pay you back, they probably won’t pay you back.

everylies

Back in the stone age of P2P lending (aka 2006), I used to read through Prosper loan listings one-by-one. Borrowers would outline their monthly budgets showing how they could afford their loan payments, along with explanations of why they needed the money (credit card debt, home improvement, etc.) and why they would pay you back (steady job, good credit history, etc). I’m not sure if this is even an option anymore, but in any case, I wasn’t very good at it.

The New York Magazine article How to Predict If a Borrower Will Pay You Back (excerpted from the new book Everybody Lies) discusses an academic paper that actually analyzed keywords within past Prosper listings against their default history. Consider the following 10 phrases:

  • God
  • promise
  • debt-free
  • minimum payment
  • lower interest rate
  • will pay
  • graduate
  • thank you
  • after-tax
  • hospital

Half of them are used by people most likely to pay back the loan. The other half are used by people who are least likely to pay back the loan. Care to venture a guess which are which?

Generally, if someone tells you he will pay you back, he will not pay you back. The more assertive the promise, the more likely he will break it. If someone writes “I promise I will pay back, so help me God,” he is among the least likely to pay you back. Appealing to your mercy—explaining that he needs the money because he has a relative in the “hospital”—also means he is unlikely to pay you back. In fact, mentioning any family member—a husband, wife, son, daughter, mother or father—is a sign someone will not be paying back. Another word that indicates default is “explain,” meaning if people are trying to explain why they are going to be able to pay back a loan, they likely won’t.

The phrases used by folks who are most likely NOT to pay back their loans are God, promise, will pay, thank you, and hospital. If someone promises that they will pay you back, they probably won’t pay you back. The more emotions are involved, the less likely they are to pay you back.

This is an interesting wrinkle as lending is such a huge part of the investing world – mortgages, bonds, insurance, and so on.

New Year’s Resolutions: Nudge Yourself Towards Success

newyears

It’s now late January. According to “the internet”, over 30% of people have already failed at their New Year’s Resolution. Well, I say let’s have a do-over since I haven’t even got around to making mine yet. Jonathan Clements has an excellent post called Committed where he outlines some strategies to help improve our chances of success. I’ve re-worked them below according to my own tastes. In my view, all of them involve making failure painful and/or inconvenient (really the same thing, just different levels and frequencies of pain).

  • Tell everyone. Announce your resolution on Facebook, Instagram, or other widespread manner. Somebody (frenemy?) will likely follow-up. You’ll want to avoid the mild shame from lots of people you know sorta well.
  • Tell just one important person. Share your resolution and deadline with a person whose opinion you care about. You’ll want to avoid that acute shame from a close friend or relative.
  • Tell nobody, but bet money on it. You could set up a bet with a friend, or use a website like DietBet. You’ll want to avoid the financial pain from losing money.
  • Put hurdles between you and bad habits. Want to spend less? Use cash for everything. Institute a cooling-off period of 1 week for every $100 of cost. Cut up or freeze your credit cards in ice. Cancel any “bad” subscriptions, and make yourself pay for it manually each month. (Try Trim if you need some help canceling things.) Remove junk food from the house, so you’ll have to go out and buy it. Make it a hassle.
  • Make it automatic. Make “good” subscriptions. Set up (or increase) an automatic paycheck withdrawal for 401(k) and/or IRA retirement accounts. Set up an automatic transfer to your savings account. Sign up for a service like Digit. After the initial setup, the lazy thing is now the good thing.

You might use one, or you might use all of them, depending on your specific goal.

Photo credit: Angus and Phil comic by Annie Taylor-Lebel.

Your Employer Took Your Money, Invested For Retirement, and You Liked It

Below is a chart taken from this WSJ article about employer-run 401(k) retirement plans and how the default settings have changed over the last decade:

wsj_vg_savings_full

The trend: Employers are making you save more initially by default, making you save a little more every year by default, and putting it in a pre-mixed target-date fund of stocks and bonds. Employees can opt out of any of these things at any time. But they aren’t.

