Tips | October 1, 2013

Five ways “doing nothing” can actually help

We know inertia is a force that makes us resist change or be prone to do nothing.

But what might not be so obvious is that in some situations inertia can be used to our advantage.

In saving and investing, inertia might be part of the reason investors steadfastly stick with what they have already bought (seen in status quo bias) or why they can be overly reluctant to make changes for fear they are doing “the wrong thing” (as seen in regret aversion). Despite these negatives, understanding the consequences of inertia could end up making a positive difference to personal finances, and its effects can be used to your advantage.
As the phrase “don’t just do something, stand there” suggests, sometimes the wisest course of action is to do nothing.

Consider using inertia to:

1. Cultivate helpful habits Personal finance writers often advise to “make saving a habit”. Inertia is helpful here as once a saving habit has been created (think: automatic payments on payday into a dedicated account), as it makes helpful habits harder to break.

2. Save for goals It won’t work for everyone everywhere, but in some areas the default is to enrol workers into a pension scheme – rather than making them act to opt in. The UK’s Financial Conduct Authority outlines the idea in its occasional paper here. A test written up by the UK government’s “Nudge Unit” found the participation rate rose from 36% to 71% in companies previously requiring employees to make an active choice to opt in to a pension. There is a risk if the default is not entirely suitable for an individual’s needs. But a suitable default means inertia is highly likely to work.

3. Give more to charity Promise to boost donations to charities next year, set up the payments now, then – do nothing. Research on “give more tomorrow” shows that people were much more likely to increase regular donations in future than if they were asked to do it immediately (related to a preference known as “present bias”). Make the commitment now and use the “change nothing” power of inertia to follow through. A similar idea is used for retirement savings known as Save More Tomorrow.

4. Avoid expensive mistakes If you have a tendency to forget to renew important policies (such as home insurance) or forget to pay important bills (such as the electricity or phone), auto renewals or automatic payment plans might be a good idea to avoid having a gap in cover or late payment fees added to the bills. It means you can “set and forget” and embrace “doing nothing” to avoid a potentially expensive mistake. Even if the auto-renewal is a little more expensive, the move might still be worthwhile depending on your money style.

5. Avoid the herd In investing, herd behaviour is the tendency to get swept up by the actions of others. Individuals may be inclined to buy (or sell) shares in companies without a fundamentally sound reason to do so – with the actions of others influencing the trade instead. Inertia could actually help avoid the herd because investors who “do nothing” are by definition not going to be swept along with the crowd.

eZonomics team
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InvestingSavingEmotionBiasGoal setting

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