How to plan for disasters and personal finance — with social psychology

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There’s a great article in last weekend’s New York Times Magazine on disaster preparedness, which I want to use to highlight the social-psychological reasons for why we behave the way we do.

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Photo from e-strategyblog.com

Read the article closely and notice the parallels between preparing for a disaster and preparing for your financial future. They are eerily similar.

Statistics on how few of us are prepared for a disaster, just like few of us are prepared for retirement:

In July and October 2005, the N.Y.U. Center for Catastrophe Preparedness and Response found that 50 percent of survey respondents reported their preparedness level as “about the same” after 9/11 as it was before, while 4 percent said they were either “somewhat less prepared” or “much less prepared.”

A number of things prevent us from preparing for disasters, including self-protective psychological factors that make us not want to think about it. The same protective mechanism works when you have people who are afraid to open their own bills, yet they keep on spending.

What prevents us from preparing for disasters? … Bad advice and false alarms discourage all of us from listening to authorities; the government’s calls for us to build atomic shelters or heed code-orange alerts have done more harm than good [Ramit’s note: Just like Wall Street’s constant drum for new products and BUY/SELL/DO ANYTHING!!! has inured us to taking reasonable steps with investments]. For the poor, scrambling to make it through the small crises of everyday life is far more urgent than planning for a possible emergency, and investing time in preparedness efforts seems relatively unimportant.

A key point: By offering us so many choices about what to prepare for, we do nothing. There is an exact parallel with the number of investment choices in a 401(k): “For every 10 mutual funds made available, the rate of participation in 401(k) investing goes down 2%.” That’s from The Paradox of Choice.

For everyone, there are opportunity costs involved in preparing yourself and your family for a catastrophe that’s unlikely to happen.
One major concern I heard was that there are simply too many things to worry about. Participants complained about having to prepare for too many specific disaster possibilities and in turn feeling overwhelmed, if not helpless.

Finally, a comment about how we don’t want to live in a culture of preparedness.

Beyond that, many people simply don’t want to live in a culture of preparedness. The notion is off-putting, and downright scary for some, because it seems to place fear and defensiveness at the center of our public and private lives. Careful planning means dwelling on the uncomfortable topics of our own mortality, the vulnerability of our loved ones and the fragility of our planet, and there’s a psychological price to be paid for that.

Using social psychology to motivate attitudinal and behavioral change
Let’s tackle the last point — that “we don’t want to be prepared” — which I disagree with. It’s a broad, overreaching statement to say that we don’t want to be prepared (and, in fact, that takeaway was taken from anecdotal research the reporter did from talking to some friends). But it’s an important one: Whether with disasters or money, it’s not that we don’t want to be prepared. Rather, the question is, “Under what conditions would we actually prepare?” Once you can identify patterns in people that do prepare, you can experimentally test and generalize.

Psychology experiment: How to get young people to get tetanus shots (or save money)
Rather than making things up, let’s turn to the social psychology literature to understand how this works. Howard Leventhal has been a prolific researcher in this area, and his study of tetanus shots is a seminal one.

First, the difference between attitudes and behavior: We all say we should be exercising more. We all believe we should read more high-quality publications. And if you asked 100 people if they should be saving more, 100 people would say yes. All of those are attitudes.

Yet, Americans spend more than they make, don’t read very much, and are fat, obviously violating their own attitudes with their behavior. Newspaper journalists will bemoan the American public for being “irresponsible” and “short-sighted,” but psychologists recognize that they need to ask the right question: What kind of message will get people to take action? Here, we turn to health psychology for an answer on how to help people do something that they agree is important, but need help making their behavior congruent with their attitudes.

Leventhal and his team decided to investigate how to get students to get tetanus shots. Once again, they varied the fear levels of their message and found that high-fear messages produced “favorable attitudes toward the tetanus shots among the students, and they also increased the students’ stated intentions to get the shots.” However, I believe Warren G. once said, “attitudinal decision-making ain’t shit.” (That is a complete lie.)

Indeed, a month after the experiment, only 3% of participants had gotten a tetanus shot. As we know, saying something is important doesn’t mean we’ll actually do something about it.

Leventhal was no fool. He added a clever twist that produced astounding results. He took the same messages and simply added a campus map, highlighting the location and times for tetanus shots. By removing the passive barrier, compliance soared to 28%.

The key was giving people a fearful message with specific instructions on what to do next.

Note: Please don’t run off screaming “I KNOW HOW TO MAKE PEOPLE DO THINGS BY USING HIGH-FEAR APPEALS!!!” The research is a little more complicated than that.

What’s the point?
The key takeaway is that informational messages alone, with no influence tactics, are the least persuasive of all. For example, if I simply write up a 1-pager on different types of retirement accounts, I can expect 0% compliance with any behavioral change. (Think about that. Most people believe, “If you have the information, you’ll make the right decision. That is entirely incorrect.)

Just adding fear to the message doesn’t change much: It’s generally ineffective at behavioral change on its own, particularly if the action is far off in the future and make me psychologically uncomfortable to think about (disasters, retirement). You must understand who your audience is and what persuades them.

So, how do you change your own behavior and your friends’ behavior? By experimentally testing your message — how it’s communicated, the persuasive elements within, who it comes from — and by adding specific instructions about what next steps to take, we can help people to make better decisions and, more importantly, take action for their own self-interests.

There are ties between disaster planning, personal finance, and social psychology. I hope this post stirs us to think about how we can better influence our friends to think about planning for their own best interests.

