213. Common Errors in Financial Decision Making with Dr. Chuck Howard

Welcome to episode 213 of the Brainy Business Understanding the Psychology of why People Buy. In today's episode, I'm so excited to introduce you to Dr. Chuck Howard. Ready? Let's get started.

You are listening to the Brainy Business Podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now here's your host, Malik Melina Palmer hello.

Hello everyone.

My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast. Today I'm very excited to introduce you to Dr. Chuck Howard, an Assistant professor of Marketing in the Mays Business School at Texas A and M University. In his research, Chuck asks questions like why do consumers so often under predict their future expenses? And why do people who work in the gig economy over predict their future income? He then designs simple solutions for these problems that help people improve their financial well being. Chuck's research has earned awards from the Society for Consumer Psychology, the Society for Judgment and Decision Making and the Behavioral Insights Group at Harvard University. Chuck earned his PhD in marketing and Behavioral Science from the University of British Columbia and his BA in Economics and Finance from Ryerson University. I met Chuck on a recent trip to College Station and we've had a few conversations since then and upon hearing about some of his recent research I thought it would be something you would find interesting because I sure did. And while it's more on a personal financial decision making side, we definitely talk about this from a business aspect as well and the insights are relevant to everyone, especially all the people in the financial industry who I know listen to the show. Within our conversation we talk about a lot of concepts and interviews which have their own past episodes of the Brainy Business. But no need for you to take notes because I've already done that for you. There are links for you in the show notes which are waiting for you within the app you're listening to or@the brainybusiness.com 213. Once there you'll find links to lots of other great related books as well, ways to learn more about Chuck and how to connect with him and more. Again, those are@the brainybusiness.com 213. Those already on the Brainy Business list got a direct link from me in the email you receive every Friday. Not on the list yet. Simply sign up for any freebie@thebrainybusiness.com and you'll be automatically added.

The freebie for this episode is the.

First chapter of my award winning book what your customer wants and can't tell you. And if you already have the book, if you in which case, thank you. You'll also be automatically added to the list when you get your copy of the free PDF companion workbook. Both are housed in our free behavioral economics community called the Be Thoughtful Revolution. There's a link to join that global community in those show notes as well. Now, let's jump right in. Dr. Chuck Howard, welcome to the Brainy Business Podcast.

Thank you, Melina. It's a pleasure to be here.

Yes. So you are going to talk a little bit about yourself and your background and how our introduction is a fun one, I think, in that. So you, you'll talk about how you teach at A and M and, and whatnot. But we didn't meet in the most, I guess, traditional way that I have guests on the show, so I think it's kind of fun. And you have a background in behavioral science, but not necessarily like fully, fully in it in the same way as some of the people I've had on the show before. So I would love if you could just share a little bit about who you are and how you found yourself, I guess, in this world of behavioral science and marketing and research and all the things.

Absolutely. So you know how some people take a gap year. After high school, I took a gap decade. I spent the first five years of that decade trying to become a professional snowboarder. I mostly just broke a lot of bones, but through that experience, I was living in Lake Louise in the Canadian Rockies. And to pay my rent, I worked at a hotel, starting as a bartender and a waiter and eventually working my way up to becoming a manager and just became fascinated by human behavior. There's no better laboratory for studying human beings in the world, I think, than standing behind a bar and watching people on a Saturday night. So I moved back home after five years in the Rockies trying to snowboard and had every intention of going to university. But I came back in the summer, so I wouldn't have been able to start until January. And I was offered a pretty good job managing an entertainment complex that had a restaurant and I promised a bar in it. So I took that. And that turned into another job managing an opera house, and that turned into another job managing a hospitality company. And so lo and behold, after 10 years, I woke up and I hadn't gone to university. But I was fascinated by human behavior. And at the time I thought the best way to understand it from a research perspective was to study economics. So that's what I did. I Went back to school after 10 years and did my BA. I was actually a double major in economics and finance. And like a lot of people around that time. So this was circa 2010-24. Like a lot of people studying economics in that particular time period, I was just not sold on the assumption that people behave rationally all the time or even most of the time. And that was particularly true because of my experience working in hospitality and seeing all of the irrational behavior that happens after last call on a Saturday. So about halfway through my undergrad, I started taking psychology classes. And then I had a chance encounter that led me to Internet at Works, which is a behavioral economics focused consultancy in Toronto, Canada. And through that experience, I was nudged, nudged towards doing my PhD in marketing rather than traditional classical economics. And through that experience, I was able to sort of combine my passion for knowledge of psychology and economics to land on studying consumer financial decision making. So what I started by doing in my dissertation work was examining why consumers, for example, so persistently underestimate their future spending and then trying to understand the psychology of that so that we could design simple tools that we could use to help people make more accurate predictions. We also have work underway where we're looking at people who work in the gig economy and how accurately they can predict their future gig income. Spoiler alert. Not very accurately. To start, my research journey was all about why do people make inaccurate predictions that are systematically biased and how can we help them make more accurate predictions? My assumption was always that if you're under predicting your spending, that will lead to negative financial outcomes. More recently, I've been working with Marcel Lucas at the University of St. Andrews in Scotland on work that looks specifically at budgeting. And what we find in that work, which I hope we'll talk about in detail a little later on, is that making ridiculously optimistic budgets, which is to say under predicting the future expenses, can help a lot of people spend less money. They'll always spend more than they budgeted, but they'll often spend a lot less than they used to, so long as they track their spending against their budget. So those are sort of the Coles notes in terms of my background and what I do and how I got here.

