Across the globe, people from all walks of life will be making resolutions on New Year’s Eve, aiming, as they do every year, to have another stab at doing better in the areas they’ve lagged.
For financial advisors, the end of one year and the beginning of another is an excellent time to get their clients to commit to making at least one sound financial decision. Research has shown that New Year’s Eve inspires positive behavioral tendencies in most people, said Katherine Milkman, the James G. Campbell Jr., assistant professor of operations and information management at the University of Pennsylvania’s Wharton School.
However, Milkman’s research has expanded the available body of evidence on the so-called New Year’s Effect by showing that human beings actually make positive resolutions at any number of different points in their lives.
“There are many points at which people start new cycles,” she said, “including the beginning of a new month, the start of a new week, their birthdays and a whole list of other landmark dates.”
Studying this Fresh Start Effect, she said, can prove extremely valuable in many different ways, particularly as it relates to financial planning, because it has the potential to help people overcome willpower problems that often limit goal attainment.
Milkman and her team studied three different data sets to formulate their theory. They looked at the number of Google searches done on diets and examined data on gym attendance, two very important markers of aspirational behavior, especially after major holidays like Thanksgiving and Christmas.
“We extended our data search to birthdays, which also exhibit the Fresh Start Effect in areas like gym attendance,” she says.
In order to rule out any incidence of the rise in gym memberships and attendance or commitments to new diets as purely a short-lived compensation act for gluttony and indulgence during the holiday period, the group also monitored action on the website StickK.com, a goal-setting platform where users can create an online commitment contract in any area they choose, with a referee to monitor progress toward their goal and an agreement to forfeit a certain sum of money if that goal isn’t met. The site enforces the contract, Milkman said, “and we looked to see whether people created more commitments on landmark dates.”
Sure enough, action on the site demonstrated clearly the Fresh Start Effect, “so we know that commitments made on landmark dates aren’t just driven by gluttony,” Milkman said.
The study, detailed in a paper entitled “The Fresh Start Effect: Temporal Landmarks Motivate Aspirational Behavior,” implies that people need to “grab these moments and take advantage of them.” Milkman said, “These are opportunities to really tackle aspirations.”
Temporal landmarks, including personally meaningful events such as birthdays and job changes as well as socially constructed calendar partitions like a new month or a public holiday, demarcate the passage of time and open new mental accounting periods, Milkman said. Specifically, naturally arising time markers create discontinuities in time perceptions that make people feel disconnected from their past imperfections by disrupting their focus on day-to-day minutiae and promoting a big-picture view of life that encourages them to pursue their aspirations.
For financial planning, the research is even more meaningful.
While many people start out gung-ho with diets and exercise, many of them don’t last all that long. On the other hand, even a single financial planning decision such as committing a set sum from a paycheck to a retirement account has much longer-term implications, Milkman said.
“Compared to gyms and diets, all you need to do when you make a financial decision is to make one choice on one day for a long-term change,” she said.
As such, it would be greatly beneficial for financial planners struggling to get their clients on track to figure out which landmarks other than New Year’s Eve are important to them, Milkman said.
“Let’s say an advisor contacted someone right before or right after their 40th birthday and said, ‘This is a milestone event and a time to step back and think about your financial plan.’ It would surely excite their clients and be a great moment to get them to commit to an important financial decision,” she said. “We know that there’s a huge inertia surrounding financial decisions and people neither take those decisions quickly nor make changes to them very quickly. We think that based on this research, more people may be willing to take financial decisions on landmark dates, so this has a natural implication for financial planning.”