Dan Ariely on Breaking Bad Financial Habits Using FinTech

Kerry K. Taylor:
Hey, I’m Kerry Taylor, and welcome to another episode of SquawkfoxTV and the Cash and Kerry podcast, so look, over the last several months, our lives and behaviors have changed dramatically during this pandemic, and it’s transformed our financial lives too, leaving many of us wondering how to save, spend, and invest in the future, so if you’re feeling a little or a lot of financial anxiety, you’re not alone, and this show is for you. My next guest uses the power of optimism, the gift of humor, and the science of behavioral economics to help us improve our finances, starting today.

Dan Ariely is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University. He’s a world-leading behavioral economist, a renowned TED speaker, a multiple “New York Times” bestselling author, and he’s the chief behavioral economist at Qapital, so he’s uniquely positioned to give us some behavioral insight on how to best manage our money during these challenging times.

He’s joining us from Israel. It’s great to meet you, Dan.

Dan Ariely:
Same here. Lovely to be here, and it’s a Friday night here, so I have a glass of wine. I don’t know what you’re drinking, but for me it’s evening. It’s already okay.

Kerry K. Taylor:
Oh, I approve. So I have a couple of your books here.

Dan Ariely:
Wow. Okay.

Kerry K. Taylor:
If you keep writing at this pace, I may need a bigger house.

Dan Ariely:
Wow. That’s very sweet.

Kerry K. Taylor:
I’ve noticed you’ve done a lot of interviews while you’re in Israel, and I’ve seen you do a lot of speeches as well, and you often explain why you have half a beard.

Dan Ariely:
Yes, that’s a very good point, and when I don’t explain half a beard, I know that people wait to the point, like, what’s the point of this half a beard? When are we going to discover what’s the point? So there’s no point. As you know, many years ago I was badly burned. Most of my body is covered with scars, my hands, most of my body. I was burned in about 70% of my body. I spent almost three years in hospital. It was a very dark, difficult, complex period, but as a consequence, I have scars on the right side of my face, so it looks sort of symmetrical, but it’s just because how the explosion happened. But a few years ago I went on a hike for a month, and I emerged like this with half a beard, and I decided to accept myself.

Kerry K. Taylor:
This time last year I was in treatment for breast cancer, so I went through chemotherapy, and at this time last year I’d shed my entire coat, so it was unpleasant having no hair on my head, but the worst was actually not having eyebrows or eyelashes because people found it difficult to communicate with you ’cause you can’t express yourself, so I understand how people relate. It’s a challenge, but-

Dan Ariely:
Yeah, but you’re back with eyebrows, so I hope your health is doing well?

Kerry K. Taylor:
Yes, I’m doing well.

Okay, let’s talk a bit about behavioral economics.

Dan Ariely:
Happier things. Let’s talk about behavioral economics.

Kerry K. Taylor:
Enough. Okay, so let’s improve our financial decisions, and I think it would help to know, if we’re gonna talk about how behavioral economics plays into this, what the difference between behavioral economics is, and how is it different from standard economics?

Dan Ariely:
So there’s lots of ways to think about it, but I think about it in two ways. The first one is that standard economics assumes lots of things. We assume that people are rational. We assume people can think about everything. People can know anything. We have infinite computational power. We can think into the future. We have no emotions, all kind of assumptions. Behavioral economics doesn’t assume anything. It just says let’s test things, right?

And the second thing is that it’s more of a science than religion in the following sense, that the standard science, it doesn’t start with assumptions. Economics does, but if you talk about biology, there’s no assumptions: all creatures are rational. We’re just saying we’re open to data, and from that perspective, behavioral economics is just open to data. It’s perfectly fine if people behave rationally. It’s perfectly fine if they’re not. We have no horse in the game, but we just want to see what people do, and why is that important? It’s important because social science is not just what’s called descriptive. It’s not just describing reality. It’s also prescriptive. It’s also tell us how to build the world, so imagine that you want to build, to give instructions of how to get people not to, to wear a mask, and wash their hands, and keep social distancing.

A standard economist will say it’s a very, very simple thing to do. Just tell people what to do. Give them the probability, and they’ll do it. A social scientist, a behavioral economist, will say not so easy. One of the challenges is that every time you see a person who’s not wearing a mask, that person is much more salient to you than the people who are wearing a mask, and you have a hard time going to somebody and say, “Could you please put a mask on?”

