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213. Common Errors in Financial Decision Making with Dr. Chuck Howard

Jul 15, 2022

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Today I am very excited to introduce you to Dr. Chuck Howard, an Assistant Professor of Marketing in the Mays Business School at Texas A&M University. In his research, Chuck asks questions like, “Why do consumers so often underpredict their future expenses?” and “Why do people who work in the gig economy over-predict their future income?” He then designs simple solutions for these problems that help people improve their financial well-being.

Chuck’s research has earned awards from the Society for Consumer Psychology, the Society for Judgment and Decision Making, and the Behavioral Insights Group at Harvard University. Chuck earned his Ph.D. in Marketing and Behavioral Science from the University of British Columbia, and his BA in Economics and Finance from Ryerson University.

I met Chuck on a recent trip to College Station and we have had a few conversations since then. Upon hearing about some of his recent research I thought it would be something that you would find interesting (I sure did!) and while it is more on personal financial decision-making, we definitely talk about this from a business aspect, and the insights are relevant to everyone -- especially all the people in the financial industry who I know listen to the show.

Show Notes:

[00:41] Today I am very excited to introduce you to Dr. Chuck Howard, an Assistant Professor of Marketing in the Mays Business School at Texas A&M University.
[03:36] Chuck and Melina didn’t meet in the same way as most guests of the show.
[04:04] Chuck shares about himself, his background (including a “gap decade”), and how he found himself in this space.
[06:30] He was able to combine his passion and knowledge of psychology and economics to land on studying consumer financial decision-making.
[07:38] Making ridiculously optimistic budgets or underpredicting your future expenses can help a lot of people spend less money. They often spend more than they budget (but still spend less than they used to) as long as they track their spending.
[10:12] Melina and Chuck talk about some weird common sayings and how they don’t always translate around the world.
[10:51] There are a number of situations in which you need to have an accurate view of how much you are going to spend in the future.
[13:14] He was motivated to understand why people underpredict expenses and how we can improve their predictions and accuracy. He wanted to help people make better financial decisions to improve their financial well-being.
[14:25] People’s predictions of expenses are deeply grounded in their past experiences. The problem is they are only thinking of the very typical things they have endured.
[16:18] In their research, they never found that the tendency to underpredict expenses or over-predict income is tied to being an optimist. It is simply about what comes to mind most easily when you are making the prediction.
[18:23] Chuck shares about a study they did where they asked people over several weeks to tell how much they spent the week prior, how typical their spending was that week, and how much they think they will spend the following week.
[19:25] Atypical expenses are common in the sense that they happen a lot of the time, but then they are uncommon because it is not the same thing repeated over time so people don’t think they will happen again.
[22:20] If the person you are thinking of is similar to you then it could be helpful to think of their spending. It could help you gain perspective on your spending.
[24:59] To make more accurate expense predictions they prompt people to consider a handful of reasons why their expenses will be different than usual. This helps them think of those atypical expenses and increases prediction accuracy.
[26:23] So far, they have people type out the reason that their budget could be atypical. Writing it down may help because it takes a load off your working memory.
[29:00] They were motivated to do budgeting research because there was a debate about whether or not budgets actually work.
[30:08] Even though peoples’ budgets are wildly optimistic and they never end up spending as little as they have budgeted, they still end up spending substantially less than they used to.
[32:23] You have to be tracking your spending against your budget. Once a week is ideal.
[34:58] At the end of the day it is typically about understanding why.
[36:53] Be very conscious of what information you are giving to people and when.
[38:55] Even if you haven’t hit your budget (because most people don’t), you are still spending less than you used to.
[41:40] They found that budgets are an effective way to decrease spending across a number of different personality traits.
[42:11] Tracking and monitoring your behavior against a goal can be very powerful.
[45:21] Melina shares her closing thoughts.
[47:40] If you enjoy the experience I’ve provided here for you, will you share about it? That could mean leaving a rating/review or sharing the episode with a friend (or 10!)

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