On Markets & Investing

How to make New Year resolutions work

19 December  2022

The end of the year is usually a time when we reflect on our achievements and make plans for the new year. Of course, I assume you have made all the necessary preparations for Christmas and New Year. Reflecting on your life before buying presents for your loved ones may be a little careless.

If you, like me, are a little disappointed that many so-called New Year’s resolutions rarely materialise, you may find a book by Katie Milkman, ‘How to Change’, quite helpful. One of the ideas is that making commitments on a special day like New Year or Birthday tends to have a more significant impact on your future actions. This sounds encouraging.
You may wonder how relevant this is for investing.

From my experience, process trumps talent. Even if you have excellent analytical skills and have learnt about a particular sector more than most other market participants, and with this edge, you can find the best investment opportunity, you still need the right temperament to execute the investment. You may sell too early or miss the changes in the investment case and get stuck with a loser.

Getting on the right track with the proper process and habits will eventually lead to superior results in any area of life, not just investing.

The issue is that even when we understand what we should be doing, we rarely do it or give up too soon. Going to a gym only for the first three months until you feel exhausted, reading for at least 30 minutes every day until you ‘just don’t have time’, and other ‘good habits’ that don’t last long enough are all very familiar.

8 Steps to Improve Your Habits

So how can we get better at following through, changing our behaviour and achieving better results?

Katie Milkman, an American professor at Wharton and an expert in decision-making, has come up with eight key points on how to change, which she discusses in her book. She starts with a story about Andre Agassi, one of the world’s best tennis players, who was exceptionally talented but, after early success, struggled to win in bigger tournaments.

His new coach, Brad Gilbert, identified the problem: Agassi was so talented that he wanted to play his best shot in every game. This put too much pressure on him, leading to mistakes that increased his self-doubt and impacted his morale, leading to even worse performance.

Gilbert's advice was for Agassi to focus less on his best shots and more on mistakes that his opponents can make. Playing longer rallies would create more opportunities for his opponents to fail. The change in Agassi’s style eventually led him to many great victories.

1. Getting started

Fresh start date (Birthday, New Year, start of spring). You can get much better results in changing behaviour if you link to a specific (big) date so that people can start a new, fresh start (impression of a clean slate). You can also try to reset your environment, start working from a café, change a laptop, move a house etc. Changing targets from annual to monthly (for sales managers) could also be helpful (reset metrics to zero).

2. Impulsivity

We overweight short-term pain and underweight long-term gains from good habits, which stops us from changing. Think of your experience of going to a gym. The author came up with a solution to allow her to listen to her favourite audiobooks and podcasts only when exercising in a gym. Just like kids take medicine with a fruit flavour focusing on pleasure and ignoring the taste of medicine. Come up with perks to reward your new behaviour.

Rather than relying on willpower to force change, think about making good behaviour more gratifying in the short term. Gamification is one technique (leaderboard, weekly score, competitions etc.).

3. Procrastination

This point is about setting up the processes around restrictions and encouragement (present bias). The state often makes certain things obligatory even if they are beneficial for citizens (e.g. mandatory pension accounts, using seat belts in cars etc.). Important to use self-commitment – an example of students delivering better results with self-imposed deadlines.

Think about various commitment devices (apps) as well as public commitments (soft commitments) or hard commitments (monetary penalties). Make smaller, more frequent commitments rather than significant and long-term (easier to save $5 a week than $275 a year).

4. Forgetfulness

Use reminders, especially timely ones, that remind you about important actions just before you need to do them. Cue-based plans – a plan of actions that have cues (something that triggers the action). An example includes a rule to increase saving by 10% each time I get a 10% salary increase.

Consider using a checklist. Plans help break down big goals into concrete steps, do not overdo it (thousands of various steps will overcomplicate the plan and reduce your motivation to follow it).

5. Laziness

Important to be flexible with goals – no need to fix a time for going to the gym, instead aim to go once a day or four times a week (without specifying days) – in this case, if you miss a date/time – you will not be discouraged from dropping your goal.

The chapter has many valuable, practical advice to turn laziness into an advantage.

Track your behaviour, this makes you feel more accountable.

The key solution is developing healthy habits.

6. Confidence

Many people suffer from overconfidence bias, but this is almost inevitable (think who would you more likely hire – a confidently looking candidate or a shy person?). Ask people for advice rather than come up with your own. In this case, you will raise people's confidence in themselves. Consider becoming a mentor to someone or forming an advice club.

Refrain from praising natural habits. This may lead people to develop a fixed mindset associating their results with their natural traits rather than being willing to develop and learn new skills. Better praise hard work or progress. Adopt a growth mindset (people's abilities and intelligence are not fixed but can be developed).

Confidence is critical in changing habits, as small failures are inevitable, and we must learn to overcome self-doubt.

Expectations shape reality. Surround yourself with mentors who believe in you.

Set ambitious goals but allow one or two slippage steps (like exercise 5 days a week, not every day during the week).

Focus on personal experiences that make you feel successful or proud, as this will make you more resilient in the face of adversity.

7. Conformity

People around you matter a lot. You are influenced by others, so it is vital to be in good company. It could be harmful to have peers who are low-achievers. This is precisely one of the central messages from a recent interview of Buffett and Munger, which I wrote about here.

Watch people who succeeded and try to copy them.

8. Life-long journey, not just a single action

The main message here is that we must constantly remind ourselves of all the key steps.

'When we diagnose a person with diabetes, we do not give them just one portion of insulin and expect them to be cured. It becomes a lifelong treatment'.

- Katie Milkman

Achieving better behaviour is like treating a chronic disease, you cannot rely on just one pill.

Final words

This is my last note in 2022. I will be back in January with the summary of the past year, reflecting on the most important tools, books and ideas I came across in the past year, as well as some thoughts on 2023. I will keep the same format as previously.

2022 has not been an easy year. But this is how success is built. Firstly, to enjoy most things in life, we have to experience the opposite side. If you are exposed to the sunlight all day long, you would not appreciate it as much as a person from the far north during winter. Investing would be a very different activity if markets rallied 20% every year. Sadly, without death, and if we lived eternally, we might have lost meaning in our lives.

Besides, it is what we learn from failures that really matters. So 2022 has been a very important year and much better than it might first appear.

I wish you a Merry Christmas and a Happy New Year!