{"id":3062,"date":"2019-05-15T15:00:17","date_gmt":"2019-05-15T22:00:17","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=3062"},"modified":"2023-12-05T14:18:17","modified_gmt":"2023-12-05T21:18:17","slug":"passive-barriers","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/passive-barriers\/","title":{"rendered":"The psychology of passive barriers"},"content":{"rendered":"

A surprising thing happens to people in their forties. After working hard, buying a house, and starting a family, they suddenly realize that they’d better start being responsible with their money. They begin reading financial books<\/a> and trying to learn how to set up a nest egg for themselves and their families. It’s a natural part of growing older.<\/p>\n

If you ask these people in their forties what their biggest life worry, the answer often is, quite simply, “money”. They want<\/em> to learn to manage their money better, and they’ll tell you how important financial stability is to them.<\/p>\n

Yet the evidence shows something very different<\/a>.<\/p>\n

In the table below, researchers followed employees at companies that offered financial-education seminars. Despite the obvious need to learn about their finances, only 17% of company employees attended. This is a common phenomenon.<\/p>\n

\"401k<\/p>\n

As Laura Levine of the Jump$tart Coalition<\/a> told me — and I paraphrase — “Bob doesn’t want to attend his 401(k) seminar because he’s afraid he’ll see his neighbor there…and that would be equivalent to admitting he didn’t know about money for all those years.”<\/p>\n

They also don’t like to attend personal finance events because they don’t like to feel bad about themselves. But of those who did<\/em> attend the employer event, something even more surprising happens.<\/p>\n

Of the people who did not<\/em> have a 401(k), 100% planned to enroll in their company’s 401(k) offering after the seminar. Yet only 14% actually did.<\/p>\n

Of those who already had a 401(k), 28% planned to increase their participation rate. 47% planned to change their fund selection (most likely because they learned they had picked the default money-market plan, which was earning them virtually nothing). But less than half of people actually made the change.<\/p>\n

This is the kind of data that drives economists and engineers crazy, because it clearly shows that people are not rational.<\/strong> Yes, we should<\/em> max out our 401(k) employer match, but billions of dollars are left on the table each year because we don’t. Yes, we should<\/em> start eating healthy<\/a> and exercising more, but we don’t.<\/p>\n

Why not? Why wouldn’t we do something that’s objectively good for us?<\/p>\n

Barriers are one of the implicit reasons you can’t achieve your goals. These barriers can be psychological or profoundly physical, like something as simple as not having a pen when you need to fill out a form. But the underlying factor is that they are breathtakingly simple \u2014 and if I pointed them out to you about someone else, you would be sickened by how seemingly obvious they are to overcome.<\/p>\n

It’s easy to dismiss these barriers are trivial, and say, “Oh, that’s so dumb!” when you realize that not having an envelope nearby could cost someone over $3,000. But it’s true. And by the end of this article, you’ll be able to identify at least three barriers in your own life \u2014 whether you want to or not.<\/p>\n

\"The<\/p>\n

<\/span>Why People Don’t Participate in Their 401(k)s<\/span><\/h2>\n

If you’re like me, whenever you hear that one of your co-workers doesn’t participate in their 401(k) \u2014 especially if there’s an employer match \u2014 you scratch your head in confusion.<\/p>\n

Even though this is free money, many people still<\/em> don’t participate.<\/strong> Journalists will cite intangibles like laziness and personal responsibility, suggesting that people are getting less responsible with their money over time. Hardly.<\/p>\n

It turns out that getting people to enroll in their 401(k) is just plain hard. Using simple psychological techniques, however, we can dramatically increase the number of people who participate in their company’s retirement plan. One technique, automatic enrollment<\/a>, automatically establishes a retirement plan and contribution. You can opt out at any time, but you’re enrolled by default.<\/p>\n