I was in Eastern Europe at the beginning of the year, and somebody picked me up from the airport. Picked me up, I sit next to him, and I put my seatbelt on, and he says, “Why do you put your seatbelt on? Don’t you trust me?” And first of all, I don’t trust him, but didn’t know him, but it was interesting to how he took that as a sign of offense. Now, imagine that you’re walking in the street, and you tell to somebody, “Could you please put a mask on?” It’s a very difficult thing, right? It’s as if you’re telling somebody, “I think you’re contaminated in some way,” so once you understand all these nuances, you’re much, much better able to design something better, so standard economics makes some very simplified assumptions.

Behavioral economics doesn’t make any assumption. We’re trying to learn what people actually do, and then the second thing is when we’re trying to build something in the world, I prefer the behavioral economics perspective because now you are informed, like you’re building a bridge, you’re building a hospital, you’re building a school, you’re building instructions, whatever it is that you’re building, you take human nature into account just making assumptions about it.

Kerry K. Taylor:
I love it. I love behavioral science because, well, specifically with money because so many people struggle with money and behavioral science explains that the struggle is real, right? Like we make these mistakes for some very explainable reasons, and standard economics kind of ignores it, so if I give someone a budget spreadsheet or a compound interest calculator and assume they’ve got it all figured out, they’ll master their money, they don’t. There’s so much more involved. There’s so much more psychology involved, and it just-

Dan Ariely:
That’s right.

Kerry K. Taylor:
I feel-

Dan Ariely:
It’s actually-

Kerry K. Taylor:
I feel like.

It helps.

Dan Ariely:
Yeah, it’s actually worse. It’s actually worse because in standard economics you don’t have to give anybody a compound calculator. They’re supposed to just intuit that because that’s how interest compounds, and you’re supposed to be able to figure it out, so you’re supposed to say, “Oh, I have this glass of wine here. The opportunity cost with compound interest over the next 20 years is so and so. Let me not get this wine,” but of course it’s impossible, and we don’t think like this, and therefore we often get into lots of trouble financially, and the other thing that happened is that in the financial world, like in nature, the orange tree is not your enemy. It’s just an orange tree, but in the market we have competition, so for example, most banks want us to overspend, right? They make money, the most amount of money they make over people who are revolving their credit, so their interest is to create lots of people who revolve their credit, still pay it, but revolve their credit and pay high interest rate, and they can do things, right? They are an interested party, and they can do things to make it more difficult for us to understand what the consequences of our actions are and therefore take advantage of us, so it’s not only that we’re naturally not inclined to deal with money. Most of the institutions out there are not designed to help us. They are designed to take advantage of us. It’s a competitive system.

Kerry K. Taylor:
Yes. For sure. I mean, and a lot of the old-school writing with money also tells people, “Use your willpower. “Use self-control; you’ll save more money,” and that advice doesn’t really help. Even when you have logical tools, the willpower thing just fails every time.

Dan Ariely:
Willpower is very tough, right? If the instruction is use your willpower all the time, that’s not a recipe for help, right? If I say to-

Kerry K. Taylor:
It’s exhausting.

Dan Ariely:
It’s exhausting. That’s right, and you don’t have to fail a lot to fail, right? So imagine that we filled your home with doughnuts and cookies, all kinds of things, and chocolate, and great smells. Will you fail 100% of the time? Of course not, but will you fail from time to time? Absolutely, and what you’re saying about exhaustion is also true, is we call this depleting. As you react to temptation, like you see a doughnut and you say, “No,” and you see a cookie and you say, “No,” it eats at your willpower, and at some point you get exhausted, and you’re more likely to fail, so we have an environment that is set up to tempt us, and we have to figure out how do we fight that? And the answer of just learn how to control yourself is not enough.

I’m really curious about the Dalai Lama, right? Here’s a guy who is clearly practicing eight hours a day for self-control, and I met him once, and I wanted to do some experiments with his monks. He was not interested, but this would have been great because normal people, like you and me, we haven’t really practiced that much self-control. These guys have practiced a lot, right? And presumably we can test are they more successful? And in what way, in what tasks, and so on, but the idea of just resist it is not is not a good instruction.

