Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / How Precommitment Contracts Beat Your Impulse Spending
Transcript
- Lucas: There's a scene in The Odyssey where Odysseus knows he won't be able to resist the Sirens' song. So he has his crew tie him to the mast and plug their own ears with beeswax. He literally binds himself in advance to override his future impulse. Luna: And that idea — binding your future self — has a name in behavioral economics. Precommitment. Lucas: Exactly. And it's one of the most practically useful concepts in the whole field, because it acknowledges something uncomfortable: left to our own devices, we often make choices our present self regrets. Luna: Like swearing you'll save more next year, then spending the bonus on a new TV. Lucas: Right. So precommitment is a tool you set up when you're in a cool, rational state — knowing that later, when temptation hits, you'll be in a hot emotional state and cave. The trick is to remove the option to cave. Luna: What's the classic real-world example here? I'm thinking of Christmas savings clubs — people put money in all year and can't withdraw until December. Lucas: That's exactly the one. A Christmas club account typically pays very little interest — sometimes even zero. But millions of people use them anyway. Why? Because the lack of liquidity is the feature, not the bug. You can't touch the money, so it's there when you need it. Luna: You're paying an opportunity cost — lost interest — for self-control. Lucas: Yes. And research suggests people are willing to pay a surprisingly high price. One study from the early 2000s found that low-to-moderate-income households who used Christmas clubs earned an average of about $40 less in interest than they could have in a basic savings account. They essentially paid $40 to guarantee the money was there. Luna: Forty bucks for peace of mind and a funded holiday. That's a pretty good deal if it works. Lucas: But the modern version is even more interesting, because it adds a loss-aversion twist. Apps like StickK let you set a goal — lose ten pounds, save $1,000, write a book chapter — and you stake your own money. If you fail, the money goes to a charity you hate, or to a friend you'd be embarrassed to explain your failure to. Luna: Wait — to a charity you hate? That's diabolical. Lucas: It's brilliant, right? The founders are Yale economists Dean Karlan and Ian Ayres. They designed it based on the insight that loss aversion is stronger than gain seeking. Losing $100 of your own money hurts more than gaining $100 feels good. So if you stake $100 on hitting your savings target, the pain of losing that money — plus the embarrassment of explaining to your referee — is a powerful motivator. Luna: Does it actually work? I remember reading a study of StickK users — something like 80 percent of people who set a financial commitment achieved their goal, versus only 35 percent who didn't stake money. Lucas: That's the headline number, and it's impressive. But there's a selection bias problem, right? People who sign up for StickK are already more motivated. Still, the within-group comparison is telling: users who choose a higher stake are more likely to succeed than those who choose a low stake. Luna: So precommitment works — but only if you're willing to put something at risk. Lucas: Right. And that's the catch. The people who most need precommitment — chronic procrastinators, impulse spenders — are often the least likely to sign up for it, because they're overly optimistic about their future self-control. It's called the planning fallacy. Luna: We think future us will have more willpower. And then future us turns out to be the same person we are today. Lucas: Exactly. So the challenge is making precommitment automatic. Some employers now offer opt-out retirement savings — you're enrolled by default, but you can leave. That's a form of paternalistic precommitment: you have to actively choose to sabotage your future self. Luna: Auto-enrollment in 401 plans. That's been studied to death, and it's one of the most effective retirement policies ever implemented. Lucas: And it works because it exploits our laziness. Most people don't opt out. They stay in the plan, increase contributions over time, and end up saving far more than they would have if they had to sign up actively. Luna: So the lesson is: design your environment so the default path is the smart path. Lucas: That's the big takeaway. But I want to drill into one more specific example: the 'Save More Tomorrow' program, developed by Richard Thaler and Shlomo Benartzi. It asks employees to commit today to increasing their savings rate in the future — specifically, each time they get a raise. Luna: Because people hate the feeling of a pay cut. If you reduce take-home pay today, it feels like a loss. But if you commit to saving more out of future raises, you never experience a drop in income. Lucas: Exactly. In the first implementation at a mid-sized manufacturing company, employees who joined the program increased their savings rate from 3.5 percent to 11.6 percent over about 28 months. That's a massive shift. Luna: And they didn't feel it. That's the genius — no pain of paying. Lucas: So we have a continuum: Christmas clubs, StickK, auto-enrollment, Save More Tomorrow. All precommitment, but with different mechanisms. The common thread is that they separate the decision from the action. Luna: One thing I'm curious about — does precommitment ever backfire? Like if the commitment is too rigid, do people rebel? Lucas: There's some evidence that overly strict precommitment can trigger psychological reactance — that feeling of 'you can't make me.' Especially if the person feels the commitment was imposed rather than chosen. That's why the most effective precommitment devices are self-imposed. Luna: So the key is agency. You have to choose to bind yourself. Lucas: Right. Odysseus told his crew to tie him tighter if he begged to be untied. That's the level of self-awareness you need. Luna: I love that image. Your rational self literally giving orders to your future emotional self. Lucas: And it's worth thinking about how many everyday spending problems could be solved with a simple precommitment. If you know you tend to blow your budget on takeout, you could delete the delivery apps from your phone on Sunday night and not reinstall until Friday. That's a one-week commitment. Luna: Or leave your credit card at home when you go to a bar. Physical precommitment. Lucas: Exactly. The point is you don't need an app or a bank account. Just a moment of self-awareness and a small barrier. Luna: It's funny — this episode is basically a masterclass in how to trick your own brain. And I think a lot of listeners might actually try one of these this week. Lucas: That's the hope. And honestly, if walking through the economy with us has made something click for you, there's a small way to keep this show ad-free and sustainable. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that literally funds making this many of these episodes. Luna: Yeah, it's a listener-supported model — no sponsors, no ads. Just people who find the show useful. Lucas: So back to precommitment: one more angle I want to touch on. There's a fascinating study by researchers at the University of Chicago and the University of Pennsylvania where they offered smokers a commitment contract: deposit $150, and if you pass a nicotine test six months later, you get your money back plus $150. If you fail, the money goes to charity. Luna: And? Lucas: Quit rates were about three times higher than a control group that got free nicotine patches and counseling. The commitment contract worked better than the medical intervention. Luna: That's remarkable. Because it's not about willpower — it's about making failure costly. Lucas: And that's the real insight of precommitment. It harnesses loss aversion, social pressure, and the gap between your present and future self. It might be the single most powerful tool in the behavioral economist's toolkit. Luna: Alright, I'm going to set a commitment for next week. I'll tell you next episode whether I stuck to it. Lucas: I'll hold you to it. And listeners, if you try one, let us know — we might share it on a future episode.