Cole's notes. Okay, so I have to ask. I feel like that's a Canadian thing.

Yes.

Or Cliffs Notes.

Okay.

Okay. I was gonna say. Is that like the other version of what.

Yes. So I don't know that I mentioned this off the top, but I was born and raised in Toronto, Canada. My five years snowboarding was spent in Lake Louise, Canada. And then my work in hospitality was across the country, but mostly back in Toronto.

All right, so that was just my, my knowledge of your background because we've talked quite a bit. Like, I already said that I was going to say. Okay, so here we have Cliff's notes. Is that a thing that is, you know, the. Or I guess. Was it a misspoken? I don't know, but that's some. Okay, so Louise Ward, who was on the show, oh my gosh, it's been far too long now, but she co founded the Behavioral Science Club, like, behavioral science reading group on LinkedIn, which has thousands of members now. But she. I just posted something this week where we're talking about people who've gone, who work while sick, because there was a really interesting article in the New York Times and I've had a bunch of people vote on this poll. Anyway, so yesterday she had a comment about, and saying that you. It was time to just, you know, got a poll, pull my finger off and like, go in to, like, and just do it sort of thing. I was like, Louise said, pull your finger off. Like, is this, is this actually a saying that I'm not familiar with? She's in Ireland. Is that, is that a real thing or is that an autocorrect? Because I don't know what that means. Apparently it is a saying.

I mean, my family is Irish, but I have not heard that saying before.

Yeah. Yes. So it's the. Yeah. If it's a UK thing or I don't know, perhaps listeners are. And, and I apologize if I said it incorrectly as I was not, you know, sitting and waiting for an opportunity. But this. Yeah. Pull. Pull your finger off. What a weird thing. That seems so strange. But any of these sayings are so weird, right, that you hear, you look, if you look at any of the things we normally, you go, that's a, that's a really weird thing to say. But we just get it right. Metaphor or whatever else.

So absolutely. Pull my finger off did not make it over to Canada, to the best of my knowledge, but I think that's great. I'm going to adopt it.

Right?

And then how does that mean that.

I'm just going to get started? Like, why am I pulling my finger off? I don't understand. So I guess, you know, for listeners, you can now let me know what that, what that means to you, if that's something that you say. And perhaps I guess we can get into the weird sayings of anywhere else. That'll be a Fun little conversation, side conversation. So anyway, so your research is like you said, is on consumer behaviors in various ways. But looking at this prediction bias, which we have the kind of double edged sweet sword problem of under predicting expenses and over predicting income, like you said in some of that gig space, Right. And then of course talking about budgeting, which I think is some really interesting stuff. But what are the implications or insights like what? Why do you think that that is important to understand? You know, why is that something that you feel the need to be, you know, looking into and really spending time on and I guess what is it that people should learn from what you found so far?