A much better instruction is to eliminate temptation, so think about something like automatic deductions. If your paycheck goes into your bank account, and it stays in your checking account until you decide to put it into savings, there’ll not be much savings. If we take a part of it, and we automatically move it into a savings account, savings will accumulate without your actions. Basically, if we wait for people to take the right action all the time, there’ll be too many times that we’ll fail, so we want to take things, automated things, and by way, what’s wonderful about money is that money’s digital now, right? So imagine we were stuck in a world in which we only had physical paper money. People got their paycheck in cash, and we had to deal with everything. We couldn’t automate anything.

The fact that money moved into digital provides both opportunities and danger, and what’s the danger? The danger is things like the Amazon Shop where you go into a store, you take things off the shelf, and then they charge you a month later. You don’t even see the money, right? And under those conditions, people don’t think about money, and they overspend. On the other hand, we could do things that you could think better about money, so as long as we had physical money, we were very limited. Now that we have electronic money, we can decide what we want to do. We can decide to create payment methods that get people to think more deeply or think less deeply. Now, I’m personally hoping it will get people to think more deeply and make better decisions, and-

Kerry K. Taylor:
Well, I have a question about the cashless world. I’ve ventured out of my house in the last little while, ’cause retailers are now opened, and I’ve noticed something new is that a lot of them have signs that say cash not accepted. We no longer accept cash. They want contactless payments, so credit card tap, mobile wallets, and I know you’ve written a lot about how using cash can reduce spending because it’s painful, right? It doesn’t feel good to hand over money. Well, why is cash so painful? And what could it mean if we’re moving into a cashless world now?

Dan Ariely:
Yeah, so basically, the story with cash is what is called the pain of paying, and of course it’s not physical pain, but it’s mental pain, and kind of just as a thought exercise, you can say, “How would it feel like if you went to a restaurant, and every time we took a bite, they charged you a dollar.” Imagine a steak is $25 on average. It’s 25 bites. You could say what would happen if every time you took a bite, somebody would make a note and then charge you a dollar for it? It would be very painful because the thing is that when we think about the money, our enjoyment goes down, right?

And that’s the pain of paying. It’s about thinking about money, and what credit cards do is they get us not to think about money because we don’t feel that we’re paying; we’re swiping. We don’t see the money leaving. Most of us, when we get a credit card statement end of the month, we’re surprised by the amount. It’s because we haven’t really thought about all the things that go into it. They don’t really register that much, so the pain of paying is really thinking about the opportunity cost, so if I gave you an amount of money, let’s say $100 a day to spend, you would see what’s going on. You would see that if you buy a huge lunch, you might not have money for rent or something like that if you got money every day for just a day. If you get a credit card, part of the way it works is we don’t think about how much we’re spending. We just spend, spend, spend. We don’t see the opportunity cost. We don’t see what we’re giving up in the process, so there’s no question in my mind that moving to more digital is going to get people to spend more.

Now, there is a solution for that-

Kerry K. Taylor:
Yes, I like solutions.

Dan Ariely:
and the solution, the solution is the prepaid debit, right? So it’s true that credit card is a mechanism to get people to spend more, but prepaid debit is better, and you mentioned Qapital earlier, and Qapital, they have a version of a prepaid debit card, so I have one of those, and it loads money onto my account, and then I see it going down, and right? The moment you see something going down, zero is very clear.

Kerry K. Taylor:
My heart rate.

Dan Ariely:
Yeah, that’s right. If the amount is going up, how much is it going, and what’s the end? It’s not clear. If it’s going down, zero is very, very clear. The second thing we did was we found out that it’s much better to have this budget load weekly rather than monthly. Why? In my personal case, I use it for discretionary spending. That’s what it’s supposed to be used for, and I load $2,000 a month, but it turns out that if you load $2,000 a month, and you check it, you say, “Oh my goodness, I’m rich,” In the beginning, it looks like I have so much money for discretionary spending. People spend it too fast. If instead, you break it into $500 a week, that’s much better.

And there’s another trick. Do you load the card on Monday or on Friday?

Kerry K. Taylor:
Oh, you want me to guess?

Dan Ariely:
Yes.

Kerry K. Taylor:
I’m gonna say Monday.

Dan Ariely:
You’re right.

Kerry K. Taylor:
‘Cause the weekend, I’d wanna spend.

