New Year Resolutions: How to keep 'em for good!

Time passes by quickly and rapidly, and it's another new year again. It's the time when (almost) everyone starts worrying about new year resolutions: some of us might be thinking of reducing waistline, others might plan to kick their smoking habit (actually, many do it and they do it very often), some might want to save more money this year, others would like to become a better human being (usually in case they could not come up with any concrete new year resolutions)! All said and done, majority of us may admit that our new year resolutions fizzle out by the end of January, or may be in many instances, by the end of the first week of the year itself. This is a problem we face almost every year (by the way, why bother about new year resolution, it happens with almost all goals we set, for that matter). So, let's talk about how to deal with this problem of ours: How to stick to our new year resolutions?

Well, I am not gonna give you any short-cuts to help you make and subsequently stick to your new year goals. Rather, in this blog post, I try to summarize some five simple ideas that I might use to make sure that I don't deviate from my new year resolutions, if I make any.

Image source: Getty Images

First and foremost, following what all preachers suggest, I would also go for making a plan, or say list of goals. The list should not be a virtual one, but in black-and-white. Writing down my goals and plans implies that I commit myself to those goals. And it is scientifically proven that committing yourself firmly by explicitly writing down your intentions increases preventing screening rate. In an earlier post, I reviewed an article published in Nature, that talks about how predetermined shopping list helps people stick to a healthy shopping habit. In a similar fashion, when we have our resolutions written, the chances of getting it through are higher than otherwise. So, let's write down our resolutions, right now (only if you have any)!

Of course, one important aspect of setting goals or making new year resolutions is: it should be specific and achievable. We all know our strengths and weaknesses, as well as how much we can take on. On our list should include the most important things that we want to accomplish this year. Be precise; don't generalize. For example, if I want to loose weight, I cannot vaguely write my goal as "To loose weight". It would be more effective if I plan as to how much weight I want to loose in how much time frame and in what ways such as jogging 2 extra kilometers or hitting the gym thrice a week, and so on. Also, it should be within our capabilities. I cannot set a goal of saving half of my salary (if presently I end up borrowing from friends and relatives to survive). Be rational in setting up goals.

Thirdly, reward yourself for avoiding any temptation while sticking on to the task. This is something what noted psychologist and behavioral economist Duke Professor Dan Ariely calls reward substitution in his book The Upside of Irrationality. It may also be referred to in the context of bundling of temptations. What it essentially means is we tend to motivate ourselves to do some otherwise difficult-to-take-up tasks by way of rewarding ourselves. For example, I love to listen to music, but due to some reasons or the other, I didn't get to enjoy music very often. Also, like most of lazy asses, I also prefer resting on the couch to jogging. To overcome this problem of duality, I adopted this strategy of bundling the temptations of listening to music with hitting the road for jogging. Now I can enjoy my favorite music for at least forty five minutes straight while I jog in the evening. Well, this strategy serves the purpose for most of our otherwise-difficult-to-start tasks, and that is for sure. The once catch is that you need to look for the right temptation.

Image source: Getty Images

Like rewarding ourselves keeps us on track towards working for our goals, punishment does do its bit. This punishment need not be literal one. As Richard Wiseman from University of Bristol suggests, it is completely natural to revert back to our old habits from time to time, hence treat any failure as a temporary setback, but don't make them as an excuse to give up altogether. At the same time, think of some punishment, even virtual, for your every failure. This fear, even small, of punishment might keep you focused on your goals. As some behavioral economists founded a website called stickK.com, where you can link your bank account and set your goals. You can arrange to forfeit money if you don't achieve your goals. This money can go to a charity you hate most, or to your friend's account, and so forth. This strategy of financial (dis-)incentives can make your plan effectively on track. You can improvise this strategy by giving a sum of money to your friend/spouse saying that if you fail to achieve a certain goal within a given time frame, (s)he can keep the money that you gave, thereby making sure you still work for your goals.