Right. So it's important because there are a number of situations in which we need to have an accurate view of how much we're going to spend in the future. And that's true for consumers and of course also true for managers and people working in businesses. So on the consumer side of things, to give an example, let's say that you want to buy a new fridge. A new fridge is a fairly atypical expense, so you're not really sure how much fridges cost or even how much you can afford to spend on one. So what a lot of people will do is take some time to think about how much money they're going to earn over the next month and then how much money they're going to spend, you know, in terms of rent and groceries, gas for the car, typical expenses, calculate the difference and then come up with some type of rough estimate of how much they can afford to spend on average. So you can imagine, let's just leave the income prediction bias out of this for the time being. If you're under predicting your future expenses and you say you think you're going to spend fifteen hundred dollars next month, but you actually end up spending two thousand. Well, if the budget you set for that new fridge is based on $1,500 a month in other expenses, you might overspend on the fridge by 500 bucks. Then you're going to have to borrow and go into debt to make up the difference or take money out of your savings. And that's a suboptimal financial outcome. So I was motivated to understand why people underpredict expenses and how we could improve their prediction accuracy based on that logic. I wanted to help people be able to make better financial decisions so that they can improve their financial well, and.

I forget if it was in this paper or in the one on income prediction bias with the gig economy stuff, but talking about how it's not so I've done an episode on the planning fallacy before, but in your research it's, it's not necessarily the same or it's not only planning fallacy that comes into play here.

Right. So research on the planning fallacy typically adopts the perspective and evidence supports those that when people are predicting how long a project is going to take, they tend to take what's called an inside view where they're just solely focused on the plan to get the project done, which is to say they're only focused on the future. What are steps A through Z for me to end up finishing this thing I'm working on? With finances, we find something that's a little bit different, which is that people's predictions for expenses anyway are deeply grounded in their past experience. The thing is, they're only thinking of the very typical expenses that they have experience with. So on the one hand, for the planning fallacy, when we're talking about project planning or project completion estimates, we're ignoring our past experience. We're only focused on our plan for the future. And on the other hand, with expenses, we're actually relying really heavily on our repeated behaviors over time. So we always pay rent or a mortgage on the same day every month. We typically go to the gas station to fill up X times per week. We, most of us have a routine around going to the grocery store one, two, three days a week. It doesn't really matter for most people. Those are repeated behaviors that come to mind really easily when we're trying to think of how much money we're going to spend future. So that's the key difference between trying to plan and make predictions for our time versus trying to plan and make predictions for our money.

Yeah, it is, it is interesting the kind of overlaps of I, because you know, been thinking about how this ties in with, you know, business projects, of course, and how you spend your time. Right. Knowing. But like you said, I mean that's the. Even when you know that it's been a problem in the past, I feel like optimism bias is just kind of tied in, in all the both of these. Right. So it's whatever is going to be the better outcome for you. What you, the wishful thinking, those rose colored glasses on either side is just helping you to see the shiniest sort of future maybe.

Absolutely. And I think it's totally fair to call these biases optimistic because to think you're going to spend less in the future than you did in the past or to think that you'll earn more in the future than you have in the past is optimistic. But what's really interesting about our research is that we never find that the tendency to under predict expenses or over predict income is tied to being an optimist. It's a really general phenomenon that happens in the strong majority of participants in our study. And so our theory is that it's simply about what comes to mind most easily when you're making your prediction in the course of expenses. As I said, those are the things that happen over and over and over again. They get embedded into our memory and they're really easy to bring to mind when we try to make our prediction for the future.

Yeah, well, and from what I remember and what I saw there, the aspect being if you are. What I found was so interesting is I'm, if I'm. You ask people, what did you spend before? Like, what are the expenses you had? What do you think is going to be coming up? And even if they overspent. And again, I potentially am overlapping on because I, you know, there are multiple, the papers have some overlap between them, but essentially even if you just overspent and then I'm going to predict what's going and I did the week before and the week before and the week before and I have this. And then I go to say, what am I going to do next week? But that one's going to be better. Like now I'm going to hit the budget, right. And I just totally wash away. Even when I just wrote this is what I did, this is normal and this is what I expect to happen and just don't even want to allow that to be part of my prediction is bizarre because you would think asking someone about what they've been experiencing it should align you to then be more realistic in your prediction. But it doesn't.