Dan Ariely:
That’s right, that’s right, so if you load on the weekend, on Friday, you spend a lot, right? You have more time on the weekend. You have more things to do. Actually, people think about, there’s a question in retirement: how much money do you need in retirement? And people say, “Oh, 70% of my assets,” but the reality is that we did this exercise. We didn’t ask people, “How much money do you need in retirement?” We asked people, “Tell us how you want to live at retirement?” and then we calculate how much money they need, and they need about 120%.

Why? Because retirement is like the weekend. Actually, working is very cheap. Somebody occupies you for eight hours a day and gives you free coffee. It’s an amazing deal. If you didn’t have that time, you have to find expensive thing, I mean, not very expensive, but you have to fill your time with something, so if it’s on Friday, then it’s very, very expensive. People spend way too much.

If it’s on Monday, you get to savor and wait for the weekend, and if you miss the weekend, the weekend is easy to scale up and down, so if you think about this version of a debit card, you can say how, instead of working like a credit card, getting you to overspend, it gets you to set your goals and live in a way that is closer to your goal, and actually, better than cash, right? Because imagine that you did a substitute. You had $500 in cash in an envelope, right? That’s a good solution because you would see it going down, but you wouldn’t know how much you had. You would have to recount it all the time, so there are benefits of electronic money. I don’t think it’s always bad, but we have to decide is the technology going to fit with human nature and help? Or is it going to be antagonistic and try to take advantage?

Kerry K. Taylor:
I’m a bit of a pessimist. I feel like a lot of these new technologies are taking advantage.

Dan Ariely:
You’re absolutely right, so first of all, you’re absolutely right. There’s lots of attempts to, for people to take advantage, but I don’t think, I’m not of a, as a pessimist as you are, because I think a lot of it, and this is kind of a individual perspective, I think a lot of it comes from stupidity rather than evil, and I think that a lot of, even credit card companies, haven’t thought very carefully about what it is that they are doing, so I think, yes, there’s some wishful thinking and some not paying attention.

I’ll tell you another story. Very different era. A few years ago, a couple of entrepreneurs came to me, and they said that they want to do a digital insurance company. I said, “Great,” and they asked me if I want to join them, and I said, “Absolutely not. “I don’t see a reason to join the insurance company,” and then they said, “What could we do to make it interesting for you?” My answer was, “What if it was an insurance company with no conflicts of interest?”

Kerry K. Taylor:
Okay, so Dan is gonna be modest about this insurance company.

It’s called Lemonade, and with Lemonade he’s completely made over and changed the adversarial relationship with buying insurance and making claims. Lemonade is the world’s first peer-to-peer insurance carrier, so funds contributed by members are shared communally. Now, last summer Lemonade went public and grew beyond a small pop stand with more than 140% gain, I’ll link to Lemonade in the show notes below.

Dan Ariely:
With a regular insurance company, you have the consumers, you have the insurance company, and consumers pay, pay, pay, pay. At some point something bad happens, they want the insurance company to pay them back, and what does the insurance company want to do? Not to pay back. It’s very simple, right? It’s a zero-sum game. There’s a pie. The insurance company holds all the pie, and every money, every dollar they give away back, they have less.

It’s a conflict of interest, and consumers know that the insurance company doesn’t want to pay them back, so they exaggerate. You lost a cheap watch; you say it was an expensive watch, and the insurance company know that people exaggerate, so they make it difficult, and complex, and painful.

Kerry K. Taylor:
It’s a strange dance.

Dan Ariely:
It’s a strange dance, and it’s not the way you would design it. Now, I don’t think it’s evil. I think it was just designed in a non-thoughtful way, so I said, “What if we decided to fix it?” So they said, “How?” I said, “What if, instead of a two-party game, we made a three-party game?” You have consumers, you have the insurance company, and you have a charity, and when people join this insurance company, they pick the charity they love the most in the whole wide world, so maybe it’s the World Wildlife Fund, and they pay, and the insurance company takes a fixed amount, let’s say 20%. Their management is 20% of that. They put it aside, and they have a pool for all the people who join under the World Wildlife Fund, and they pay people from the pool, and the end of the year, there’s money in the pool.

The money doesn’t go to the insurance company. It goes to the charity. Now, what it does is it makes the insurance company have no conflicts of interest. We always make 20%. There are more claims. There are less claims. We are indifferent to that. It’s all the way the money is divided between consumers and the non-for-profits, and if consumers cheat us, who are they cheating? The non-for-profits ’cause we always take 20%.