Finally, find someone who can kinda mentor you through the odds of achieving the goals. This becomes more important if the goal requires some specific pedigree. In an article published in the Annals of Internal Medicine, it was found that achieving goals become easier with the help of a mentor. So, seek social support to achieve your goals. Richard Wiseman also suggests that we should share our goals with our friends and family. By doing so, we feel the fear of failure and consequently working more sincerely for our goals, but at the same time, it gives us motivation in terms of eliciting support from them in case we are able to achieve our goals. Another reward... huh!

These are some of the ideas that I feel might keep us stick to our new year goals. Well, obviously there could be lot more, and you can find articles written on this subject here, here, here, and here.

If you haven't happened to chalk out your new year resolutions yet, fearing that your last year's new year resolutions got burst right after you overcame the hangover of new year party, then it's time to write down and share your new new year resolutions. Cheers!

[Review] Nudge Yourself with a Pre-committed Shopping List and Stay Healthier

Behavioral economists have for long been studying about how to exploit people's behavioral tendencies to nudge them take such decisions which are in best of their interest, even if not in short term, definitely in long term. Health economics is one of such areas that researchers in behavioral economics are exploring in terms of practically relevant issues with great curiosity. I recently happened to read a paper titled "The cost-effectiveness of shopping to a predetermined grocery list to reduce overweight and obesity" authored by Nicole Au, G. Marsden, D. Mortimer, and P. K. Lorgelly, published in Nature's Nutrition & Diabetes journal. In this post, I am reviewing the same article with my personal observations and comments. Hope you find it interesting to read.

The study examines whether pre-commitment strategies such as shopping according to a shopping/grocery list (prepared in advance) is likely to be cost-effective and result in benefits such as facilitating healthier diets, weight loss, and ultimately better health among those who are over-weighted and suffering from obesity. The issue has been a serious one especially among the urban population irrespective of geographical boundaries, and the researchers at the Centre for Health Economics at Monash University, Melbourne (Australia) have investigated the issue from the perspective of behavioral economics which seeks to answer why and how people behave in a certain way and how their behavior can be modeled using their own behavioral tendencies and habits as nudge. These nudging strategies can be used to help people make choices that are healthier and more beneficial to their lifestyle.

The researchers say, "And the good thing is some of these behavioral economic strategies can often be carried out at very low costs. Encouraging these strategies in the community could also be a cost-effective policy option for the governments."

Image source: bbc.co.uk

When we commit to a shopping list (prepared in advance) to buy only the stuff we actually need, it help us avoid the temptations of purchasing unhealthy food items, apart from spending money on (sort of) unnecessary purchases. The experimental evidence suggests that such habits lead the individual bring out meaningful impact on weight loss and long-term health, particularly among overweight and obese individuals.

The authors say that the advance planning of shopping list is a really cost-effective tool to lose weight when compared to the alternative of 'doing nothing', and moreover it does improve quality of life, both in terms of irrational habits leading to unhealthier decisions and unwarranted monetary loss.

Dr. Nicole Au also adds that diet is just one side of energy equation and that "there is a great potential for behavioral economic strategies to improve physical activity as well as diet, and future work is needed to investigate whether such strategies are cost-effective."

It is unarguably acceptable proposition that pre-commitment strategies can be effective interventions for facilitating healthier diets and also for promoting weight loss among overweight and obese individuals.  However, the issue whether the incremental weight loss arising from shopping to a pre-commitment intervention tool is small yet significant. We all may agree that the long-term effects of such decision habits are definitely significantly large in various contexts, including health and financial aspects.

Image source: Literacy Revelation (Blog)

According to the study, a pre-commitment strategy to alter the home food environment is a cost-effective means for maintaining healthier life style. For instance, in Indian context, people tend to drop in to shopping malls and superstores without any pre-commitment intervention tool (i.e. shopping/grocery list) and end up buying unnecessary food items (many time other stuff too that they later regret buying of)  involving financial implications and health implications (just a little later when they will have to consume those unhealthy purchases in order to derive utility from the money they spent on buying those things).