Absolutely. So I'll shamelessly plug the paper for any academics that might be listening. It's understanding and neutralizing the expense prediction bias. It's available from the Journal of Marketing Research and the study that you're referring to, Molina. We're asking people over a period of several weeks to first tell us how much money they spent in the previous week and then tell us how typical their spending was in that week. And then immediately we asked them, well, how much money are you going to spend next week and how typical do you think those expenses are going to be? And you're right. What we see is that people will say, well, last week I spent $500 and my spending was a little bit atypical. I acknowledge there were some things in there that were a bit weird. And then right away people will say, but next week I'm only going to spend 350 and my spending will be highly typical. And part of the reason why that's true is because although we very frequently encounter these atypical expenses, by definition they're not the same expenses week over week or month over month. So if your atypical expense this week or this month is a car repair next month, if you're in the U.S. it could be an unexpected co pay on your health insurance because you got sick. Atypical expenses are common in the sense that they happen a lot of the time, but then of course they're uncommon in the sense that it's not the same thing repeated over time. So people just don't think they'll happen again.

Yeah. Is it as simple as it being variable versus fixed and. Or is it just a frequency thing? Or is it. And you might not know the answers to these questions. Questions yet, but is it also in a space of just even not wanting it to be a thing? Right. Is it just the. Because I don't want it. I refuse to acknowledge it when I plan.

So those are all great hypotheses and ones that we hope to test shortly, but I don't have a clear answer. I think it's a little bit of all of those things, to be honest with you.

Yeah, well, that's where I think really, while I can appreciate with the planning fallacy piece, not being exactly the same outcome right in the way that you're. Or I guess the outcome's pretty similar, but the approach maybe is different in the way that you're predicting in the future. I think the way that people would look at working on projects is very similar in you're always going to have. There's always some work emergency that's going to happen or the kids are going to need something or somebody's going to call you or you're going to get a slack notification, you're going to get distracted by Instagram or whatever, there's going to be the emails, but we don't allocate for that time because we think we're going to be better into the future. And even though it's always the same sort of stuff because it comes in a different way and it's not the exact same email and we don't really want to deal with it, I think then we don't maybe allocate for it in that kind of optimistic view. Similarly to what we might be doing with some of those expenses.

Absolutely. So with project planning and trying to estimate how long it's going to take, it can be really hard to think of the current project in terms of past projects. So how do you define what is a similar past project that could be informative in terms of projecting how long the current project is going to take to complete? That's not always a straightforward question. So, yeah, the planning fallacy, that, that's a big part of it. Of course, again, for expenses, we have tons of relevant experience that we can draw from and those things like rent and gas and groceries are going to keep coming up.

Yeah. And so, you know, I know. Similarly, one of the tips coming up with planning fallacy, you know, is to think about someone else. Right. So if someone on your team who you think is not as good as you were to be doing this project, how long do you think they would need to get it done? And so how does that tie in with some of the expense planning and whatnot?

Yeah, so I think that's a really cool question. And my instinct is that if the person you were thinking of was similar to you, it could be helpful to think of their spending. So perhaps if you're talking about a spouse or a very close, close friends and you adopt that outside perspective of, well, of course that person's going to spend more than they thought they would because they always go out for ice cream on Sunday afternoon and they didn't include that in their prediction, that could help you gain some perspective on how much you might also spend. But it's really hard to find that similar person. And I think that's true even in intimate relationships. For example, my wife and I have very different spending tendencies. So I'm not sure how helpful it would be be for either of us to be thinking of the other persons. But I think that's an interesting direction for future research. And I think there really is right now not enough research being done on how people make financial decisions together. Jenny Olson has some great work that looks at that and a few others, but I think there's a lot of room for contribution in that particular area because that is how so many households are making these decisions. Right. It's to sit down at the dinner table and do it together. And right now, most of the work on the subject, my own included, treats people as individuals that operate autonomously from their strategies.

Right. And so as we look at that from a business perspective, and knowing that there are, you know, companies mentioned in the, that you worked with on the Research to whether, you know, to. On the budgeting stuff, you know, for example, which we haven't really talked much about yet. So what are some of the implications for, you know, a business and, and it might be a specific type of business. But how do you look at this as a business question knowing that you of course teach in the school of marketing and business there at A and M. Right.