So we started this company five, about five years ago, and lots of good things happened, and in particular, about two weeks after we started, we got the first interesting e-mail from somebody, and he said, “I insured my apartment with you. I reported a theft. My laptop was stolen. You paid me. Thank you, but I just realize that nobody stole my laptop. I just misplaced it,” and he said, “How do I return the money?” Now, on that day, I called all my friends in all kinds of big insurance companies, and I asked them, “How does the form look like when people pay you back?” Guess what? They don’t have a form.

Kerry K. Taylor:
It’s never happened before.

Dan Ariely:
That’s right. It doesn’t happen. They don’t need, and we get these things happening from time to time. By the way, this company is doing well. Last week we had an IPO.

Kerry K. Taylor:
I saw. Lemonade.

Dan Ariely:
Yeah, yeah, so we’re very happy with that, and part of it is I’m happy. Insurance is an important product, and so on, but part of it is your pessimism, right? Partially, for me, Lemonade is so important because it shows that you can be on consumers’ side, right? This notion of an antagonistic financial service companies that are trying to squeeze everything out of consumers rather than provide services that are helpful, important, and so on, and make, I mean, everybody should make a decent living, but there’s no reason to get into conflicts of interest or abusive relationships, so I’m hopeful, and Lemonade, for me, is a good example of how you basically say, “Let’s change the rules of the game”.

And next, if you ask me what’s my wishlist, I want a bank. I want a bank that does the same thing, but I want a bank that says, “We’re on your side as a consumer, and we’re not going to be any conflicts of interest, and we’re only going to serve you, and we’ll charge for it,” which is fine, but will not be any conflicts of interest.

Kerry K. Taylor:
Right, well, why don’t I just skip ahead and ask you about Qapital now? ‘Cause I’m fascinated. I checked it out, so you’re the chief behavioral economist at Qapital. Qapital is a banking and budgeting app available in the United States, and it uses behavioral finance principles to help make people better, to help people make better decisions with money and help improve their financial habits. I took a look. The UI is very not bank-like. It’s fun to look at, so-

Dan Ariely:
The designers are great, I have to say. They’re really wonderful, and there’s like a magic to design that science hasn’t figured out. I can’t tell you what’s a good design, but when you see it, you recognize it, and then there’s lots of elements from this, so we talked already about the cards, right? Preloaded once a week on Monday and so on, but there’s lots of other features.

One important feature is realizing that the money you have in your checking account is not always, is not the money available to be spent, so think about two people, as an example. Both of them get paid on the first of the month. One of them has their mortgage check coming out on the 2nd, and one of them on the 19th. What’s the difference in how they perceive their finances? The guy that has their mortgage coming on the 19th, for 17 days thinks that they have money, but they don’t.

The money has been spoken for, but it just sits in your checking account, so in many ways the checking account is like the garbage can of personal finance. You have money there. Some of it is for mortgage. Some of it is to pay your insurance in six months. Some is to pay your kid’s tuition. Something is for summer. It’s really not a good system. You wouldn’t design a checking account. You wouldn’t go to a company, and go to the CFO, and say, “Can you make this investment?” And he would say, “Let me look at how much money I have in checking.” Money has been labeled. In fact, the moment your salary hits, almost all of it has been labeled, some of it more than once, but you just don’t remember the labels, so one of the things that Qapital does is to be more specific about those labels, and we use goals.

Kerry K. Taylor:
Is this like mental accounting?

Dan Ariely:
That’s right. That’s right, but it’s not mental. We create a real representation for it, right, that says, “This is your money for your summer vacation, and this is your money for your next computer, and this is the money to pay your bills, the insurance bill and your kid’s school tuition, and so,” and that helps you understand better.

Kerry K. Taylor:
As an aside, let’s unpack mental accounting because it’s a cognitive bias most of us have. Mental accounting is our tendency to label money and put it in a specific bucket that isn’t interchangeable, but our money is interchangeable. One dollar is as useful as another, but we still tend to put our money into different mental accounts and use it differently, so you may spend your tax refund more freely by treating yourself, but you’ll be way more responsible with your paycheck and use it to pay the bills. That’s mental accounting.

