As we go about our daily lives, we are constantly making decisions.
What to eat, what to wear, who to meet and many more.
Some of these are financial decisions that involve money while the rest are non-monetary choices, like which colour shirt I should wear to office today.
All through this process we assume that we are in full control of the decisions we are making.
After all, the reason you decided to buy a new smartphone should not change whether it is early or late in the day. You are pretty sure that you will make the same decision whether you visit the shop in the morning, afternoon or evening.
Well here is some sobering news:
Research suggests that you are more likely to make better financial decisions when you are well rested and just after you have had a meal break.
The Impact of Timing on Financial Decisions
A famous study on decision making involved looking at the decision making process of a group of judges.
These judges had to make a decision if a prisoner’s parole application should be approved or not. Each judge went through multiple parole cases through the day.
Some applications were approved while other were rejected.
The researchers wanted to see if there was any pattern to the decision making of the judges.
The study found that the likelihood of a favourable ruling was greater at the beginning of the work day or after a meal break than later.
So if a prisoner’s file came up for review just after the judge had a meal break, then there was a high chance that his parole application would be approved.
The study points to something remarkable – Unknown to the judges themselves, their actions were being partly influenced by something external to the process i.e. their meal breaks.
The judges were more likely to make an active decision (granting parole) just after a meal break.
However later in the day they were more likely go with a passive decision (rejecting the parole application)
Active versus Passive Decision Making
The type of decisions we face every day fall into two broad categories: Active and Passive.
Passive Decisions
Passive decisions are things like which route to take to office, how to drive your car or how to fix yourself a cup of coffee.
Decisions like these are pretty routine and don’t require a great deal of mental effort to make them. We make them as if our mind is on auto-pilot.
You have done them so many times over and over that you could literally do it with your eyes closed.
(Although I would strongly suggest keeping your eyes open when driving your car.)
Active Decisions
On the other hand are the more active decisions.
Things like preparing for a meeting with a new client, dealing with an unexpected office emergency or delivering a major presentation to your board of directors.
These decisions require significantly more mental effort as our mind is no longer operating in an automatic mode.
While arriving at these decisions we make substantial prior preparations, analyse the pros and cons of the decisions in detail as well as their future impact on our objectives.
Active decisions by their very nature drain the resources of our body and mind. The greater the number of active decisions you make during the day, the more strain you put on your body.
If you have had a particularly tough day, there is a good chance that you will end the day slumped on your couch watching TV. Something that requires very minimal effort from your body or mind.
The Impact of a Meal Break
A meal break recharges your body by replenishing your energy cells. As you consume food, the glucose (a source of energy) level in your blood shoots up.
The meal restores your body back from the condition of decision fatigue. You brain is ready for more active decision making.
All of this is happening unknown to us and without us actively noticing it.
Why the Post-Meal Period is the Best Time to Make Financial Decisions
Now that we know this background to decision making let us see how it impacts the financial choices we make.
A company trying to sell you something will make every effort to make it as easy as possible for you to say yes to the purchase.
The company wants you to take a passive decision approach when evaluating its offer.
There is a whole science behind designing the layout of shops and supermarkets. The business owner wants to make it very easy for you to spend your money at the shop.
Everything from the brightness of the lights, the colours on the walls, and the fragrance in the air is designed to unconsciously impact your behaviour without you realising it.
The less you actively notice any of these external elements, the more likely that a company can influence your purchasing behaviour.
Now let us consider two different scenarios when you go to the mall to purchase the same product.
Scenario 1
You have had a long day. It was packed with one meeting after the other as a senior overseas colleague was visiting your office.
You went out for a joint sales call to meet your largest customer, had to get the office renovation budget approved and discussed the future hiring requirements,
It is now almost 7 pm. The last time you ate something was 7 hours ago.
On your way home you decide to make a quick stop at the mall to buy a product. The shop shows you multiple brands for the same product which are not easily comparable.
Brand A is cheaper but does not come with any extended warranty. Brand B has an extended warranty but has less capacity than brand A. And then there is brand C, which has a special offer if you buy 2 pieces.
Your mind now starts spinning – You are not sure which factor should be the most important to consider – Is it the price, the warranty or the special offer?
You quickly scan all 3 brands and then pick one of them. You just want to get home now and crash on your couch.
Scenario 2
You wake up on a weekend and have a relaxed breakfast. Then you head off to the mall to purchase the same product.
The shopkeeper gives you the same 3 options. This time you give your decision some more thought.
The last time you bought this product it lasted 5 years without any trouble so an extended warranty of Brand B is not important.
Your desk only has space for 1 of these products so getting 2 of them make no sense even if the unit cost per item for Brand C works out cheaper.
So you evaluate all 3 options and decide to pick Brand A since it meets all your requirements at the cheapest price.
Taking on an active approach to decision making versus a passive purchase has led you to make a much more prudent financial decision.
It is the same process that makes it dangerous to pay for purchases passively using a credit card versus actively counting and give out cash for it.
Is This an Over Simplification of Decision Making?
A thought that might come to your mind at this stage about the simplicity of all this. Is it not an over simplification to link good decision making to just a meal break?
Yes, you are absolutely right.
If the link was so direct our world should stop around noon every day as everyone rushes to eat food before making any decisions.
There is lot more that goes into good financial decision making. Of course we are capable of making good and active decisions even on an empty stomach.
The objective of this article instead is to bring out the fact that there can be external factors that may impact our decision making and financial wellness.
Given a choice, it is best to eliminate these external factors from having any impact on the decision making process.
If that is not possible then it is good to be actively aware of these factors to avoid their possible negative impact as we our make financial choices.
Conclusion
We don’t realise it but things happening around us can play a part in the financial decisions we end up making.
Making good personal financial decisions requires that we take an active approach to decision making.
The world around us is configured to make us go for the passive / default/ less prudent financial option.
So the next time you are visiting your favourite shopping mall, do so after a good night’s rest.
Then make sure to visit the food court BEFORE (not after) you visit any of the shops. Get those energy levels up.
Doing so might improve your chances of spotting a good bargain.
Even better, you may be able to avoid getting tricked into buying something that you will later regret.
Dushyant Choudhary is the founder of dushyantnomics, an early retirement blog for professionals. Dushyant retired early from his 9-5 corporate life after a successful international career. He brings his knowledge and experience to his current role where he’s dedicated to helping professionals achieve a fulfilling retirement.