Credit Suisse braced for complaints last year when it upped its initial automatic savings rate for new employees to 9% from 6%. It did so after years of experiencing lackluster interest from the firm’s roughly 8,500 employees—specifically younger workers—in the U.S. when meeting to discuss increasing retirement savings, said Joseph Huber, chairman of the bank’s pension-investment committee.

But Mr. Huber said the bank heard concerns from only two people, who weren’t previously putting any money into their 401(k) plans. Credit Suisse also decided to automatically increase the default rate by 1% a year until an employee reaches 15%. It doesn’t match contributions up to the highest rate, although it contributes $3,000 to $10,000 for each employee annually.

“It’s companies’ biggest fear and it was radio silence,” he said.

Well, perhaps I shouldn’t be pointing this out because the current inaction may be a good thing. The only problem is that nearly half of US workers don’t have an company-sponsored retirement plan. The bigger your company, the more likely you have one as an option.

wsj_vg_bw

The takeaway? Try using this behavioral psychology trick on yourself. Commit to saving more through automatic, recurring transfers. Use a savings account or an IRA if you don’t have a 401(k) match. Set the amount such that it hurts a bit. You can always change it back later (but hopefully you won’t need to).

Healthywage Review: Final Results, Tips, Diet Bet Comparison

hw_logoAfter reading academic studies which found that financial incentives were effective in helping people lose weight, I joined both DietBet* and HealthWage in early 2015. This week, I received my winnings from my individual “Healthy Wager” bet at HealthyWage.com. You tell them your body details, how much you want to bet, how much you want to lose, and they’ll calculate what prize to offer you. This is my final review of the entire process, including some helpful tips and a comparison with similar site DietBet.

(* See my separate DietBet Review.)

My original HealthyWage offer was for $100 a month times 9 months = $900 total, for a potential win of $100 (11.1% payout). This was based on losing 10% of my initial weight (~20 lbs) over 9 months (2/2 to 11/3/15). However, Healthywage issues 1099-MISC forms for your total gross winnings (initial bet + profit) when at or over $600. After learning about this, I asked them to adjust my bet so I would remain under this amount. I had already made my first $100 monthly bet, but all future bets were then set to $50. I had already started the bet, so I appreciated this courtesy. Now my total bets would add up to $100 x 1 month plus $50 x 8 months = $500. Times the same 11.1% payout, my total winnings would be $555.56.

Honestly, risking $500 to win $50 didn’t feel like a very good risk/reward ratio, but I wanted both the extra motivation and the ability to compare the two services. Back in 2011, Healthwage used to have a “double down” bet where participants put $150 on the line and won $300 if they lost 10% of their weight over 6 months. I guess they found that to be too generous, as I no longer see it as available.

Initial weigh-in verification. There are three ways to verify your weight:

  1. Video Verification. Smartphone video using your personal scale. The most popular option, and the one that I chose.
  2. Verification by a Fitness or Health Professional – Bring a form to your “local gym, pharmacies, corporate wellness clinics, walk-in clinics, HR reps, nurses, your personal doctor, your personal trainer or your chiropractor.”
  3. Verification at a Weight Watchers Meeting.

I followed their directions carefully, uploaded my video, and both my initial and final videos were accepted with no issues or additional requests.

Very little ongoing support during the challenge. Every month since February, I would see a $50 charge on my credit card bill from Healthwage. However, that was about it. There were no regular e-mail updates. No interim weigh-ins. No fun tokens or prize giveaways. No smartphone app. No encouraging quotes or success stories. No interaction at all.

Upon initial sign-up, I was given my 2-week window for final weigh-in (October 20th to November 3rd, 2015). HealthyWage’s two-week window is definitely more generous than DietBet’s 48-hour window, with the important difference that I was never sent any reminders by HealthyWage when the time actually came. In comparison, Dietbet sent me multiple reminders beforehand. Now, I had the date marked on my digital calendar with several alerts, so I completed my weigh-in by the second day of the window. It is quite possible that if I waited until closer to the final deadline, I would have gotten a reminder. But I wouldn’t rely on it. I got the feeling that they wouldn’t mind if you forgot about that final weigh-in.

