What is... | May 23, 2017

What is the control premium?

Staying in control can feel great. But there can be a price to pay.


Many people prefer to do things themselves, rather than delegate tasks to others. However, this desire for control might cost more than you think. Have you ever refused someone’s help when they offer to do something for you? Yes, you have.

The most likely reason for turning down assistance is simply that you want to do the job yourself. Perhaps you might argue that this means getting the task done the way you want – with no interference, and a better chance of a good result. Among behavioural economists, this tendency is known as the control premium.

The control premium can be described as a desire for feelings of control over tasks and events that could potentially affect our lives. The phenomenon has been well documented by psychologists. And the consequences of a natural desire to feel in control can be far-reaching – and even affect our finances.

Losing control
Researchers have been investigating the human need to feel in control for decades. Studies suggest the explanation is in fact rather simple: people who think they are in control are mentally healthier than those who do not feel this way.

When we feel that our grip on events is weak, emotions of self-doubt, insecurity and depression can emerge. This even increases our desire to get and keep control in a bid to boost our feelings of wellbeing.

How we pay
A 2014 American Economics Journal article details an experiment by David Owens, Zachary Grossman and Ryan Fackler where people had to choose to bet on whether they themselves or a (randomly chosen) partner would get a question right. If participants wanted to make the most money, they would bet on themselves 56% of the time.

But the people in the experiment actually chose to bet on themselves 65% of the time. The average difference was eight percent – reflecting a “premium” on keeping control themselves.

For some, the difference was as high as 15%. This suggests that people can want to stay in control of a situation so badly that they end up taking bigger risks than they realise – which can ultimately cost them money.

Do or delegate
Paying a 15% premium on expected asset earnings to maintain control, or a perception of it, seems like a bad deal. But it is more common than you might think. To have control means to make your own decisions.

Many of us prefer to make their own decisions about all sorts of finance-related areas – from investing, to saving and spending, and on our pensions. This may not seem that dangerous in itself. However, when combined with overconfidence, it can be.

To be overconfident means you believe you know more or are more able than others, without objective knowledge on which to base this conclusion. The all-too-common result is that people refuse to delegate their choices to professionals – even though the professional person typically has extensive training and specialised knowledge.

When to let go
Wanting control is natural and hard to ignore. But you can reduce the effect of the control premium. Try asking yourself why you feel you need control over a specific task, and whether the reason is a good one.

Most importantly, ask yourself whether you are really the best person in the world to handle it. If you truly believe you are best suited for the job in question – fantastic, stay in control. But when in doubt, consider delegating to someone who you believe has the skills to do an even better job than you would yourself.

SpendingEmotionBias

eZonomics team
.(JavaScript must be enabled to view this email address)

Have your say

Would you tell your partner about any money worries?