Expert Q&A

Q&A with ‘Smart Thinking’ author Art Markman


Art Markman, author of the upcoming ‘Smart Thinking’ and a psychology professor at the University of Texas, explains what psychology can teach us about making better personal financial decisions

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You may think you control your money, but like it or not, your habits may have more to say about your spending than you do.

University of Texas psychology professor Art Markman knows how consumers’ habits can improve — or hurt — their personal finances. In his upcoming book, “Smart Thinking: Three Essential Keys to Solve Problems, Innovate and Get Things Done,” Markman lays out a three-part formula for developing intelligent habits to acquire high quality knowledge — and using that knowledge when necessary.

Art Markman, author,
‘Smart Thinking’
QA with 'Smart Thinking' author Art Markman

QA with 'Smart Thinking' author Art Markman

Art Markman is the Annabel Irion Worsham Centennial Professor of Psychology and Marketing at the University of Texas at Austin. In his upcoming book, “Smart Thinking: Three Essential Keys to Solve Problems, Innovate and Get Things Done,” Markman lays out a formula for well-informed decision making that can be applied to our daily lives.

Relying on that expertise, Markman responded to emailed questions from about changing your bad personal finance habits, what happens when you lose a movie ticket and whether budget-conscious shoppers should carry cash or credit cards. In your upcoming book, you focus on habits. What does psychology teach us about personal finance habits?

Art Markman: Habits are things that we do without awareness. We are actually habit-creating machines. Basically, whenever there is repeated consistency between something going on in the world and an action we take, we get a habit. We develop all kinds of habits with personal finance. We often take the same amount of money out of an ATM every time. It may not make sense to do that, but it is easier to take a consistent amount of money out rather than thinking through all of your upcoming expenses all the time.

Likewise, we have habits for doing things like paying bills. It might be cheaper, easier and better for your organization to pay bills online, but if you have a habit to pay bills by check, then you will continue to do that.

The benefit of habits is that they allow you to do things that you do all the time without thinking about them. That frees you up to focus your mental energy on new things going on in your world.

The potential problem with these mindless behaviors is that they go unanalyzed. If you have some bad financial habits, then you may not recognize what you are doing that is causing a problem. For example, if you go to Starbucks every day and get a coffee and a pastry, then you have a habit that is costing you about $100 a month. If you are not thinking about that daily expenditure, then you may not realize where your money is going. How might we go about changing “bad” personal finance habits and replacing them with “good” habits?

Markman: In order to change your habits, it is important to make your mindless behaviors more mindful. There are a couple of good ways to do that.

One is to keep a diary for two weeks to figure out your spending habits. Carry a small notebook or get a notetaking program on your smartphone or iPad. Every time you spend money, make a note of what you bought, how much it was and how you paid for it (cash, credit card, debit card). For this period, act like you normally do.

After two weeks, take a look at your spending behavior. Are there any surprises there? Are you making impulse purchases at the supermarket? Are you making online purchases more often than you expected? Are you adding a couple of dollars to every trip to the gas station buying snacks? This diary will help you to recognize some of your hidden spending habits.

To help change your habits, try switching up the way you spend money for a few weeks. If you generally spend money using a credit card, try carrying cash for a week. Do things to force yourself to think about every transaction rather than doing it habitually. Every time you have to think about something that you were doing mindlessly before, you have an opportunity to change your behavior. On your blog, you’ve written about how what we carry in our wallets (such as large bills, small bills and credit cards) can influence how much money we spend on purchases. Why do we spend more with certain payment forms than with others?

Markman: Generally speaking, we spend more money with credit and debit cards than with cash. There are a few reasons for that.

First, we generally use credit cards to make larger purchases than cash. So, we have a strong association between making large purchases and credit cards. That makes us more comfortable using credit cards to spend more money and makes us feel like we can add more to a purchase when spending with a credit card than when spending with cash.

Second, a wad of cash is a physical reminder of the amount of money you have. Credit and debit cards are purely conceptual. They are just numbers. It is easier to keep track of your purchases when you have to part with real money than when all you are doing is affecting the more abstract number of the amount of money you owe.

People are much better at dealing with specific situations than with abstract ones, and so it is easier to control your spending when you are carrying cash than when you are carrying credit cards. How can we use this knowledge to keep ourselves from spending too much — or from making unnecessary purchases?

Markman: If you are worried about your spending, then work to make every purchase situation as specific as possible. Carry cash rather than credit cards as often as possible. Use checks rather than cash to make larger purchases when you can.

In addition, make lists when you go to the store. Whether you are going to the grocery store, to a big box retailer or to a hardware store, there are lots of opportunities for impulse purchases. Let’s face it — retailers design the store hoping that you will stumble on something that you really want to purchase.

Your best protection against impulse purchases is a shopping list. There is good research showing that people who bring lists to the store buy fewer things that they did not intend to buy than those who do not bring lists. How might the trade-off between long-term and short-term goals impact consumers’ financial decisions?

Markman: A central part of our psychology is that we are wired to act in our short-term interests. You can see that in eating behavior. It is hard to resist a piece of chocolate cake, even though eating that cake might interfere with dieting.

The same thing happens with spending. Most of us have not saved enough to put our kids through college or for our retirement. The appealing objects in the world are out there calling to us to spend our money in the here-and-now.

That is one reason why we create all kinds of special accounts to help to protect our long-term selves from our short-term selves. 401(k) plans and other retirement accounts protect a pile of money that we might otherwise spend in the short-term to ensure that we have money for retirement. Likewise, if you have another long-term goal like saving for a child’s education, protect that money by setting up a separate account and getting in the habit of putting aside money from your paycheck right away rather than hoping that you will remember to save money. What is “mental accounting”? How does it impact our personal finance decisions?

Markman: Another way that we protect our long-term selves from our short-term selves is through mental accounting. Even though money can be used for any purpose, we tend to treat different kinds of money specially. If we go out to a movie, then we account that spending against a mental entertainment budget. We might decide against going to a concert on another night when we feel like we have overspent our mental entertainment budget for the week.

A classic experiment shows this in action. Imagine you go to a movie theater to buy a ticket for a show. The ticket costs $10. When you get to the front of the line, you realize that you have somehow lost $10 from your wallet. Do you still go to the movie?

Most people buy a ticket for the movie without a second thought.

But now, imagine that you go to the theater early in the day and buy a ticket for a show that evening for $10. When you get to the theater later in the day, you realize that you lost the ticket. Do you buy another?

You might still buy the ticket, but now you feel like the movie is costing you $10. In the first case, the lost $10 comes from your general ‘wealth,’ but in the second case, you have already put it in your mental entertainment budget.

This habit to classify types of money together helps you to control your spending by making you uncomfortable when you start to think you have overspent on a particular mental account.

See related: Is using credit cards like playing with Monopoly money?, QA with Adam Baker of Man Vs. Debt, QA with Kimberly Palmer, author of ‘Generation Earn’

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