
Energy usage
Understanding your energy usage
Everyone has unconscious biases they struggle with, knowingly or unknowingly. When it comes to our money, these biases can have a dramatic outcome long-term. The first step to tackling your biases is to accept that you have them.
First, let’s give them their technical name: heuristics. Heuristics are mental shortcuts to help us make quick decisions. Using them we can ignore chunks of information, either consciously or unconsciously, and make assumptions about the world around us.
A lot of the time heuristics are perfectly sensible. Hear a loud bang and most of us will duck or run. It might look funny if it turns out it was just a door slamming but the natural instinct is self-preservation. Most of the time, ducking or running from an explosion is the sensible thing to do.
We have lot of other similar shortcuts that work well a lot of the time, but not all the time. In some cases, when we let them influence all our decision, they can lead to the wrong result.
In terms of money, that can mean you losing money, saving less, not getting the best price, not taking the best advice, or not growing your investment as much as you should.
There are many different biases that can affect your finances. You may identify several of these that apply to you. That’s the first step towards tackling them.
One bias we haven't mentioned yet is present bias. This is where we put more focus on issues affecting our lives now.
Present bias is tiresome to have around because it limits thinking about change. That’s not very helpful when there’s so much else to fight, such as close-to-zero savings interest rates, stagnant wages and rising costs.
“When I talk about this [bias] to customers and colleagues,” says Peter Brooks, head of behavioural finance at Barclays, “I ask them a simple question: would you like to be happy now, or would you like to be happy in the future?”
“Many say if they can be happy now that sounds better than being happier in the future. But if you saved some money, I say, you could be even happier in the future. And then they respond ‘but why would I wait if interest rates are as low as they have been?’”
Multiply that response by the UK population and no wonder UK levels of saving are so low. For many of us the future is difficult to picture – and the present is difficult enough. There’s also a huge emotional attachment to money warns Brooks.
“Your future self is so far away from your pension savings you just can’t imagine what your future self will be like,” says Brooks. But small changes in our behaviour can support long-term change. Think about “what is in your everyday life that could boost your willpower.”
A decade ago Brooks himself wanted to lose weight before his wedding. To avoid going past his local patisserie he got off at another tube stop and walked a different route home. He changed a habit and so he changed his behaviour. It wasn't easy but it worked.
Richard Harris coaches on financial and physical well-being. He locates what we label "present bias" in the pre-frontal cortex. “That’s the bit of the wrinkly brain underneath the forehead associated with personality and higher cognition,” he says.
Banks consult expensive behavioural psychologists when they design products such as credit cards, he says. “They’re well aware of [present] bias, and will design their products to lean on people's weaknesses to this as effectively as possible.”
“Underlying every addiction is a sense of anxiety avoided,” says Harris. If you have an addictive personality when it comes to spending he says, “look to your own capacity to handle anxiety”.
If you want to tackle anxiety Harris advises finding hard things to do and doing them. Deliberately choosing pain and discomfort is rocket fuel for your confidence and self-esteem he says.
Jessica Exton, a behavioural scientist for ING Bank, says the key to tackling financial blind spots is to view money more as a tool rather than its market value.
But in a fragmented work world where decent work pensions are no longer and short-term contracts are the norm for so many of us, what’s the best way to handle longer term goals?
“Think about breaking things down into smaller chunks,” she says. “Having shorter term goals for the next month might be more achievable rather than thinking I need £X amount that year to go on holiday or to buy that property.”
The unconscious mind controls a lot of our activities, she goes on. “If you’re forced to rethink a lot of things around your financial situation, your earning and spending, this might prompt you to think more about your finances more often.”
Thinking about our finances is often dull and the work to get them operating effectively can be energy-sapping and confusing. But many of our natural biases can be controlled by small changes to our habits, conscious and unconscious.
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