Self control

What Is Self-control?

Self-control in finance refers to an individual's capacity to manage their impulses, desires, and emotions to make investment decisions and financial choices that align with their long-term goal setting rather than immediate gratification. It is a critical concept within behavioral finance, a field that combines psychological insights with economic theory to understand human financial behavior. Effective self-control enables individuals to adhere to their budgeting plans, resist impulse spending, and consistently save and invest for future objectives like retirement savings.

History and Origin

The concept of self-control has deep roots in psychology, particularly in studies of willpower and delayed gratification that later influenced behavioral economics. A foundational psychological experiment often cited in discussions of self-control is the "Marshmallow Test," conducted by psychologist Walter Mischel in the early 1960s. In this study, young children were offered a choice between an immediate small reward or a larger reward if they could wait for a short period. The children's ability to resist the immediate temptation was observed, and follow-up studies suggested correlations between this early self-control and various positive life outcomes, including academic performance and healthier lifestyle choices.⁴

The integration of such psychological insights into economics formally began to take shape in the 1970s and 1980s, largely through the work of economists like Richard Thaler and psychologists Daniel Kahneman and Amos Tversky. Traditional economic theory often assumed individuals were perfectly rational actors with complete self-control, but behavioral economists challenged this view by demonstrating that people are predictably irrational and often influenced by cognitive biases and emotional states. Thaler, for instance, highlighted how individuals often exhibit "present bias," a tendency to give greater weight to immediate rewards than to future ones, underscoring the constant struggle for self-control.

Key Takeaways

• Self-control is the ability to align financial actions with long-term goals over short-term desires.
• It is a core concept in behavioral finance, influencing decisions like saving, spending, and investing.
• Studies show that stronger self-control often correlates with better financial outcomes, including increased savings and lower debt levels.
• Strategies like pre-commitment, automation, and mental accounting can help enhance financial self-control.
• The effectiveness of self-control can be influenced by external factors and can be challenged by cognitive fatigue.

Interpreting Self-control

In a financial context, interpreting self-control involves assessing an individual's consistency in executing their financial planning. It's not necessarily about a measurable "score," but rather the observed behavior patterns. An individual demonstrating high self-control consistently makes choices that prioritize future financial well-being, such as regularly contributing to investment accounts, paying down debt, and avoiding unnecessary credit card balances. Conversely, a lack of self-control might manifest as frequent impulse spending, accumulating high-interest debt, or failing to save adequately for long-term objectives. This behavioral pattern directly impacts personal financial health and can dictate the success of strategies like diversification or leveraging compounding returns.

Hypothetical Example

Consider Sarah, a 30-year-old aiming to save for a down payment on a house within five years. She creates a detailed budget that requires her to save $500 each month. Her self-control is tested when she sees a new smartphone she desires, costing $800.

• Scenario 1 (High Self-control): Sarah remembers her housing goal. She acknowledges the desire for the phone but prioritizes her long-term objective. She decides not to purchase the phone, understanding that doing so would derail her monthly savings target. Instead, she puts the $500 into her dedicated savings account. This consistent behavior, driven by self-control, helps her stay on track for her down payment, demonstrating financial discipline.
• Scenario 2 (Low Self-control): Sarah buys the new smartphone immediately. This impulsive purchase causes her to fall $300 short of her monthly savings goal. If this pattern of yielding to immediate desires continues, she will struggle to accumulate the necessary funds for her down payment within her desired time horizon, illustrating how a lack of self-control can undermine financial goals.

Practical Applications

Self-control is foundational to various aspects of personal finance and investing. It underpins effective budgeting by enabling individuals to stick to spending limits and allocate funds responsibly. In managing debt, self-control helps resist the temptation of excessive borrowing and ensures timely payments, preventing spiraling interest costs. For long-term wealth building, it is crucial for consistent retirement savings contributions and adhering to an investment plan, even during market volatility.

Research indicates that the application of self-control strategies can significantly aid financial goals, leading to reduced spending and increased saving.³ These strategies include proactive measures, such as setting up automatic transfers to savings accounts, and reactive techniques, like mentally accounting for purchases to feel the impact of spending more acutely. The ability to manage impulses and make decisions aligned with long-term objectives is a key predictor of overall financial well-being.²

Limitations and Criticisms

While self-control is vital for financial success, relying solely on willpower can have its limitations. The exertion of willpower is often described as effortful and cognitively costly, suggesting that our capacity for self-control can be depleted over time, a concept known as "decision fatigue."¹ This depletion can lead to poorer financial choices when individuals are mentally exhausted. For example, a person might successfully resist small spending temptations throughout the day but then succumb to a large, regrettable purchase in the evening.

Furthermore, some critiques suggest that societal and environmental factors can profoundly influence an individual's ability to exhibit self-control, potentially more so than inherent willpower. Economic insecurity or a lack of trust in future stability, for instance, might reduce the perceived benefit of delaying gratification. This highlights that self-control is not solely an individual trait but can be shaped by external circumstances and the reliability of the environment. Financial professionals recognize that external prompts and system design, such as automatic enrollment in savings plans, can be more effective than simply admonishing individuals to "have more" self-control, especially when dealing with prevalent cognitive bias that lead to emotional investing.

Self-control vs. Delayed Gratification

While often used interchangeably, self-control and delayed gratification represent distinct but closely related concepts. Self-control is the broader ability to regulate one's thoughts, emotions, and behaviors in pursuit of long-term goals. It is the underlying capacity. Delayed gratification, on the other hand, is a specific outcome or manifestation of self-control. It refers to the act of resisting an immediate reward or pleasure in favor of a larger, more desirable reward later. Therefore, self-control is the internal mechanism, while delayed gratification is the specific behavior of waiting for a preferred outcome. An individual uses self-control to achieve delayed gratification, such as foregoing immediate consumption to save for a future down payment.

FAQs

How does self-control impact my investments?

Self-control significantly impacts investment decisions by helping you stick to your long-term strategy, rather than reacting impulsively to market fluctuations or engaging in speculative trades. It helps manage risk tolerance and avoid behaviors that might deviate from a well-thought-out plan.

Can self-control be improved?

Yes, self-control can be improved through various strategies. These include setting clear goal setting, automating financial processes like savings, using pre-commitment strategies (e.g., locking funds), and creating a financial environment that reduces temptations. Practicing mindfulness and building positive habits can also strengthen self-control.

What are common financial self-control challenges?

Common challenges include resisting impulse spending, overcoming present bias (preferring immediate rewards), avoiding unnecessary debt, sticking to a budget, and not succumbing to herd mentality during market bubbles or crashes. These challenges often lead to short-term financial satisfaction at the expense of long-term security.

Is a lack of self-control always bad financially?

While a lack of self-control often leads to suboptimal financial outcomes, it's a natural human tendency. Understanding its existence allows for the implementation of external structures and systems (like automatic savings) that can compensate for inherent behavioral biases, rather than relying purely on internal willpower.