“Never go grocery shopping on an empty stomach” captures a recognized truth: there are better and worse moments in life to make decisions for our future selves. The trick is to seize the favorable moments to protect ourselves later during the more difficult ones. Precommitment strategies offer a powerful way to do this.
The basic idea is simple: we commit ourselves to a course of action that will be difficult to change when temptation or duress arrives. The most famous example is Ulysses’ decision in “The Odyssey” to be bound to the mast, with swords at his throat, by crew members with wax in their ears, so that his ship could sail safely past the island of the Sirens.
The goddess Circes had advised Ulysses to take these steps, warning that he would be driven insane by the Sirens’ songs. While it seems obvious that he should have heeded her advice, most of us know how easy it is to overestimate our ability to withstand temptation. In the morning, we vow to forgo dessert at dinner; after a day’s work, it seems foolish to deny ourselves a treat.
The crux of the problem is that we’re different people at different times, subject to what behavioral psychologists call “hot” and “cold” states of mind. During cold states, we tend to be more patient and deliberative, able to consider our long-term interests. During hot states, we’re prone to be impulsive, subject to passion, focused on the short term. We are our very own Dr. Jekyll and Mr. Hyde of conflicting objectives, subject to making very different assessments for what’s in our best interests, depending on the moment.
These traits are apparently hardwired into us, making it difficult to educate them away. In his masterful tour of behavioral psychology, “Thinking Fast and Slow,” Nobel-laureate Daniel Kahneman noted that even his long years of study did little to help him avoid the numerous biases he had described, saying, “I have improved only in my ability to recognize situations in which errors are likely” and that corrective action was “least likely to be applied when it is needed most.” (p. 417)
I can resist everything except temptation.
– Oscar Wilde
Thus, while willpower and good habits remain valuable tools, they’re often not enough to get us past some obstacles, no matter how desirable our goal. Precommitments remove the obstacles ahead of time, helping us win battles we might otherwise lose by avoiding them altogether.
Goals that require consistently good behavior over long periods of time are ripe for such assistance. Personal health and finance goals top the list, and it was economists studying consumer behavior in the 1950’s who recommended precommitment strategies to help with the “intertemporal tussles” that such goals create.
The classic intertemporal challenge is finding a way to save money for tomorrow when there are bills to pay today. Some households don’t earn enough income to do so, but many more simply cannot resist today’s temptations, which are often cast as “needs” even though we create them, often with stories about how we ought to be living or how it will be easier tomorrow to save.
The time-honored solution is to “pay yourself first” by setting aside part of each paycheck, with an automatic deposit into savings, before you address today’s expenses. It’s difficult to fight with yourself over how to use the money if it’s not even there.
“Christmas Club” accounts popularized this strategy in the early twentieth century, with banks helping customers set aside money during the year for annual holiday purchases. Later, payroll deduction plans arose to withhold earnings for income taxes, Social Security and 401(k) retirement contributions.
Another popular precommitment is a house purchase. Most people commit to making mortgage payments month after month until one day they wake and discover they own the whole kit and kaboodle. Having made the initial purchase decision, they don’t spend time debating each monthly payment; they simply pay it, freeing themselves to focus on other matters.
The consistent payments mean that decades later many people find they’ve accumulated more wealth in their homes than they did with other investments. In theory, this shouldn’t have happened, since other investments are not saddled with ongoing costs such as mortgage interest, property taxes, insurance and maintenance and historically have offered higher returns than houses. In practice, though, few people are able to maintain the same consistency with other investments that they maintain with their homes.
If you add a little to a little and do this often, soon the little will become great.
– Hesiod
We can achieve consistency with good habits and willpower, too. However, they require a degree of self-control that can be difficult to maintain when times get tough, whether because of external circumstances or because of our emotional needs or even a bad night’s sleep. Precommitment strategies take a different approach, effectively bottling up consistency in advance by creating costs to change course.
Websites like stickk.com will help you create such costs for any type of goal. The site will automatically transfer money from a credit card to a designated recipient, such as a charity, if the user fails to meet a specified goal.
The costs can be non-financial, too. It’s the cost of personal disappointment that encourages amateur athletes and musicians to keep showing up day after day, continuing to improve, for the triathlon or gig. Social costs for abandoning commitments are the reason groups such as Weightwatchers and Alcoholic Anonymous work where other methods fail.
It’s these costs, though, that make people hesitate to make commitments. Do we really want to risk disappointment or money? Plus, committing means shutting down other possibilities – what if conditions or our preferences change, shouldn’t we keep our options open?
Most precommitments don’t enslave us, however. They merely create enough friction that we’re incentivized to pause and reflect before deciding to change course. You can get your money back out of the retirement account before retirement age if you’re willing to pay the taxes and penalties. You can sell the house.
Plus, in many cases, deciding to commit isn’t an all-or-nothing proposition. You can start small with automatic savings; you can buy a smaller house and reserve more money for investment; you can annuitize only a small portion of your investment portfolio for now.
Failing to make a decision to commit to a course of action today may mean that a less-optimal decision will be made for you. Even people with a track record of discipline and good financial decisions can find themselves challenged to maintain this record as they age. Cognitive decline robs many people of the good habits and self control they previously exercised and can make them vulnerable to unscrupulous sales pitches and other undue influence.
In fact, the first signs of cognitive decline often manifest through a series of surprisingly poor financial decisions later in life. Locking in good financial and health decisions earlier through tools such as advanced healthcare directives, long-term-care insurance, and low-cost immediate annuities can provide a power assist from our past selves that protects us.
It’s always easy to imagine we’ll be better positioned tomorrow to implement our best intentions. The rub is that we must get through a series of todays to reach tomorrow, past continuous demands, distractions, temptations and duress. Precommitment strategies can remove or steer us around these obstacles, smoothing the path to getting what we want.