If you’ve read the Greek epic The Odyssey, you may remember Odysseus’s ingenious plan to hear the dangerous voices of the sirens, who would lure sailors to their deaths. Every member of his crew plugs their ears with beeswax so they can’t hear the tempting song, and Odysseus latches himself tightly to the mast of his ship, so that he cannot escape and steer the ship off course. With a little forethought, Odysseus manages to be the only human who hears the sirens’ song and lives to tell the tale.
Odysseus’s scheme is an excellent example of what behavioral economists and social scientists call “pre-commitment mechanisms.” These mechanisms can be powerful tools in helping people overcome impulsive behavior, and specifically, overspending.
Here’s what you need to know about pre-commitment mechanisms and how you can incorporate them into your financial decisions. (See also: 5 Mental Biases That Are Keeping You Poor)
Why do pre-commitments work?
According to Dr. Daniel Crosby, author of The Behavioral Investor, “pre-commitment works because it takes natural (and sometimes negative) human tendencies like laziness and status quo bias and actually makes them work for us.”
Since we’re likely to let a previous decision stand if it keeps us from having to make a new decision, we can profit from our own laziness. For instance, someone trying to maintain a healthy lifestyle may not keep donuts or ice cream in their home as a pre-commitment to eating better. Since getting junk food requires leaving the house, the pre-commitment of not buying treats can often be enough to keep sweets out of their diet.
Pre-commitments can help align your long-term goals with your short-term decisions. Dr. Crosby writes that “a pre-commitment should be used anytime we feel our short-term preferences may change, but our hope is for our long-term commitments to mirror our current frame of mind.”
This means that anyone who’d like to spend less, make rational investment choices, or pay down debt could benefit from creating pre-commitment mechanisms.
What does a pre-commitment mechanism look like?
There are multiple ways to create a pre-commitment mechanism to keep you on track to accomplishing your goals.
Many successful budgeters blog about their journey out of debt or toward financial independence. These budgeters are pre-committing to social consequences if they should fall off the debt-repayment wagon. The negative social consequences of reneging on the publicly stated goals are much stronger than the immediate temptation to spend, which helps those who share their goals publicly to stay on track.
In the modern world, there are a number of ways to use social consequences as a pre-commitment to improving your spending habits. For instance, you can set up an automated alert from your bank or credit card issuer that texts your spouse anytime you make a transaction larger than a certain amount. The social consequences of having to explain your purchase to your spouse can be enough to make you pause before buying anything.
In addition, you can also seek out accountability partners via social networks or take a page from debt bloggers and record your journey in a blog.
Having your savings taken automatically from your checking account allows you to pre-commit to a savings strategy that’s harder to undo. This automated decision allows you to benefit from your own disinclination to change the default setting. (See also: 5 Ways to Automate Your Finances)
According to Dr. Crosby, one of the most famous examples of a pre-commitment mechanism is the Save More Tomorrow program, popularized by Richard Thaler and Shlomo Benartzi:
“It involves pre-commiting to the auto-withdrawal and auto-escalation of retirement savings over time. Effectively, it allows a retirement saver to make a good decision once that benefits them for the entirety of their savings lifetime. People are busy, their willpower is weak, and their decisions can be inconsistent. By ‘setting and forgetting’ decisions like saving and escalating retirement contributions, human frailty gets turned on its head.”
Another pre-commitment option is to change your environment so that you encounter fewer temptations. This is what the dieter who has no sweet treats at home is doing. Reformed spenders can do the same by taking their credit card out of their wallet. (There’s a very good reason for the old-fashioned advice about freezing your credit card in a block of ice.)
Similarly, removing your payment information from your favorite online retail sites, unsubscribing from retail email newsletters, and immediately recycling paper catalogs you receive can all help you avoid the siren song of spending.
When pre-commitments don’t work
While setting up pre-commitment mechanisms can do a great deal to help you improve your financial life, they’re not magic. A pre-commitment that can be undone will be undone if it’s easy for you to change your commitment when you’re feeling tempted.
Dr. Crosby has seen that creating rules-based pre-commitment strategies often does little to stop investors from reacting emotionally. “Jim O’Shaughnessy, the godfather of quantitative investing, recently revealed that 60 percent of rules-based traders broke their rules during the Great Recession, effectively nullifying their pre-commitment (which is all an automated, quantitative strategy really is).”
These traders had pre-committed to a kind of “if this, then that” rules system for investing. But when they got scared about their investments, they ignored the rules they had committed to. Because they could break their own rules, these traders did so, despite their pre-commitment to more rational investment choices.
This is why Dr. Crosby recommends making your pre-commitments difficult to alter. “Once you’ve made a commitment, you want it to be as hard as possible to change it. Make that choice and lose the key!”
Know your temptations
Pre-commitments can help you protect yourself from making easy, habitual, lazy, emotional, or poorly-thought-out decisions. But your pre-commitments will be more effective if you know which temptations are most likely to affect you, and if you make your pre-commitments difficult to change.
Be like Odysseus, and outsmart your worst impulses before you have a chance to indulge them.