* * *

Note: Research was taken from Age of Propaganda, The Paradox of Choice, and The Tipping Point. All highly recommended.

Interested in having me speak at your school/company? Click here for my speaking details.

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14 Comments

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  1. Robert M. Cavezza Link to this comment

    Very interesting article. I have read the Tipping Point by Gladwell (highly recommend to everyone), but have not read the other two mentioned.

    Everything you mention can have potentially great benefits for business owners and marketing types alike.

    I only have a minor contention with points made in the post. Giving specific instructions on what to do next would increase the likelihood of any action, not just one based out of fear. If a desired outcome isn’t specifically stated, hundreds of different people may take hundreds of different actions. They may read more about the subject, go to a different doctor, or discuss it with a family or friend. Of course, there is no way to measure most of these actions. Making a specific call to action would increase the desired outcome because if the desired outcome isn’t specifically stated, readers may take actions other than what the author intends for them to take. This doesn’t necessarily equate to the materials not having an effect on the reader, but the effect on the reader may not be known to the author, or he may not have made his point as intentionally as he had originally thought.

    By the way, congratulations on the book deal.

    Robert M. Cavezza
    rcavezza@gmail.com

  2. Ramit,

    Extremely interesting take. I really liked when you stated,

    “First, the difference between attitudes and behavior: We all say we should be exercising more. We all believe we should read more high-quality publications. And if you asked 100 people if they should be saving more, 100 people would say yes. All of those are attitudes.

    Yet, Americans spend more than they make, don’t read very much, and are fat, obviously violating their own attitudes with their behavior. ” The few percentage of people who can “learn on their own” -> level 5 and 6 learning (http://www.esf.edu/erfeg/endreny/courses/LevelsofKnowledge.htm) are really the ones who are the doers. I am not going to lie – I say I will be more financially responsible, but sometimes get caught up in compulsive buying (the pack of gum at the gas station). I thought that this article was very thought out, backed up by research, and presented well.

    I commend you, Ramit.

    Keep generating great content – it’ll only make you that more valuable. I’ll echo what others were saying…don’t advertise as much…honesty is priceless and look at the big picture.

    I read in a blog somewhere that all people want to feel:
    -safe, welcomed, part of something big, recognized, valued, rewarded, loved, empowered, successful, and part of a new brand world.

    If you can somehow make people feel any of those, you’ll be surprised of the groundswell that occurs…you’re site will explode in unique users…of the power of word of mouth marketing (which is how I found this)

    Best,
    Brandon

  3. The first quotation seems irrelevant to the point of the article. 50% not changing their levels of preparation is not the same as 50% being unprepared.

  4. Great post…consumer psychology is incredibly interesting and something I have been wanting to learn more about. Thanks for the book titles too…I have heard of a couple but haven’t read any yet. Keep up the great posts!

  5. Should’ve concluded the post with “If all your money is still in banks, then right now, go sign up with [this online trader] and invest 30% of your savings in [this particular international index fund].”

  6. AintNoFunIfTheHomiesCantHaveNone Link to this comment

    Warren G?

  7. As they say ‘Prevention is better than Cure’ , taking apt finance decisions at the first instance is the best way than to regret later.

    And for that we have a really good guide and i.e. MoneyLIFE, a fortnightly personal finance magazine.

    http://www.moneylife.in

  8. Wow – great article. I *never* understood those that were “too afraid” to look at their bills. I have known people like that, but it just made *no* sense to me. The tetanus shot experiment was interesting – which also makes sense. People get overwhelmed/scared/confused with choices, and therefore do nothing. If we give them step-by-step guidance, they’ll do it – although a problem arises when different “professional” people give different opinions/guidance – which equally confuses people. My brother graduated from Stanford BTW… I graduated from “lowly” Georgia Tech.. :-)

  9. Yes, excellent article indeed. I know people in real life that know how to talk the talk, but for some reason, they just don’t want to walk it. And to this day, they remain financially-challenged (though you probably wouldn’t know it if you met and talked to them at a dinner party).

  10. Hey Ramit,
    I love the quote “I hope this post stirs us to think about how we can better influence our friends to think about planning for their own best interests.”

    I wish you had expanded on this point more (the emotional connections we make with people) rather than approaching this from a purely analytical standpoint. It’s so much easier to influence people after we make that emotional connection. Regardless of how well thought out your plan or approach, if they don’t trust you, you won’t get a lot of buy-in unless they feel you’re clearly an expert on the subject.
    I hope to see a follow-up or related articles, this was a fun read,
    Odd Lot
    http://www.Money-and-Investing.com

  11. Hi Ramit;

    Thanks. Another good point well made.

    A few weeks back, the biotech company I worked for had a “Disaster Preparedness” day; 2 hours of watching firemen burn things and then put them out with extinguishers, while vendors inside the building tried to sell first aid kits and flashlights, and the red cross handed out completely useless leaflets. RIght, I thought, now I am completely unprepared for a SF-area disaster, namely an earthquake, leading to a fire / tidal wave … and I better remind myself to go elsewhere for more information. Sigh.

  12. Do you think this is why Dave Ramsey is so popular with people that have used his plan to get out of debt? I read The Total Money Makeover, and the whole first half is informative regarding debt, but also shows all the fearful angles of it. The second half is a very specific plan for getting out of debt (a map, if you will).

  13. Great post, its scary because we never know when disasters will come. However, it is a great idea to prepare for them

  14. I think its a bad strategy to fear the future, or disasters or anything. Be fearless, live life to your best ability and die like a hero. Don’t hang around being miserable fearing what might happen to you or your money, that is a waste of life!