This brings me to the important structural difference between HealthyWage and DietBet. DietBet collects participants into groups and then takes a cut from the pooled bets. The winners of each group then split the money from the losers, so that Dietbet makes the same commission amount, no matter how many people win or lose. HealthyWage, on the other hand, makes one-on-one bets with individuals. So whether you win or lose does affect their bottom line. HealthWage is more strict in its final verification requirements (see below), and in my humble opinion this structural difference is the cause.

Extra final verification hoops. Upon final weight verification, you’ll have to submit the verification video again (see above). But that’s not all. I also had to locate and upload a “before photo” and an “after photo”, which could be any photo from “around the time” of the start and end of the challenge. I also had to upload a scan of my driver’s license. Here’s a screenshot of their page asking for additional information. Note the final line in red letters:

Please note, this is you last chance to avoid scrutiny of your account. If you have cheated, do not proceed.

Not exactly giving off the warm fuzzies, are we?

Finally, despite my desire to avoid receiving a 1099-MISC, I successfully referred a few people to Healthwage and received $240 of extra money added my “pot”. (I had to win the challenge in order to get this money.) Since I did win and my final amount was now above $600, I had to provide them with my Social Security number in order for them to fill out the 1099.

Final payout options. There are two options to receive your winnings. A mailed check takes 3-4 weeks to process, with no fee. The other “fast” option is PayPal, which charges a 3% fee. I picked the PayPal option because I didn’t want to wait around for a check. However, they later clarified that it would still take 3-5 business days for Paypal transfer. The 3% fee is actually taken out by PayPal, so HealthyWage actually sends the full amount (they just choose not to subsidize the fee). In retrospect, maybe I should have just waited for the check. Here’s a screenshot:

hw_finalpay

Summary and recommendations. I committed to a Healthywage bet to lose 10% of my initial weight over 9 months. I completed my initial and final weight verifications without hassle, won the bet, and was paid my winnings. However, the process felt rather sterile and business-like. I put $500 at risk and won $55, for a payout ratio of 11%. I also won a bit extra due to referring others.

In comparison, DietBet had a much more online interaction, regular e-mail communication, and a useful smartphone app. It felt more like a friendly, supportive game. I was only able to bet $150 total, but I won $129. That’s a payout ratio of 93% (variable, not guaranteed). This was for a 10% weight loss bet over a shorter period of 6 months.

Both Healthywage and DietBet paid out and fulfilled all of their promises and obligations. My recommendation is that for more fun and most likely better payout odds, I would join DietBet first. If you want extra motivation and the ability to risk more money and thus possibly win more money, add a concurrent HealthyWage bet as well. If I had kept my initial $100 a month bet commitment, my total winnings from both sites would have been nearly $250.

Do Financial Advisors Really Keep Portfolios and Clients Disciplined?

I written about Dimensional Fund Advisors (DFA), a mutual fund family that is powered by top academic research. Another things that makes DFA unique is that they are only sold through approved financial advisors. You can’t buy them with just any old brokerage account. (Exceptions are certain 401(k)-style retirement plans and 529 college savings plans.) Allan Roth has new article about DFA funds in Financial Planning magazine, which is a trade publication targeted to financial professionals.

Why not sell directly to Average Joe investor? Here is David Butler, head of DFA Global Financial Advisor Services:

DFA has no intention of bypassing the advisor channel and offering its funds directly to retail investors. “We think advisors help keep investors disciplined,” Butler says.

In my previous post The True Value of a Real, Human Financial Advisor, I wrote about this concept. A good client advisor will help you keep your cool when the next disaster comes. Vanguard says that the biggest “value add” from good advisors is their “behavioral coaching”. A good financial advisor keeps you from making the “Big Mistake” that derails your plans.

onepage_bigmistake

But later in the same Allan Roth article, the idea of advisors as disciplinarians is called into question.