Now, Dan puts this bias to really good use at Qapital because he turns mental accounts into physical banking accounts, so people can visually keep track of budgeting and calculate the opportunity cost of spending from one category to the next, so our budgets become way more physical and a lot less mental.

Dan Ariely:
And then, on top of that, there are things that help you get more motivated, so there’s some things that are just not that motivating, like long-term saving, or paying off debt, and so on, and we have all kinds of things that increase the motivation. We show you progress. There’s a really beautiful integration with If This Then That, so you can, for example… I put a bit more money into our summer vacation every time my kids e-mail me. Let’s say every time the kids e-mail me, a bit more money moves into that. You could do rules that says, if you walk 10,000 steps, money will go into your coffee account. I mean, there’s all kinds of things to do, which is basically creating lots of opportunities to motivate ourselves, and when you think about money, there’s really kind of couple of decisions. It’s about consuming now versus later.

That’s one decision, and for that, we need to understand the later. We need to visualize the later. We need to think about the later, and we need to understand those trade-offs, and if somebody goes automatically into later, and then we say, “Oh, well, I want to take it back,” that’s a better process than saying everything is in the now, and I have to move money into the later, and the second thing is to decide what we want to buy now, and again, here, going back to our supermarket example from earlier, or the food example, the world is trying to derail us.

You go to the supermarket, and you have a list in your mind, and you have a budget in your mind, and then the supermarket has a different goal, and their goal is not the same as yours, and guess what? They control the environment, so they decide what to put at the end of the aisle, and they decide where to put the cookies, and what to put next to the cashier, and they’re not trying to get you to buy more cucumbers. They’re trying to get you to buy the things that tickle your emotions and get you to crave something. That’s a much easier job for them, so Qapital is basically trying to say, “Tell us what your goals are. “We’ll help you, “and then we’ll do the budget “in a way that would help you keep those things. “We’ll help you.” I mean, we can’t guarantee it, but we’ll get you get more enlightened.

Kerry K. Taylor:
Right, so I guess with the budgeting, then, we can weigh opportunity cost, and when we see goals, then it becomes visual, so we get motivated.

Dan Ariely:
That’s right, so imagine two cases. Imagine two people. Both of them want to buy a new bicycle at the end of the year, and it’s a relatively expensive electronic bike, and they want to drive their car less and use their bike, and one of them has a mental budget for that, or a budget for that, and every time they get a paycheck, $200 goes to that account, and the other person doesn’t have it. The money is just sitting in checking account, and now both of those people go for a drink in the pub, and one of their friends says, “You know, there’s a really amazing new restaurant in town. They charge $400, but it’s an amazing meal,” and they both look at their bank account to see if they have enough money or not.

Which one is likely to be tempted? The one that wants the bicycle see that they, they don’t have that much money in checking account, and they realize that if they want to do that, they have to take money away from their bike, right? Now, that person could say, “Oh, you know what? “I’ll delay the buying the bicycle by two months, “and I’ll take $400 away from that, and I pay for it,” but at least they’ve done the mental exercise. Now, if that person really wants a bike, and they don’t care so much about the meal, they will not do it. If the meal is better than the bike, they’ll do it, and it’s fine to do it.

I’m not saying people should not go and have amazing meals, but it’s not what people would naturally do, so we need to basically get people to say, “It’s fine. Expensive meal is fine.” We just want to make sure that it really fits with your overall objectives.

Kerry K. Taylor:
Right, so this is all about opportunity cost.

Dan Ariely:
Exactly.

Kerry K. Taylor:
So let’s talk about opportunity cost because it’s the biggest thing we don’t consider when we spend our money because when we spend our money on one thing, that’s money we aren’t spending on something else. Money we spend today can’t be spent tomorrow. What’s the trade-off? There are alternative ways to spending money, and that’s surprising to so many people because we don’t normally consider those alternatives. So before buying anything, try reframing your spending decision in terms of opportunity cost to see if something is worth it for you, and ask yourself, “What are the alternatives to buying this thing? What else could I do with all that money? And what’s the trade-off?”

Dan Ariely:
An opportunity cost is very hard to think about, right? If you’re going to buy whatever it is, let’s say an expensive meal, where’s the money coming from? A lot of the modern tools are making it impossible to see opportunity cost. We want to bring opportunity cost into the picture. We’re supposed to think about opportunity cost, right? If this expensive meal is better, it’s better to delay the bike by two months and buy it, that’s fine, but we need people to at least make those trade-offs.