Here’s how it affects 401(k) enrollment. (“AE” = automatic enrollment.)<\/p>\n

\"401k<\/p>\n

From 40% participation to nearly 100% in one example. Astonishing.<\/p>\n

Today, J.D. has given me the opportunity to talk about one of the ways to drive behavioral change when it comes to your money. I call them barriers.<\/p>\n

While I do this, I’m going to ask you for a favor. You’ll see examples of people who lost thousands of dollars because they wouldn’t spend one hour reading a form. It’s easy to call these people “lazy” \u2014 and there’s certainly an element of that \u2014 but disdainfully calling someone lazy doesn’t explain the whole story. Getting people to change their behavior is extraordinarily hard \u2014 even if it will save them thousands of dollars or save their lives. <\/strong><\/p>\n

If it were easy, you would have a perfect financial situation: You’d have no debt, your asset allocation would be ideal and rebalanced annually, and you’d have a long-term outlook without worrying about the current economic crisis. You’d be at your college weight, with washboard abs and tight legs. You’d have a clean garage.<\/p>\n

But you don’t.<\/p>\n

None of us are perfect. That’s why understanding barriers is so important to changing your own behavior.<\/p>\n

<\/span>“Just Spend Less Than You Earn!”<\/span><\/h2>\n

There’s something especially annoying about comments on personal finance blogs. On nearly every major blog post I ever made, someone left a comment that goes like this: “Ugh, not another money tip. All you need to know is: spend less than you earn<\/a>.”<\/p>\n

Actually, it’s not<\/em> that simple. If that were the case, as I pointed out above, nobody would be in debt, overweight, or have relationship problems of any kind. Simply knowing a high-level fact doesn’t make it useful.<\/strong> I studied persuasion and social influence in college and grad school, for example, but I still get persuaded all of the time.<\/p>\n

These commenters make the common mistake of assuming that people are rational actors, meaning they behave as a computer model would predict. We know this is simply untrue: Books like Freakonomics<\/em><\/a> and Judgment in Managerial Decision Making<\/em><\/a> are great places to get an overview of our cognitive biases and psychological motivations.<\/p>\n

For example, we say<\/em> we want to be in shape, but we don’t really want to go to the gym. (J.D. is a prime example of this, and he’ll be the first to admit it.) We believe we’re not affected by advertising, but we’re driving a Mercedes or using Tupperware or wearing Calvin Klein jeans.<\/p>\n

There are dramatic differences in what we say versus what we do.<\/strong> Often, the reason is so simple that we can’t believe it would affect us. I call these barriers, and I’ve written about them before<\/a>:<\/p>\n

Last weekend, I went home to visit my family. While I was there, I asked my mom if she would make me some food, so like any Indian mom would, she cooked me two weeks’ worth. I came back home skipping like a little girl.<\/p>\n

Now here’s where it gets interesting. When I got back to my place, I took the food out of the brown grocery bag and put the clear plastic bags on the counter. I was about to put the bags in the fridge but I realized something astonishing:<\/p>\n

\"Food<\/p>\n

…if I got hungry, I’d probably go to the fridge, see the plastic bags, and realize that I’d have to (1) open them up and then I’d have to (2) open the Tupperware to (3) finally get to the food. And the truth was, I just wouldn’t do it. The clear plastic bags were enough of a barrier to ignore the fresh-cooked Indian food for some crackers!!<\/p>\n

Obviously, once I realized this, I tore the bags apart like a voracious wolf and have provided myself delicious sustenance for the past week.<\/p>\n

I think the source of 95%+ of barriers to success is\u2026ourselves. It’s not our lack of resources (money, education, etc). It’s not our competition. It’s usually just what’s in our own heads. Barriers are more than just excuses \u2014 they’re the things that make us not get anything done. And not only do we allow them to exist around us, we encourage them. There are active barriers and passive barriers, but the result is still the same: We don’t achieve what we want to.<\/p><\/blockquote>\n

I believe there are two kinds of barriers.<\/p>\n