But do investors get better returns? I tested Butler’s claim that DFA advisors help keep investors disciplined by asking Morningstar to compare the performance gap between the two fund families. The performance gap is the difference between investor returns (dollar weighted) and fund returns (geometric).

Over the 10 years ending Dec. 31, 2014, the DFA annualized performance gap stood at 1.28% versus only 0.22% for Vanguard. When I showed these figures to Butler, he responded, “It’s hard to make an argument about the discipline of advisors based on these figures.

Here’s a primer on investor returns vs. fund returns. Investor returns are the actual returns earned by investors, based on the timing of their buying and selling activities.

The next step was to compare the investor returns of DFA’s largest fund, DFA Emerging Markets Value I Fund (DFEVX) with $14B in assets with the closest Vanguard competitor, Vanguard Emerging Markets Index Fund (VEMAX) with $54B in assets. I personally think a better comparison would be with their DFA Emerging Markets Core Equity I Fund (DFCEX), so I’m throwing that in as well.

DFA fund returns are often higher relative to index fund competitors. Here’s a Morningstar chart comparing the growth of $10,000 invested 10 years ago in each of the three funds. You can see the DFA funds do slightly better in terms of fund returns. Click to enlarge.

dfa_em_vg_10k

But what about investor returns? I took some screenshots of their respective Morningstar Investor Return pages.

dfa_em1b

dfa_em_vg

dfa_em3

We see that after accounting for the timing of actual cashflows, the average investor in the DFA fund actually lost money with an annualized return of -1.01% and -2.04%! Meanwhile, the average Vanguard investor earned over 6% annualized.

The three mutual funds don’t have the exact same investment objective, but they do both all pull from the overall Emerging Markets asset class. The DFA funds try to focus ways to earn greater long-term return by holding stocks with a higher “value” factor, but it also has a higher expense ratio. The Vanguard fund just tries to “buy the haystack” and passively track the entire index.

Let’s recap. The stated reason why DFA is only sold through advisors is that they offer more discipline. We are told that such behavioral coaching is where human advisors provide their greatest value. However, the evidence available suggests that DFA advisors are less good at trading discipline than when a similar fund is completely open to retail investors.

I found this rather surprising. I used to think that restricting my potential advisors to those were affiliated with DFA was one way of getting an “above-average” advisor. But after doing my own research, I found that even though DFA investments are generally lower-cost, the additional fees charged by individual advisors ranged widely from reasonable to quite expensive.

I am confident there are financial advisors that can provide the proper behavioral coaching that makes them well worth the cost. At the same time, clearly many are not providing the advertised guidance and discipline. The problem remains – how does Average Joe investor find the good ones? I still know of no clear-cut way.

Weight Management vs. Money Management Advice Similarities, Revisited

nodietI’ve written previously about the importance of permanent habit change in both managing your finances and your body weight. After finishing Smart People Don’t Diet by Charlotte Markey and then reviewing my Kindle highlights, please allow me to compare weight management and money management one more time.

I’m going to keep it simple; I’ll quote exact sentences from the book, and then tweak them ever-so-slightly to magically transform them into personal finance wisdom. Here’s a quote about her overall reason for writing this book:

Psychologists like me have been doing research about eating and weight loss for over a hundred years, and thousands of studies about these issues have been published. Scientists in related fields such as nutrition, medicine, and community health have also been studying and publishing about these issues for a very long time. And yet it seems that the most marketable and even outlandish ideas are what get the most attention when it comes to weight loss—not necessarily the ideas that are really going to work!

Here’s my Mad Libs version (all changes are bolded):

Finance academics like me have been doing research about investing for over a hundred years, and thousands of studies about these issues have been published. Scientists in related fields such as economics and behavioral psychology have also been studying and publishing about these issues for a very long time. And yet it seems that the most marketable and even outlandish ideas are what get the most attention when it comes to investing—not necessarily the ideas that are really going to work!