Kerry K. Taylor:
Right.

Dan Ariely:
But because thinking about opportunity cost is so hard, people naturally just don’t.

Kerry K. Taylor:
Yeah, no, for sure, and I mean, the fact that everything’s automated as well. I mean, I always explain to people we need to have goals, right? So I think people naturally have good intentions ’cause most people, if I ask them, “What are your financial goals?” They can list off a whole bunch, right? But it’s almost like they’ve got the intention, but they don’t put it into practice, so when you automate it-

And it’s hard.

Dan Ariely:
That’s right. That’s right. It’s so hard to put goals into practice, right? What are you supposed to do? It’s so much work, so we don’t do it, but if an assistant, and again, going back to electronic, if we had paper money, setting up goals would be very hard. You have digital money, yes, people can abuse us, but we can also create a system that automatically creates goals, move money automatically, helps us track it, helps us think about what is, and make better decisions. With paper money, it would have been very tough.

Kerry K. Taylor:
Mm-hmm. Okay, that’s amazing. Okay, I wanna talk a bit about the pandemic ’cause a lot has changed in the last few months. Many people have lost their jobs. Some of us are working from home. Some of us have reduced incomes. Our kids are stuck at home with us, so there’s a lot of stress and financial anxiety going on. Have our financial habits changed during COVID-19? Are we making better decisions because we have less money? Or is the pandemic just amplifying our already messy money behaviors? What’s going on?

Dan Ariely:
Yeah, so first of all, it’s terribly sad. Loss of job is real. Governments around the world are too slow in reacting, and the people who have money are also extra cautious, so lots of things have changed, and I think the question now is for how long will this change last?

And one perspective is people are spending less, then the economy will open, and people would go back to what they were spending before, but I think there is an opportunity here, and the opportunity is to reflect on the relationship between spending money and joy, so you’ve been in lockdown for a year, a bit more, and I can ask you, “How much money two years ago did you spend on going out?” And I’m not asking you to say it, but I could, right? And then I could say, “And now that, for the last year, you haven’t, “how much has your quality of life changed?” Now, it could be that somebody said, “I moved from $1,000 a month to 0, “and my life sucks,” and then you say to this person, “Go back and spend lots of money on eating out,” and it could be that people would say, “You know what? “I’m actually enjoying eating at home,” or, “Once a month is sufficient,” so when we come to spend money, the issue is how much joy are we getting from it? And how much is it costing us?

Now, if two years ago I came to you and I say, “Would you mind for three months not going out, “and then report to me “how much it would change your quality of life?” You would say, “No,” but now we had this opportunity. We have been in lockdown. We don’t buy clothes. I mean, lots of things are happening, and I think it’s a good time to stop, reflect, and see whether there’s a new balance between happiness and spending, and if there is, we need to write it down, and we need to create a new budget.

You see, the moment COVID is over, the pressures in the economy would want to get us to go back to the old equilibria, but maybe we don’t want that. Maybe we, and by the way, it’s not just about money. Maybe there are things we’ve realized about spending money with friends. Maybe spend time with friends, with family. Maybe realize new things about sleep, so it’s an opportunity to say we had this terrible period, absolutely horrific in all kinds of ways, but did we learn anything about the equation of money, time, happiness, and can we somehow make decisions that would stay with us for a long time?

Well, I’ll tell you, just for me, personally, I used to spend, I used to travel about 300 days a year. That’s a lot. The last few months, 0. All of a sudden, I’m saying, “You know what? “There used to be days “when I had a project in a slum in Africa, “and I would just fly over, spend a day, “land in the morning, “spend two days in this particular slum, “learn as much as I could, and take a flight back.” That was lots of hours. All of a sudden I’m thinking, “Are there better ways to spend my time “and to learn the things I had to learn?” So in all kinds of ways, I think it’s a really important opportunity to reflect.

Kerry K. Taylor:
What are some of the most important financial decisions we should be making right now?

Dan Ariely:
Yeah, so first of all, I think we see at Qapital that people are opening lots of emergency savings, and I think that being diligent about saving is incredibly important, and first of all, it gives us some sense of control in this period where we have so little control over our lives. It gives us some resemblance of control. Here, I’m putting money into savings. I’m putting money into savings, so I think we have to do that. We have to create a rainy day. None of us know what exactly will happen to the economy, and our job, and so on.

