January's good resolutions are marked by behavioural biases at work in behavioural finance
The month of January is traditionally marked by the exchange of good wishes and, for some, by the making of good resolutions for the new calendar year. This is an opportunity to focus on two key elements to draw parallels with behavioural finance: the essence of resolutions and how they relate to the month of January.
Resolutions: you won't necessarily hold them up…
The many resolutions made at the beginning of the year are not always kept... If you plead guilty, rest assured, you are not a unique case! Indeed, researchers at the University of Scranton have estimated that 45% of Americans make resolutions but only 46% of them will keep them for six months... and 8% until the end of the year(1). However, year after year, while the nature of resolutions may change, they are still present in conversations at the beginning of the year. How do we analyze these January wishes and what do they tell us about managing personal finances? First of all, they reflect more than simple voluntarism: strong optimism on the part of individuals, sometimes even if it means joining the "magical thinking" (see our article on behavioural biases from Friday the 13th). What can we say about a non-sportsman who decides to do one hour of sport a day, about a smoker with a high level of consumption who claims to reduce it by half? Some researchers call "false hope syndrome" these unrealistic and incoherent resolutions with the view of oneself.
... but they will help you understand how to manage your personal finances!
A study by the University of Bristol(2) found that while 88% of January resolutions were not kept throughout the year, 52% of individuals were initially confident that they would be successful. The magnitude of these differences reflects a very common over-confidence bias among individuals. These overconfidence and optimism biases can be found in the management of personal finances. For example, one can contrast this with a denial attitude when faced with an investment that has gone wrong: "the information is not so negative", "the stock will go up" ... Some of the resolutions stem from a need to mimic a strong social pressure: although little paid in intentions at the beginning of the year, an individual will be influenced by his personal and/or professional entourage who will claim to have made decisions for the year ahead. The notion of mimicry can be found in the various effects of investment fashions: trendy assets, fashionable investment sector, types of funds prized by investors. This danger lurks in the case of an investor who is too susceptible to influence. Finally, once the decision to change has been taken, the individual is confronted with a commitment bias: subscribing to a gymnastics club results in a feeling of commitment such that not going there is guilt-ridden! If this feeling of commitment can be positive, it can also be harmful for the management of personal finances: stubbornness, sometimes out of simple pride, in a financial investment that is not very profitable joins this bias of commitment.
If you missed the fateful date, it's not too late!
In addition to the relevance of the resolutions, their systematic attachment to the month of January is interesting. First of all, because this starting point does not necessarily make much sense: January, in the depths of winter, is not a good time to start something new. Shorter days and less pleasant weather conditions take away the dynamism... and therefore the motivation for change. A resolution taken in April would therefore make more sense, but it comes up against our perpetual anchoring in January. This strong anchoring is reminiscent of the calculations of the historical financial performance of investments (shares, funds, etc.) which are systematically based on the calendar year. However, when making an investment decision in June, is it relevant to look at the comparison of performance -which, it should be remembered, is not an indicator of future performance - over the last two or three calendar years? Wouldn't it be better to look at performance over a few months of sharp falls or rises in the financial markets?
Bad news: having missed the 1st of January is unfortunately not a valid excuse for not making good resolutions; even if the statistics tell us that you won't necessarily make them!
(1)Study conducted by John C. Norcross in 1989 : https://www.sciencedirect.com/science/article/abs/pii/0306460389900506?via%3Dihub
(2) 2007 study conducted by Richard Wiseman : http://www.richardwiseman.quirkology/new/USA/Experiment 2 resolution.shtmlg
This document is not intended to provide an investment service and does not constitute investment advice or a personalised recommendation on a financial product, nor a solicitation of any kind, nor legal, accounting or tax advice from Societe Generale Private Banking.
No entity within Societe Generale Private Banking can be held liable for any decision taken by an investor based solely on the information contained in this document.
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