It is very much oblivious that many consumers understand all too well of those unhealthier purchases but they suffer from impulsiveness (which the marketers prefer to to call strategies to generate impulsive buying) and poor self-control that they behave in a manner that depart from a rational (or even, quasi rational) decisions that are in their good intentions.

Okay! Enough of Gyan! Now I better go prepare my shopping list for this weekend. You too think about the same or else you may continue reading some more blog posts of mine. ;)

Happy Rational Learning!

The study, recently published in Nutrition and Diabetes, looked at whether pre-commitment strategies such as shopping according to a grocery list were likely to be cost-effective in facilitating healthier diets, weight loss, and ultimately better health among overweight and obese individuals. - See more at: http://www.thefiscaltimes.com/Articles/2013/09/12/Hidden-Power-Grocery-List#sthash.8bozXie7.dpuf

The study, recently published in Nutrition and Diabetes, looked at whether pre-commitment strategies such as shopping according to a grocery list were likely to be cost-effective in facilitating healthier diets, weight loss, and ultimately better health among overweight and obese individuals. - See more at: http://www.thefiscaltimes.com/Articles/2013/09/12/Hidden-Power-Grocery-List#sthash.8bozXie7.dpuf

The study, recently published in Nutrition and Diabetes, looked at whether pre-commitment strategies such as shopping according to a grocery list were likely to be cost-effective in facilitating healthier diets, weight loss, and ultimately better health among overweight and obese individuals. - See more at: http://www.thefiscaltimes.com/Articles/2013/09/12/Hidden-Power-Grocery-List#sthash.8bozXie7.dpuf

FII Trading Behaviour [JIBR - 4(4): 286-300]: Abstract

In a time when the aggressive movements of foreign institutional investors (FIIs) are creating both positive and negative concerns among the stock market stakeholders including investors, economists, and policy makers alike, one of my works focusing on the causality between FII trading behavior and stock market returns in India has got published in the Journal of Indian Business Research, a publication of the Emerald Group Publishing Ltd., UK. The structured abstract of the paper is given below. Full paper can be accessed here. I hope the findings of my study contribute to the ongoing debate of FIIs role in (de)stabilizing the Indian stock market.

Title: Cause and Effect between FII Trading Behaviour and Stock Market Returns: The Indian Experience

Source: Journal of Indian Business Research, Vol. 4, Iss. 4, pp. 286-300.

Structured Abstract

Purpose – The purpose of this paper is to examine the direction of causality between foreign institutional investment (FII) trading volume and stock market returns in the Indian context. There is evidence of uni-directional causalities from stock returns to FII flows across various sample periods. The paper attempts to establish whether net FII trading volume causes variations in stock market returns or vice versa.

Design/methodology/approach – Using daily data on three different measures of FII trading volume as proxy for FII trading behaviour and S&P CNX Nifty returns, Granger-causality approach is applied to investigate the bi-directional causality between net FII trades and returns.

Findings – Bi-directional causality between net FII investment and Indian stock market return is observed. In general, the FIIs seem to be chasing the Indian stock market returns. It is found that FII trading behaviour resulting in heavy trading volumes may cause variations in stock market returns only in the very short-term, but afterwards, it is the stock market returns which cause changes in FII trading behaviour.

Research limitations/implications – Since foreign equity investors monitor the movement of stock prices, and furthermore, the role of FIIs' exerting impact on Indian stock markets tends to be growing, the authorities will have to develop an environment where FIIs would maintain their positions with confidence, thereby making the markets, as well as investments, more stable. This research considered only stock market returns to test its relationship with three measures of FII trading volume; more macroeconomic as well as microeconomic variables may further be considered for the purpose.

Originality/value – The paper contributes some empirical evidence using three different measures of FII trading volume as proxy of FII trading behaviour, and its bi-directional relationship with Indian stock market returns.

The copyright of the article rests with the publisher. Errors remain my responsibility.

Happy Knowledge Sharing!!