We have to also figure out what we can cut on spending, and I think we all need two plans. We need a plan for now, to say, “Let me cut spending right now “in the following things,” but we also need to have a plan just in case things get worse, so you can say, “Okay, if my income is get cut by more than 20%, “what will I do?” Rather than wait for that to happen, we should plan, so I think savings, reduce spending now, and a plan for later is important. Also, there are all kinds of things to, all kinds of things to trim. In the U.S. lots of people have storage units, right? So you had all this stuff that you accumulated over a long time, and you didn’t have enough space at home. You buy it. You rent space outside. Maybe it’s time to let go those.

And then the other thing is there is going to be, there is unemployment now, and there’ll be more unemployment, and brushing up on skills, and the kind of, imagine a few scenarios. Scenario one is the whole company closes. Scenario two, there are layoffs, and some people are let go, and some people are not. Improving our human capital is incredibly important, right? So this is, it’s going to be tough. It’s going to be tough in the next phase of looking for a job, and we all need to kind of figure out what we need to brush on, improve, and so on to be relevant to the workplace.

Kerry K. Taylor:
Yeah, for sure. I feel like I’m always in school. Okay, one last question. The stock market moves a lot. It’s really uncomfortable when we see our retirement savings take a plunge, and I get a lot of e-mail from readers who want my advice on timing the market. They wanna buy the dip, and I tell them I don’t know the dip. I’m not clairvoyant, so it’s a struggle to explain this, but should people even be looking at their portfolios right now?

Dan Ariely:
No. No. There was a study by Fidelity a few years ago, and they found that the people who did the best long-term investing are people who died, right? Because they did not do anything in their portfolio, and the reality is what happened is if you’re trying to time the market, you can’t be smarter than everybody else. It just doesn’t work, so my sense is the best strategy for most people, so in the stock market, in general, some generalization. There are people who are experts, and the people who are experts should go ahead, and time the market, and do what they want in the.

Then there are people like me, who basically say, “I’m just an average Joe. “I don’t know anything more than other people. “I don’t have a unique perspective,” and for me, it’s kind of, I want some money in cash in case something bad happens, and the rest of it, I have no idea. I’ll put it in the stock market, and I will not watch because watching is just painful. Why do I want this pain, right? I’m not going to make any decision, and then there’s the middle category, so we said the ignorant people, right? The people who recognize that they don’t have any unique value or insight into the market, and we should do nothing, and we shouldn’t watch.

Then there are the experts, right? Some really amazing people, George Soros, kind of, people who know a lot, and they should go ahead and do everything, and then there’s a second category, and the second category is the people who think that they know, but they don’t really know, and those are the dangerous people, right? They’re the dangerous people because they feel that they know, and they try to time the market, and they do day trading, and they do all kinds of things. Those people really belong in the don’t-do-anything category. They just don’t.

They just don’t see it, so I would say for most of us, if you ask me what’s the best asset class to invest in right now: stock, bond, real estate, duh-duh-duh, I would say human capital. The most assets that yields revenue for any of us, for any normal people, right? It’s us. We’re going to get more value out of our own skill, and intelligence, and knowledge, and so on, than dividends from the stock market, and I think we need to invest in that asset. It’s a time to go back and invest in our ability to be productive in the workplace rather than speculate about timing the market.

Kerry K. Taylor:
Mm-hmm. ‘Kay, we’ll leave it there. I just wanna thank you. You’re amazing. Your optimism is incredible, and I appreciate your time today, and I look forward to seeing what you do in the future because I really could use a bigger house, so thank you so much. I appreciate it.

Dan Ariely:
Thank you.

Kerry K. Taylor:
Have a great evening.

Dan Ariely:
Thank you very much. You too.

Kerry K. Taylor:
And now I would love to hear from you. I’m super curious: are you into behavioral economics as much as I am? Or were there some other insights you got from this interview? I wanna hear about it in the comments. Now, as always, the best conversations always happen over at squawkfox.com, so head over there and leave a comment right now, and if you’re not already, please subscribe to my e-mail list and become a Squawkfox insider. You’ll get my free budget bundle and priority access to all my stuff once a week in your inbox. Thank you so much for tuning in to SquawkfoxTV, and The Cash and Kerry podcast, and I will catch you next time.