Habit: the key to helping clients make better financial decisions stick
- Long-term goals and once-off decisions require different types of action control
- The focus should be on the easy, small, actions an individual can take to establish a habit
- The truth is that habit-memory is a learning system
Contrary to popular opinion, willpower is not enough to establish a sustainable habit. Instead, people need to focus on creating an immediate reward for desirable behaviour and focus on regularly doing what is practically easy to do.
This is according to Wendy Wood, Provost Professor of Psychology and Business at the University of Southern California, who we interviewed at our annual Nedgroup Investments Summit.
While willpower may be helpful in the short-term to direct behaviour or to make certain decisions, it can be counter-productive to creating long-term habits such as saving for retirement or exercising consistently. This is because, by denying yourself things in cases like dieting or extreme saving, you are actually activating thoughts of what you are missing, instead of what you are trying to achieve.
Long-term goals and once-off decisions require different types of action control. The key to nurturing long-term habits is to engage in repeated behaviour that has an immediate reward-connection. This can be something simple like feeling pride in sending money to an investment fund or getting positive feedback from other people every time you do something.
How can advisors support clients to form great habits?
This concept could be extremely useful for financial advisors who want to encourage better financial habits in their clients. The focus should be on the easy, small, actions an individual can take to establish a habit. By doing this over and over again, the habit will form naturally - and it will become something autonomous.
Advisors can help people understand what the easy behaviours are and how they can repeat them.
It’s even better if that action can be intrinsically rewarding. The reward needs to be immediate when you engage in a behaviour – so long-term rewards like having a monthly meeting with your advisor when they tell you that you are doing a good job won’t cut it. Advisors need to help clients feel an immediate sense of pride when they engage in a good behaviour so that they experience the release of dopamine in the brain which starts to form the connection of the habit with the sense of reward.
Is there any truth that doing something for 21 days creates a habit?
The truth is that habit-memory is a learning system. It’s a way we learn about the world through experience – so things that are difficult to learn are going to take longer than things that are easier to learn.
So, while there is no magic number of times that you have to repeat a behaviour in order for it to become habitual – finding simple, practical and rewarding actions to take consistently is an extremely powerful tool to getting there.