The Blue Focus Effect

To solve the problems of today, we must focus on tomorrow.

 - Erik Nupponen

It has been so long since I’ve got something to post here. It’s not that I haven’t got any interesting stuff to write about; rather I was overloaded with the ideas to discuss here. Just that I was preoccupied with some other academic assignments. Now when I’m finally here, let’s start with a simple exercise as follows:

1. Take a good look all around you and try and notice everything that is brown. Really try and memorize everything you see that is brown, whether it be dark or light shades of brown.
2. In a moment, without peeking, close your eyes and try to remember everything you saw… that was blue!

This is tricky, isn’t it? Most people are stumped. Actually, we are so focused on the brown things that we hardly notice anything that is blue. This is what psychologists prefer to call the blue focus effect. We sometimes allow ourselves to get so focused on the negative things in our lives (the brown) that we don’t notice any of the positive things (the blue).

I was just wondering if individual/small investors also behave in a similar way. I’m trying to get detailed account of some individuals who would have behaved similarly. I’ll try to put it down here once I’m through with gathering relevant information. Keep watching this space. Till then... Happy Investing!

5 Reasons to Know Why Wealth Maximization is not an Investor’s Ultimate Goal?

It is believed that an investor wants to make money out of investing in financial assets. They tend to realize the goal of wealth maximization from their investments. Their investment decision making is in line with the classic economic theory of utility maximization. But what they fail to realize that they are human being and are bound to make mistakes that might stray them from their investment goals.

Image source: http://www.outofmygod.com

Most models in economics and finance assume that investors are completely rational and that the market is efficient. With these two assumptions, one can develop models that derive equilibrium prices of risky assets, the prices of a unit of risk, the risk premium, the risk-return relationship and so on. Research in applied finance and economics has provided enough evidence that the market is inefficient and that investors are only “semi-rational”, while semi-rationality means that that investors make systematic errors while making their investment decisions. Given the certainty that investors make systematic errors, it seems quite logical that wealth maximization is not the ultimate goal of investment decision making. Following are the five reasons explaining their semi-rational approach to investment decision making, leading to erroneous investment goal:

(i)         Investors ignore in their investment decision-making process the correlation of rates of return on various assets. They don’t see the relationship between two or more different assets return following a similar trend.

(ii)       Decision weights, w(p) – subjective probabilities – are used instead of the true probabilities, p. Investors assign weights to past rates of return even though such rates of return may be irrelevant. Thus, even when the investors are told that the market is efficient and rates of return follow a random pattern, they form their belief based on assets past return.

(iii)           Investors make investment decisions based on the change of wealth, x, rather than the total wealth, w+x, where w is the initial wealth and x is the change in wealth. They perceive each of their investment in the portfolio in relative terms, rather than absolute terms. This approach gives them half the picture of their investments, and they tend to make faulty investment decisions.

(iv)          Individuals in general and investors in particular have “mental department” – also known as mental accounts – (i.e. they make several accounts in their minds, which implies that the aggregate wealth maximization is not the goal of their investment decision making.) Suppose an investor has a portfolio of P₀ value at time t₀, where P₀ consists of a certain portion of equity E₀, and remaining as debt instrument D₀. Essentially, P₀=E₀+D₀. If at time t₁, the portfolio becomes P₁=E₁+D₁, where P₁>P₀, E₁<E₀ and D₁>D₀. He fails to take into account the overall increase in the value of the portfolio; instead he might get panic and make a financial fatal decision.

(v)     In a nutshell, under certain conditions, investors’ deviation from rationality is important in determining asset prices and market dynamics. Literature has already provided sufficient evidence about this phenomenon of irrational or semi-rational behavior of investors and its relationship with asset prices and returns. There is ample support for this theory of investors being non-rational in investment decision making.

So, what if I’m irrational?

This post of mine starts with a simple question: Are you irrational?

What is your take on it? You think you’re rational. Or, you’re not sure of being either. And why so?