Sounds about right to me. Now, the recommended first step is to track your eating with a food diary:

Phase 1 is all about taking inventory and getting to know yourself—a critical first step. There should be no sense of deprivation when you follow the instructions for Phase 1. Phase 2 is when you’ll start to actually make changes to your eating behaviors.

In the same way, my recommended first step has been to track your spending with a daily log. There is virtually no change needed!

Phase 1 is all about taking inventory and getting to know yourself—a critical first step. There should be no sense of deprivation when you follow the instructions for Phase 1. Phase 2 is when you’ll start to actually make changes to your spending behaviors.

However, many successful people don’t need to keep up this daily tracking forever.

This is all common sense, but it is also supported by research: keeping a mental record of what you eat, or “counting” what you eat, is exhausting. This is one reason I don’t recommend constantly counting calories or counting anything as part of a long-term approach to weight management: food choices shouldn’t add to your mental fatigue.

The key is to measure your baseline and then make incremental but permanent changes. Nowadays, I still add up my expenses at the end of each month, but I don’t track anything on a day-to-day basis.

This is all common sense, but it is also supported by research: keeping a mental record of what you spend, or “counting” what you spend, is exhausting. This is one reason I don’t recommend constantly tracking every expense or counting anything as part of a long-term approach to money management: financial choices shouldn’t add to your mental fatigue.

Here are tips on creating better habits that won’t suck up all your willpower:

You don’t need to squeeze your own oranges to make juice; just eat an orange. You don’t need to make homemade bread; just buy whole-grain bread. It is okay to rely on frozen fruits or veggies to ensure that you eat enough each day. If you want to change your habits for the long-term, stick to a plan that is simple and create food routines. Simple is sustainable.

Simple is sustainable, I like that phrase!

You don’t need to analyze the balance sheets of individual companies; just buy an index fund. You don’t need to remember to manually save every month; make it automatic with scheduled online transfers to your IRA and/or 401k. It is okay to rely on Mint.com or PersonalCapital.com and credit/debit cards to track your overall spending. If you want to change your habits for the long-term, stick to a plan that is simple and create financial routines. Simple is sustainable.

Finally, a nice little summary. (The book has a lot of good advice, but it is a little repetitive.)

What I recommend to people to help them to lose weight is not always sexy, but it is what works. Weight-loss books change; most of them don’t stick around because they don’t work. To be healthy and lose weight, you have to change your habits. You also have to understand why you are eating. Convenience, habits, and our emotions are all an important part of our food choices.

What I recommend to people to help them to save and invest wisely is not always sexy, but it is what works. Personal finance and investing books change; most of them don’t stick around because they don’t work. To save prudently and achieve financial freedom, you have to change your habits. You also have to understand why you are earning and spending. Convenience, habits, and our emotions are all an important part of our financial choices.

DietBet Review: Game Tips, Final Results, Payout Details

dietbetfinal0

I just completed a weight-loss challenge at DietBet.com, where I bet my own hard-earned cash that I could lose 10% of my body weight within 6 months. More specifically, a group of folks (strangers or friends) agreed on a weight loss goal, put money into a community pot, and the winners split the pot. My final results were pretty surprising to me – I ended up losing over 20% of my original weight and nearly doubled the money that I put at risk. Here’s a look back at how the process worked along with some helpful tips and detailed numbers.

Game basics. You pick from a list of available “games” that are starting soon. All of them have a goal of either losing 4% of your body weight in 4 weeks (Kickstarter), or 10% in 6 months (Transformer). I chose the 10% goal and joined The Transformer (Feb 5 – Aug 4), mostly because there were over 1,000 participants and I figured there had to be some people that would drop out. A selfish move, but Dietbet uses the poker rake model where the winners take money from the losers. This is smart because Dietbet doesn’t risk any of its own money (also doesn’t have any incentive for you to lose).

