What Can I Do About T?
Self-Control, or the Lack of ft!
A common adage on Wall Street is that the markets are motivated by two emotions: fear and greed. Indeed, this book suggests that investors are affected by these emotions. However, acting out of fear or greed is rarely the wise move. The decision that will benefit you over the long term is usually made in the absence of strong emotions. You will face a lifelong struggle choosing
between decisions that make
the present more enjoyable
and those that will make the
future more enjoyable. Many
decisions require balancing
this trade-off. Do you read this chapter now or later? Do you
purchase a new stereo or invest the money for the future?
The self-control problem can be thought of as the interaction or conflict between your two selves—the planner and the doer. The doer (your emotional side) wishes to consume now instead of later and to procrastinate on unpleasant tasks, acting on desire. The planner (your rational side) wishes to save for later consumption, show will power, and complete unpleasant tasks now.2
Fortunately people recognize the fact that they sometimes lack willpower and that this can lead to spur-of-the-moment decisions. Our society is full of examples of people recognizing they need help with self-control, such as diet clinics, Alcoholics Anonymous, drug abuse treatment programs. In fact, we are often willing to pay for help.
SHORT-TERM VERSUS LONG-TERM FOCUS
In general, you like to receive rewards early and put off unpleasant tasks until later. However, this attitude depends on the circumstances. Consider this example.3 If people are asked on February 1 whether they would prefer to do seven hours of an unpleasant task on April 1 or eight hours of the unpleasant task on April 15, people prefer to do the lesser work on April 1. However, if given the same choice on the morning of April 1, most people decide to delay the work until April 15 even though it means doing more total work. When making decisions involving the present, you often procrastinate, even when it causes you to do more work later.
This attitude can also affect your investment decision making.
CONTROLLING OURSELVES
Most people want to maintain self-control and implement decisions that provide benefits over the long term. However, oftentimes desire is stronger than willpower, prompting people to employ many techniques to help them have willpower. I categorize these techniques into two groups: rules of thumb and environment control.5 These techniques can help you to reduce desire and increase willpower.
Rules of Thumb
Rules of thumb can help you to control your behavior. You can create these rules during times when your willpower is high and emotions are at a low ebb. During situations with high emotion and desire, you can rely on these rules to remind you how to exert willpower. Consider these common rules.
■ To control spending: don't borrow money.
■ Also to keep spending down: fight the urge to splurge.
■ Recovering alcoholics use: not one drop.
■ Retired people who don't want to outlive their money control spending with: don't touch the principal.
■ Employees should contribute to their 401(k) plan and refrain from spending the money early through loan programs. To remember the importance of this strategy: save much, don't touch.
■ To control emotional biases and trading behavior, investors: buy low, sell high.
■ To maintain a long-term perspective during bear markets: stay the course.
Environment Control
You can also control your environment to help with willpower. Common ways to control the environment are to remove desired objects from the area or avoid situations that are likely to cause self-control problems. Common examples are:
■ People on a diet will not keep cookies in the house.
■ Gambling addicts will avoid going to Las Vegas.
■ People that are always late set their watch a few minutes ahead.
■ People who have trouble getting out of bed place the alarm clock across the room to force themselves to get up.
■ Forgetful or unorganized people make lists to help them get things done.
People are often willing to incur costs in order to maintain self-control. For example, professional athletes earn the vast majority of their income during a short time period. After earning millions of dollars, some end up bankrupt because they could not control their desires. To help with willpower, some athletes hire agents to impose limits on their consumption. For another example consider the average smoker. Most smokers recognize that they should not smoke too much (or at all). In order to avoid smoking too much, most smokers buy cigarettes by the pack because the easiest way to control the number of cigarettes smoked is to control the number available. But this technique causes higher spending on cigarettes since it's more expensive to buy by the pack than by the carton. Nevertheless, smokers are willing to pay the extra cost in order to control their environment in the pursuit of stronger willpower.