So let me just start by saying one of the reasons that we study these financial prediction biases in consumers is that the incentive for consumers is often to be as accurate as possible possible. Because going back to our fridge example earlier, if they're inaccurate, there might be an expense to pay. By contrast, if we ran the same studies with managers at companies, there's often an external incentive to make a wildly optimistic forecast. Because, for example, you're trying to pitch a project to a client and if you over predict how much it's going to cost, well, you'll lose out on the bid. Right. They'll go with another company. I think the psychology of how we make these predictions and how we fail to make accurate predictions is the same in both circumstances. Very similar. Anyway, so in terms of solving the problem, whether it's a consumer or a manager in a company, to make more accurate expense predictions, we simply prompt people to consider a handful of reasons between 1 and 3 why their expenses will be different than usual. Because different than usual in the context of expenses almost always means more than usual. And that very simple nudge, having people take between, gosh, five and let's say, 30 seconds to think of one to three reasons why their expenses for the next week, next month could be different than usual, does a remarkably effective job at helping them bring to mind atypical expenses that they simply hadn't thought of when they made their first prediction. And it increases expense prediction accuracy remarkably. In fact, in the paper that we're discussing with general marketing research, we have a couple of studies where we make the effect go away entirely.

We completely neutralize the expense prediction bias, which is fascinating. Especially like we said with the reviewing, I just was looking at what has happened before and there were atypical expenses in there. And I go to predict and just totally don't care about it. But having to take a moment to write something. Do you specifically. Do they have to write it down or say it out loud or they can just think it and then move along? Was that part of the.

So that's a great question. And to be very specific, we have people type it out. So these studies are always conducted online so on the survey platform that we use, they'll have a, you know, about a sentence long space to type in their reasons. And we started by using three reasons just based on intuition that that would really sort of hammer home for people that they might be under predicting and they should be thinking of reasons why their expenses could be atypical. But we've also run studies, for example, with members of a budget gap in the UK where we only prompt them to think of one reason. And the nudge is just as effective when we do that.

Yeah, I think it's, it would be interesting in there's some research, you know, if you write something down, it feels more relevant to the brain and whatnot, that you're more likely to remember it and have some stress and importance on it. I'd be interested if it's just to think about it. Does it have the same impact where, and you know, people let their minds wander, they don't really pay that much attention. But having to actually write it down, how much of that matters in that process?

That's an interesting question and, but I mean that's a very testable hypothesis that we could look at in future research. My intuition is that writing it down might make a difference because it takes a little bit of load off of your working memory. You don't have to hold it there. And so that might make it a little bit easier to make your holistic prediction and arrive at the total number, say $500 for the next week. Whereas if I only ask you to think of it, that might interfere with your ability to then think about their expenses. You might end up still under predicting. But that's an empirical question that we could easily test. So we talk about that after the show.

Yeah, I look forward to it. Let's do it, let's run the test. So with the budgeting piece, let's talk a little bit about that and what you found in budgets because, and I know you're understandably excited about this research because I think it's a really interesting discovery and it's one of these things where, you know, some of the best research, like I love the fresh start effect and Katie Milkman's research, and that's one of those things where, and I talked with her about this when she was on the show too, is like just so duh type of stuff. Right. But, but there's so much that went into figuring it out and really proving it. But it's one of those things that you hear and you go, well, obviously like we all sort of intuitively knew that thing, but then when you see just solidifies in a different way. And I feel like some of the budget stuff gets there too. So can you share a little bit about your budget research?

Absolutely. So, I mean, we were motivated to do the budgeting research because there was actually this debate in the public square around whether budgets actually work. And it's probably fair to say that some of that was people hot taking their way into trying to go viral and essentially saying, budgets don't work work, you should abandon them, do this other thing instead, and of course pay me to tell you what that other thing is. So we went to the academic literature, as professors are want to do, and we started to go through the past research on budgeting. And what we saw was that there's a ton of great research that makes it clear what the psychology of budgeting is. But there hadn't yet been a really compelling study of asking and answering the question, do budgets actually work? Like in the real world, outside of the lab, people set budgets, do they subsequently spend less money? And what we find in our paper that's forthcoming at the Journal of Consumer Research is that yes, they absolutely do. And we find that that's true. Even though people's budgets are wildly optimistic and they never end up spending as little as they have budgeted, they still end up spending substantially less than they used to. And this brings up this really interesting point between budgeting and predicting expenses. Right? If you're predicting expenses because you're buying a new fridge, you want to make a really accurate prediction so you don't overspend on the fridge. That would be just as true, by the way, for those listeners who are still in the housing market and trying to figure out how much of a mortgage they can afford forward. You do not want to under predict your future expenses because then you're going to take on too much of a mortgage. Find yourself in some financial hot water. But if you're trying to set a budget so that you can spend less money over time and increase your savings, and if you're going to commit to tracking your spending against that budget on a somewhat frequent basis, we find about once a week is often enough, then it actually helps to make an optimistic budget to, you know, say, okay, this is a reach goal. It would be pretty aggressive for me to decrease my spending, say from $500 a week to 350, but I'm going to go for it. And even if you don't hit 350, you might get to 475 in week. One and 450 in week two. And one of the coolest things in that paper is we find the effect of budgets on spending is really sticky. So even six months after people set a budget, they're still spending a lot more than they budgeted, but they're also spending substantially less than they did before they ever set a budget.