Well, for those who feel unsure about the term ‘irrationality’, let me suggest some explanation. Wikipedia describes irrationality as “an action or opinion given through inadequate reasoning, emotional distress, or cognitive deficiency”. It is understood that economic definition of rationality and irrationality will vary according to the context it is used in. But, in general, irrationality refers to the state of being irrational – the opposite of being rational – when people lack the power of understanding, either full or in part, and fail to decide according to ‘the economic theory of utility maximization’.

Research on the issue of irrationality observes that people tend to be continuously irrational, at the same time claim to be perfectly rational. Strange!! No? I’ll further take up some contextual examples wherein people intentionally behave in irrational manner, but argue (with others or with themselves) that their actions are rational, also otherwise.

First example which I pick to quote here is related to a very much trending issue: Team Anna Hazare and its anti-corruption movement. This anti-graft crusader led by Sri Anna Hazare has gathered enormous supports from the masses; of course, it has attracted critics also, but very less when compared. People are coming from almost every nook and corner to their nearest protest points to extend their support to the movement. There are two issues which explain their behavior at this moment. First, their actual belief differs from what they perceive to believe, known as delusions. They do know that any severe issue such as corruption is not going to vanish or even controlled just by passing of the Jan Lokpal Bill or whatever; still they are herding in one sense or the other; most of them are doing what their neighbor is doing. And you remember my last post where I tried to explain how our neighbor’s actions affect our own behavior and actions also. Don’t feel like I am against extending support to the cause, on the contrary, I am a strong supporter to the movement. I am just explaining the behavior of majority of them, including that of mine! My question is: Do you feel you won’t give away bribe for a small service such as getting a berth in railways and go on to make a complaint to the Lokpal or any such agent? In this context, I believe that making paying bribery legal as suggested by the chief economic advisor Kaushik Basu in his working paper for Ministry of Finance (Govt. of India) and supported by NR Narayana Murthy, seem more rational. Yet, these irrational behaviors are justified to great extent, aren’t they?

Another example is concerned with my core area of interest, finance, economics and investments. Human behavior works within a mechanism that has evolved to give optimal behavior in normal conditions leading to irrational behavior in abnormal conditions. Once in situations outside one’s comfort zone (this may again vary depending on one’s life cycle, demography, and other host of factors), people often experience intense level of odd behavior – either fear or greed – and tend to regress to a fight-or-flight-response mentality. You may encounter a number of individuals who show this type of behavior in stock market. Investors get panic on (sometimes entirely) irrelevant piece of information and commit financially fatal mistakes. Their irrational response to such situations is reflected in their trading decisions, which subsequently boomerangs and this process continues to create some sort of market bubbles. Ultimately, investors end up losing their fortunes. This may be called the negative side of irrationality. Now, let’s look into the positive sides of irrationality, if any. For instance, you along with your friend go out for a lunch at some place where we are most unlikely to visit again. You notice that your friend leaves the waiter a tip. You might be thinking, “How irrational! He is not going to see the waiter and the restaurant again, so why leave him a tip?” So, is it really irrational to tip? Even if, it is, it is good to do that – both economically and socially! Similarly, in stock markets, going against the prevailing trends might seem irrational at that moment, but afterwards, it may take either course: favourable or unfavorable. If favourable, you would pat yourself that you’re wiser than others and earn yourself a good reward for that. If your odd decision goes wrong, you are most likely to say that you might be suffering from behavioral biases leading to a wrong decision and a subsequent loss. Your one time rational behavior (as it was perceived then) becomes entirely irrational after the outcome changes.

Being irrational sometimes lead to favourable outcomes and vice versa. For me, therefore, a person is rational if he exhibits a goal-directed behavior and tries to achieve this goal in the best possible way, given his constraints. “Goal” and “best possible way” are, of course, specific to the context. Often, our inability to comprehend the consequences of our own actions, possibly due in part to lack of understanding exactly the goal we’ve set. This leads to our judgment whether our actions are irrational or otherwise.