Behavioral Biases Series: Self-Control Bias

 In Investing, Uncategorized

Unless you are some kind robot, programmed to scan this article based on some “buzz-word” in the text, self-control bias is a hurdle you’ve probably faced in the past, and will most likely face in the future. Stemming from the familiar concept of self-control, self-control bias is the behaviorally sub-optimal tendency preventing us from reaching our long-term, overarching goals, due to a lack of self-discipline.¹

Though lack of self-control is dangerous in just about every execution setting, it can be especially detrimental within the realm of investing. Dealings involving money or the pursuit of monetary reward are emotionally charged ventures where consequences often outweigh more basic consequential guilt such as that felt from cheating on a diet. As such, the decision-making process is intensified, which is why exercising consistent self-discipline in accordance to achieving a long-term goal becomes increasingly important.

Within saving and investing self-control bias is predominantly manifested in individuals losing site of their long-term goal of retirement; uncontrollably spending too much today while saving too little for tomorrow.  Whether you have met with a financial professional and constructed a long-term plan or not, if you plan to retire one day; retirement is your long-term goal.  Since future retirement requires current funding, the self-control you practice today directly influences your future level of wealth. Irrational by nature, investors tend to save too little for retirement or fail to appreciate the benefits of compound interest, instead electing to consume today while forgoing consumption in the future.

“But self-control, or lack thereof, is so easy to understand, and should therefore be the easiest bias to overcome, right?”

Not quite, and it is as present today as it has been historically. However, the degree of importance placed on a specific goal by the individual pursuing that goal may make it easier to exercise self-control (such as retirement vs. dieting).  I’ll illustrate this point with an example:

Although he long strived to become one, my college roommate certainly did not fit the common held description of a “morning person.” Why? “Because I’m a night owl and the best games/shows are on at later times.” But the reality is: if “becoming a morning person” is a goal he truly wants to attain (degree of importance), we can rationalize that he must lack the self-control to either:

1)    get to bed at an early enough hour the night before, OR
2)    not hit the morning snooze button like it’s testing his reaction time

Thwarting self-control bias is ultimately improving self-discipline, whereby we forgo our current wants (watching favorite game/shows live, sleeping in), to achieve what we want in the future (to be a morning person). This arduous process is much like building a habit and requires consistency to produce results.  In investing, saving, and elsewhere in life, the use of a systematic process to pursue a long-term goal can be of serious help in supplementing that consistency.

In pursuit of his long-term goal of becoming a morning person, my college roommates systematic process was as follows:

1)    No use of any screen (phone, TV, iPad) after 9:45 PM.
2)    Place his alarm in the same spot every night before bed: in the top corner of his room farthest away from the bed, requiring the use of a stepping stool to reach, which we kept downstairs.

As comical as these measures seemed at first, he began waking up at 6 AM sharp for the next 2 weeks. Though he did not yet consider himself a morning person, he could reasonably expect that adhering to this model of behavior would best position him to become one over the long-term. Today, years later, he runs 2.5 miles in the morning before most people wake up! Notice, though, that the self-control bias he battled daily had not changed (he can still stay awake without TV/phone, and can still turn the alarm off and return to bed). However, by implementing a disciplined system he was able to mitigate the detrimental influence that self-control bias had on his long-term goal, ultimately making his bias easier to overcome on the day-to-day.

Hopefully the wheels are spinning on how my own college roommate’s self-discipline story is somewhat analogous to the behavioral landscape of a financial plan.  To actual money managers and individual investors, self-control bias is always present.  Headlines, cable news networks, and other subscription services provoke constant temptation of new investment opportunity supported by a hyperbolic narrative prompting an “act now or it’s too late” mindset. To more common execution settings, there is always the lure of a new product or service that we haven’t previously budgeted for. “That’s awesome, can I afford that now? Maybe if I cut back on…” Self-discipline is tested around every corner: whether it’s a buy/sell/hold decision of a security, or a sale you were previously unaware of that you “have to take advantage of.”

Like last week’s topic, Behavioral Biases Series: Recency Bias mitigating self-control bias involves a fervent effort to remain focused on the long-term. Hence, my mentioning degree of importance – how important are the long-term goals you are setting? If my roommate still wanted to go back to bed, ignoring his new system despite the arduous process of turning off his alarm, he could have. The new process simply involved more guilt-provoking actions than his previous routine. Self-control bias pertains to our current wants, that are much easier to understand (and feel) than what we want 5, 10, 20 years from now – which is often how we rationalize today’s decisions that are inconsistent with what may be best for achieving our long-term goals.  Adam Smith, the high priest of free market economics, even documented this self-control fallacy in 1776, writing, “The pleasure which we are to enjoy ten years hence, interests us so little in comparison with that which we may enjoy to-day.”²

If your retirement is something you truly want to get right (rhetorical question!), don’t be surprised by the need for meticulous consistency in exercising self-control and minimizing “cheat days.”

If you are like me, creating models of behavior based on what is necessary to achieve your longer-term goal will help you limit the influence of your self-control bias, instead promoting a focused consistency in decision-making processes.

We are highly emotional, largely myopic beings, and it is not wrong of you to want to “consume” whatever it is your heart desires at the moment. However, you may find it a beneficial exercise to view that consumption as “consuming less later.”

1. Pompian, Michael M. Behavioral Finance and Wealth Management: How to Build Investment Strategies That Account for Investor Biases. Hoboken, NJ: Wiley, 2012. Print.
2. Smith, Adam. (1776) 1981. An Inquiry into the Nature and Causes of the Wealth of Nations. Reprint edited by R.H. Campbell and A.S. Skinner. Indianapolis: LibertyClassics.


FullSizeRender-2-e1469474387550-225x300Samuel Frymier is a co-founder and managing partner of Quesne Capital. Sam earned a Bachelor of Science in Finance from Duquesne University, graduating in the top 10% of his class. Once a nationally recognized division one soccer player, Sam now coaches at the youth level. Outside of soccer he has always had a love for golf.

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