Weigh-in rules and tips. Your weight is verified each round by uploading two pictures: one with your feet on a digital scale, and another of your entire (lightly-clothed) body on the same scale. You are given a special keyword to ensure that the weigh-in is done during a 48-hour window. Here are my tips:

  1. Use the smartphone app. Having the smartphone app made it so much easier to snap the pictures and upload with a few taps. iOS and Android only.
  2. Check the dates with your work schedule. During one of my weigh-ins, I was on the road. Dietbet says digital scales are “preferred” but the only thing at my hotel’s gym was a non-digital balance scale. My submission was still accepted. If my hotel gym didn’t have a scale at all, I would have had to search for a Wal-Mart or something.
  3. Know the rules and give yourself time for rejections. One of my submissions was initially rejected because I was wearing running shoes (in that same hotel gym) and I forgot that shoes aren’t allowed in the pictures. You only get a 12-hour grace period after a rejection to re-submit a qualifying weigh-in.

Overall, I felt that Dietbet was fair and quick when judging my weigh-in pictures. You may also be “audited” and be required to submit a video verification. I did not get audited.

Money details. The bet amounts can vary by game, but mine was for $25 a month times 6 months. I was offered one month free ($25 discount) if I paid $125 upfront, but since this is all about the behavioral component for me, I wanted the monthly charge to show up on my credit card bill. Players who have chosen to place their bets on a monthly basis may drop out at any time and avoid being charged for future, unplayed rounds.

There is one round per month; Rounds 1 to 6. Half of the total money bet is put towards Round 1 through 5. That is $25 x 6 / 2 = $75, split across 5 rounds is $15 per round. The other half is put toward the final weigh-in round. So $75 is bet on Round 6. Here’s a screenshot that shows my actual winnings from each round:

dietbetfinal2

  • Round 1 Breakdown: $16.09 (7% ROI on $15 bet)
  • Round 2 Breakdown: $26.94 (80% ROI)
  • Round 3 Breakdown: $31.36 (109% ROI)
  • Round 4 Breakdown: $31.50 (110% ROI)
  • Round 5 Breakdown: $30.42 (103% ROI)
  • Round 6 Breakdown: $152.87 (104% ROI)

I ended up winning $289.19, for a net win of $139.18. That’s a solid 93% return on my $150 initial bet! According to their documentation, the average “win” is 50% to 100% of your contribution. I would venture to guess that the 6-month games have a higher overall payout due to a higher difficulty level.

As noted above, Dietbet makes their money by taking a cut of the gross pot before distribution, between 10% to 25%. In a previous post, I erroneously assumed that the numbers being reported above were before fees were taken out. The numbers are actually net of fees. (You are always guaranteed never to lose money if you win, which otherwise technically could happen if enough people win.)

Your winnings can be withdrawn either via PayPal or paper check, but you have to pay a $5 fee and make special request for a paper check. When withdrawing via PayPal, you won’t pay any fees, and I was sent my money within a hour. Here’s screenshot proof of my winnings payout showing no fees.

Don’t overlook this part! When signing up for a challenge, Dietbet will automatically add $20 of “Official Weigh-in Tokens” to your cart. These are not mandatory. I think using the word “Official” is misleading. They should use “Optional” or “Additional” instead. You should treat them as extra raffle tickets for prizes like Fitbits and such. If you want that, fine, but otherwise be sure to remove them.

Cheating. I’m sure there are ways to try and cheat at these Dietbet games, despite their various anti-fraud protocols. But for one thing, I now know that if you really lose 10% of your body weight, your body will look entirely different and that is hard to fake. In addition, I think that for most people, losing the weight is worth much more than winning the money. The community board for my challenge was 100% positive in supporting other people towards their weight-loss goals.

Final thoughts. Loss aversion is quite a strange thing. Even though 25 bucks a month isn’t all that much money, the prospect of losing it was a powerful motivator. Powerful enough to get me back in the same pants size and weight as 19-year-old me. But winning 150 bucks? I’ll probably forget about it in a few weeks. An additional motivator was the fact that I told people about the challenge and didn’t want to admit publicly to failure.