Yeah.

And with that. So I feel like it's an anchoring piece. Right. So when we're kind of anchored on what we always spend and we don't pay too much attention, whereas if we try to shoot really low in this case. Right. So we're saying, I'm going for 200. And that's kind of the. We're now looking at something else. We're being more critical at the spending we have, and it helps to cut some things out. And even if you don't hit it, you're still, in essence, you. You end up spending less than you would have. And those who didn't have the budget, even if the budget you set was completely ridiculous.

Yeah, exactly.

Yeah.

And so there's just the caveat there that I really want to underline for people, is that you have to be tracking your spending against your budget. If you set the budget and never look at it again, of course it's not going to be effective. But if you come back to it, let's say once a week, and take stock of where you're at vis a vis your budget, then it hurts a little bit to see that you're not on track, and that's what will keep you from spending as much as you used to, even if you're not spending quite as little as you have. Budget.

When I was reading that in the paper, it made me think about calorie counting and where they say that people who count their calories eat less calories just by nature of counting them. Um, and I think with any of those similar to what you have with the budget stuff, there's a goal in mind. Right. So I'm trying to hit, you know, 1700 calories, and so I'm counting them. I'm trying to only spend $350 this month, so I'm counting what I'm spending. Have you done anything yet? Or is there anything in the research in the act of counting without a goal? And if you have to physically go in and record and pay attention and do that without having the reduced goal if the. If the tracking itself is part of the impact.

So that's a fantastic question that I can't answer quite yet, but we're actually running studies to investigate that this summer.

Cool.

So we will be able to see the extent to which, as you're saying, just tracking without setting the budget actually makes a difference. My instinct is that it probably makes a little bit of a difference, but not nearly as much of a difference as setting a budget and then tracking against it.

Right. Yeah, I would feel the same way. Yeah. But that's where now you. Oh yeah, it's recorded. We have it here that you can never deny that this is what you thought. But that's okay.

I just pre registered my hypothesis. Brady Business Podcast.

I love it. Yeah, well, I think I intuitively that's where my mind goes as well. But we'll see.

Right?

That's, that's why you run the test. You go to see if, if that's true or, or not. And even if you find out that you were totally wrong, that's such a cool thing. I love that about any sort of research. And true researchers get, I think this aspect of when something comes out totally different than what you were expecting, it's. Hopefully you don't then, you know, try to find a way to prove the thing you were looking for. But in the nature of, you know, research. There you go. I wonder why that happened. And you go digging deeper. Right?

That's exactly it. At the end of the day, it's just about understanding why. I don't typically have strong feelings about the direction of a given effect. I just want to know why it happens and if it's problematic. I want to understand how we can make it better.

Right.

For sure.

And so I know there are a lot of people who work at financial institutions that listen to the show and those who are likely working on encouraging their members, customers, whatever side of the industry they're in, to perform better financially. So are there any tips as far as when, when we think about us inside of an organization and trying to encourage behavior or you know, anyone who works for Mint.com or any of these other type of aggregators of spending? Because that's the thing. Right. I, I have worked in a financial institution before. I and I do consult for, for a lot of them and speak to those groups that conversation of trying to be the aggregator and if people would just use this and you feel like you have to come up with the most amazing tool to help them in the online banking and tracking the spending and we give them the resources and they will overcome all the these problems and it just doesn't happen. Which is of course what has led to a lot of your research. Right. So I guess what advice do you have for people that are in the industry of helping others to update their spending and do better?

