Thursday, March 17, 2011

I Don't Gamble, But I Understand...

Presently, I'm reading Richard Thaler and Cass Sunstien's Nudge: Improving Decisions About Health, Wealth, and Happiness. It addresses behavioral economics: how humans behave "irrationally" and what tools/techniques could be used to help us make better decisions, despite the temptations (or laziness) that lead us to be "irrational." You should read the book, because there's much more to it than I let on.

At any rate, Thaler and Sunstein discuss how one such technique that can help us perform in our best interest is betting (it really has more to do with us being loss averse, I think). They give an example of two friends who committed to losing thirty pounds over the course of nine months. If either of them failed, they'd have to pay the other $10,000. They lost the weight and extended the commitment to keep the weight off with a subsequent bet.

I began to wonder, what type of bet could I make with a friend to stay on track with my financial goals? Commit to paying off my credit card balance? Commit to only charging up to 30% of my available credit limit? Saving a certain amount of money? Making sure I periodically reviewed the performance of my investments and make changes, accordingly? Commit to earning more income through a business?

I haven't decided yet what would be appropriate for me, although the fitness goal is a compelling one.

What would YOU bet on to ensure that you would stick to your goals? 
(It can be related to finances or not.)

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