While Dietbet was not there to cook my healthy meals, exercise for me, or keep me away from the late-night Doritos, it was the missing catalyst that I needed to get my health back on track. For other people this might be a heart attack or other medical issue. I’m glad I didn’t have to wait for something like that.

But remember, diets don’t work. That is, if you do something special to lose that 4% or 10%, and then stop doing that something special, you’ll eventually just gain the weight back. Instead of gimmicks, you should focus on long-term changes that you can maintain for the rest of your life. I personally use portion control and moderation in place of strict rules.

In the end, Dietbet does a good job of using loss aversion as a motivational tool. The rules are clear, the app is easy to use, and the monthly check-ins are a good frequency. Even if I “lost” the challenge but also lost 5% of my body weight, that is still something. Most importantly, you get the feeling that everyone including Dietbet wants you to succeed. I am still in an ongoing 9-month challenge at a similar site called Healthywage, but so far I would recommend Dietbet over Healthwage – the financial reward ended up being higher at Dietbet, for starters.

I was hoping to never need another Dietbet challenge again, but they just announced a beta test of a new challenge type called a “Maintainer” where you just have to maintain your weight-loss. Intriguing!

Pact App: Cash Motivation For Exercising or Eating Healthier

gEHJgtmM_400x400I am nearing my 6-month anniversary of making a weight loss bet with HealthyWage (3 months left) and DietBet (less than a week left). My aversion to losing money has really helped me remain focused on my goals, so I have a newfound respect for this niche inspired by behavioral economics. I’m also looking forward to spending my winnings! 😉

The Pact app (Free: Android, iOS) is another way that you can use money to motivate your health-related goals. (Formerly known as GymPact.) While the betting websites above track weight loss, this one has three different goals that you can choose:

  • Gym workouts. You make a commitment to “work out” at a set frequency per week. Any gym workout, run, or bike ride over 30 minutes counts, as does walking 10,000 steps in day. Only one workout per day counts, and the app will use GPS or built-in motion sensors to track your progress. You can also link up a Fitbit or Jawbone.
  • Food diary logging. You make a commitment to log your daily food intake a certain number of times per week. A complete daily food log with at least 1,200 calories and 3 recorded meals will count as a completed day. In partnership with MyFitnessPal.
  • Eat more veggies. You make a commitment to track and eat a certain number of servings of fruits and vegetables per week. This is tracked by uploading pictures taken by your smartphone and verified by other Pact users.

Some screenshots:

pactapp3 pactapp2 pactapp1

For each item that you miss, like a missed workout, you agree to a set penalty like $10. Upon starting a pact, you must provide a payment source of either a credit card or PayPal. If you complete the pact, then you will actually earn a small profit from the money taken from other users. The numbers will vary, but the reports I have found indicate that it has worked out to between 15 cents to at most $1 for each completed task, usually more towards the lower end. Pact gets their cut of the broken commitment penalties first, as that is how they make money.

In order to understand how or why such money-based incentives work, read this article from The Atlantic which summarizes recent academic research in behavioral economics:

Cash is a strong incentive, but the motivation goes away soon after the money does. That’s where those commitment contracts come in. At the end of the month-long incentive program, Royer and her team approached some of the employees with a proposal: They would hold onto your money if you committed to going to the gym once every two weeks, over a period of two months. If you met that goal, they’d give you your money back; if you didn’t, they’d give it away to charity. Not everyone the researchers approached signed on, but the ones who did—women and overweight people were the groups most likely to opt in—went 25 percent more often than those who didn’t.

[…] But it was the after-effects of the contracts—the behavioral changes that had been cemented long after the agreements expired—that most thrilled the researchers. Even two to three years after the study, those who participated in the month-long incentive program and then signed a two-month contract went to the gym at a rate that was 20 percent higher than those who weren’t entered into any program. Twenty percent may not seem like a lot, but it’s a remarkable uptick for an experimental program to maintain long after its conclusion.