Yes. So keep it simple. That's the first thing. You can often let perfection be the enemy of good enough. If you keep chasing, you know, that next layer of complexity that could be incrementally or marginally more helpful to a consumer, but in doing so, make the task so unenjoyable or so complicated that people just walk away from it. The other thing is to be very conscious of what information you're giving people and when. So I think that one reason why people who use the budgeting app, work with in the UK so successfully decrease their spending by budgeting and then tracking against their budget is that that app, which is Money Dashboard, lets people see how much money they spent in the past. So if I see, say I set a budget of 350 and I go in, I see that I spend 450, that could be really depressing if that's all the information that I see. But if I'm also really easily able to see that I decreased my spending by $50 compared to last month, well, now I'm probably a little more motivated to stick with it. And so next month I'm only going to spend 425, the month after 400 and so on. And as I said, we see that that effect is really sticky. Six months after people set their budget, they're still working toward it even though they're spending more than they have budgeted. And then, you know, as coming back to the situation, as I said, if you are helping people, say, predict how much of a mortgage they can afford, whether they're trying to make some big capital purchase like a new fridge, whether they're planning for retirement, those are all situations in which you want to help people make very accurate estimates of their future spending so that they can plan accordingly. Okay, that's where you want to prompt them to think of reasons why their spending might be different than usual. So you can increase their spending estimate and get them to be as accurate as as possible. But the flip side is that if we're talking about helping people set a budget that they are going to track once a week and over the course of months at a time, because, let's say, you know, you've got your cousin's wedding coming up and you need to save some money to buy a new outfit and get the plane ticket and so on and so forth, you want to make an optimistic budget, you want to be aggressive and, you know, reach for the stars, so to speak, try to decrease your spending by as much as possible. But always keep in mind, even if you haven't hit your budget, because most people don't, like I said, most people are spending more than they have budgeted. You're spending less than you used to, and that's a great way to stay motivated and reach your goals.

And that was. I forget the exact phrasing in the paper, and perhaps you have it off the top of your head, but something about the. Where the. On the budget side, specifically the 100% compliance is not as important as the, like, percent achievement, you know, sort of toward the goal and like having some sort of a shift. So it's not that when you're setting budgets to look at it as a failure if you don't hit the number you set. Right. But if you put stretch goals for budgets, knowing that most people don't hit it, it's, you know, saying, I'm going to spend $10 less this month, and then you do hooray. Right. But if you try for a hundred and you spend $50 less, you're actually getting closer. You're doing better. Even though I'm on a more traditional measure that you might look at if you were someone creating those sorts of apps and things, it's worse. But, you know, finding the right motivating tactic and knowing that what, what you track matters and the way you share that information matters to keep people motivated.

Absolutely.

Yeah. Cool. All right. Well, we'll just, like, leave that there.

I mean, we're laughing about it. But, you know, there. There is this assumption that underlies a lot of research, including some of my own early work, that we want to help people make more accurate budgets and financial forecasts so that they can achieve 100% compliance, so that their budget or their forecast exactly matches what they end up spending. And what we find in this new paper, the influence of budgets on consumer spending in the next issue of Journal of Consumer Research, is that, you know, making, as we term it, wildly optimistic budgets can actually be beneficial for all of the reasons that you just mentioned. You will end up spending less than you used to in the past.

Yeah, and that's. I'm sure the audience is sick of me saying it by now, but I always talk about really understanding and knowing what problem you're solving. And it's not the problem of sticking to the budget specifically. It's the problem of helping people to spend less. Right. So if we look at it in that way, the goal setting A crazy goal if it's going to help them spend less is better than sticking to what you said you were going to do in this way.

Absolutely. And one of the really cool exploratory results in that paper that we will follow up on, but is worth talking about now is that we find that budgets are an effective way to decrease spending across a number of different personality traits. So setting a budget and tracking against it will help people who are impulsive shoppers decrease their spending as well as people who are not impulsive shoppers for people who have low self control and people who have high self control and so on and so forth. That's study two in the paper for anyone who wants to check it out. And I think that speaks to this very basic cognitive process of how powerful it can be to track your behavior and monitor your behavior against a goal, even if that goal is, you know, out of reach in the short term.

Yeah. Well, I've definitely referenced the. A tight wad to spend thrift, polar, whatever. The. I love the phrasing of that particular paper. And I forget your. What is it? Your likelihood toward tightwadism, I think is part of what they say in there, which is just funny. I, you know, it's the, I guess research humor that those little tidbits that you. So seeing that you talk about tightwads and spendthrifts was I enjoyed as well.

So thank you, Melina. Yeah, they both, people who fall into either of those camps both ended up spending less. So.

Awesome.

Yeah. Again, it's something that seems to work for a lot of different types of people, which is funny because in academic research we're always trying to figure out what the boundary conditions are for particular effects. And there can be some benefit to that in the publication process because it can make your explanation seem more novel or dare I say complicated than it needs to be. And in this particular case we're just like, no, it's a really basic effect that is quite powerful and as you said earlier, kind of intuitive, except we didn't know that it was until now.

Yeah. Which is fun, right? Like I said, I think that is some of the best research in finding the stuff where you go, well, that's so obvious. But it took a lot of work to get there. So thank you for doing that work. It is much appreciated. We'll definitely link to all three of those papers that we've talked about in the show. Notes here for the episode. Anything else, you know, for people that want to reach out to you, companies that are looking to do research like this and are wanting to, you know, reach out to do something with the lab or I, of course, the Human Behavior Lab at Texas A and M. We can do some partnering with Chuck here to be able to do research there with Dr. Palma as well. But and you have your own ways that you're doing research. So what's the best way for people to get in touch with you and learn more?

So people can find me on LinkedIn or they can find me on the Texas A and M University website. If they just Google Chuck Howard Mays Business School Department of Marketing I will come up and they can find my email address and contact information there. And I'm always happy to chat people who are working in fintech or finance more generally. Any consumers out there who are listening and interested in talking about their own personal experience. If you want to share an interesting story about your experience of budgeting, trying to predict your future expenses, I'd love to chat. So feel free to get at me anytime.

Awesome.

And we'll definitely link to that page in the show notes just to make it that much easier for people to find you, reduce some of the sludge as we like, say, in behavioral terms. Right. So thank you so much again, Chuck, for joining me on the show. It's been a lot of fun to chat with you.

Thanks, Melinda. It's my pleasure.

Thank you again to Dr. Chuck Howard for joining me on the show today. What got your brain buzzing in today's conversation? For me, I love that Chuck found this work and his passion later in life and that he entered into an academic space because of his interests that developed over time and observation. One of my favorite things about talking to researchers and truly everyone I have the honor of interviewing for this show is to hear how excited they get about the work they do, how nuanced it can be, and the rabbit holes they found themselves in the way a question will live within them. And they feel compelled to find the next and the next and the next. It's something that I always love to see and something that gets me excited to talk with them about whatever it.

Is they're excited about.

With my background in financial services, I also have a soft spot for consumer spending, behavior, budgeting and financial fitness. My own research for my master's thesis was using behavioral nudges to help people to save more money. So the work that Chuck was talking about today and his research focus is pretty near and dear to my heart. In addition to Chuck's research papers, I have linked to my own in the show notes as well, which was published by the Filing Research Institute.

And as a reminder, those notes are waiting for you within the app you're.

Listening to and at the brainy business.com 213. In them you will find, of course, links to all those articles and many other important links, past episodes, related books, ways to connect with Chuck, and so much more. Especially definitely connect and reach out if you're interested in doing some research. Like I mentioned, I know there are a lot of financial institutions and those in financial services and insurance that listen to the show and so if you're interested in digging deeper with us, send me an email or send one to Chuck. You can find me at Molina at the brainy business.com or melinapamu. Edu. That's T A M U like Texas A and M University Edu.

We would love to talk with you.

About doing some research together again. Links for everything waiting for you at the brainy business.com 213 and if you enjoy the experience I've provided here for you, will you share about it? That could mean leaving a rating and review on Apple Podcasts or wherever else you listen, sharing this episode or any other with a friend who you think would find value in the insights, or even hitting that subscribe button if you haven't already. Thank you so much in advance. I appreciate it and you. Thank you again to Dr. Chuck Howard for joining me on the show today. It was a delight to chat with and learn from you. Join me next week for another Brainy episode of the Brainy Business Podcast.

It's going to be a lot of fun.

You won't want to miss it.

Until then, thanks again for listening and.

Learning with me and remember to be thoughtful.

Thank you for listening to the Brainy Business Podcast. Molina offers virtual strategy sessions, workshops and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness. Com.