Despite the hype about “getting paid to work out” or “cash rewards for health living”, this app is mostly about the human tendency of loss aversion. Losing $5 or $10 for every time you slack off and skip the gym is going to hurt a lot more than getting 50 cents if you do go. But based on my own experiences, such motivation can definitely work if you make the commitment.

I personally like this app because I don’t think I can lose another 10% of my current weight, but I can keep eating a steady stream of fruits and vegetables. I just have to consider whether I will actually remember to check-in several times a week, even if I actually do the healthy activity. Otherwise, I’ll just be losing money due to another human tendency: procrastination!

Combining Maslow’s Hierarchy of Needs & Personal Finance

Updated. You may or may not be familiar with Maslow’s Hierarchy of Needs, which is part of one theory explaining human behavior by psychologist Abraham Maslow. It suggests that there are five general levels of needs:

  • Physiological
  • Safety
  • Social
  • Esteem
  • Growth

These are often represented as a triangle due to their relative importance. Lower needs must be satisfied before the higher needs can be addressed. For example, one must first obtain food and water (physiological) before worrying about what might happen if they get in a car accident tomorrow (safety). It’s just a theory, but an interesting one.

maslow_wiki

While not all of these needs can be explicitly bought with money, it’s not too much of a stretch to see the relationship between this triangle and finances. We usually worry about paying for rent and food first before worrying about giving to charity or that long distance telephone bill.

In the book Retirement Income Redesigned, the authors make a close correlation between the hierarchy of needs and planning for retirement. Here is a figure from the book:

maslowmoney600

The new levels:

  • Survival income. How much do you spend simply to survive?
  • What-if income. You will want to protect your life. This could mean health care costs, health insurance, and/or proper portfolio planning so you don’t outlive your money.
  • Freedom income. Money needed to do the things that bring joy and fulfillment to your life. Could be travel, education, or fine wine.
  • Gift income. Money for people and causes that deserve your help. This is the replacement for “love”.
  • Dream income. This is the elusive “self-actualization” level where you find true happiness and meaning.

By breaking down your income needs, this could be another way to track your progress towards financial freedom. You can make covering your bare necessities your first smaller goal, and move on from there. This would involve both measuring your expenses and also deciding how much you’d need to save to create that much income.

Alternative View: Keep Up With The OTHER Joneses

joneses

We’ve all heard the phrase “Keeping up with the Joneses”. It even has its own Wikipedia page with competing origin stories. Perhaps the greatest marketing trick ever is making people equate social status with material goods.

Instead of worrying about the neighbors who (supposedly) make more money than us, what if we instead looked carefully at the neighbors who make less than us? Their valuable example is what can actually help us grow real wealth. What am I talking about? Michael Taylor of Bankers Anonymous explains in his post Saving is never easy:

But – and here’s a key point that you should understand – if you make $50,000 per year, you probably live on the same street as someone who makes quite a bit less than you, say, $40,000 a year.

Somehow your neighbor making $40,000 has figured out how to pay all the bills and sock away an extra few hundred dollars every month. I don’t know she does it. Frankly, I’m resentful of her success. But I’m also impressed.

Also, she doesn’t understand how the family of four two blocks away can survive on $30,000. And yet, that family does it too.

Meanwhile, in another part of your same town, another family is going completely broke on $120,000 a year. If they could just find an extra 10% more income, they think, the checkbook would balance. They could pay down that ever-growing credit card balance. But each month comes and goes, and the debts grow.

Let’s consider this in the context of financial freedom and early retirement. If you wanted to oversimplify things, you would say that you need to control your spending to the household median income level (say, $50,000 a year) while boosting your household income to double that (say, $100,000 a year). A nice, round 50% savings rate. I’m sure many households who make over $100,000 would laugh at the idea of spending under $50,000 a year. Impossible. Can’t do it. But guess what? Half of all US households are doing exactly that every day, so it certainly isn’t impossible! For some reason of human psychology, it is just incredibly hard to make that choice.