Recently I came across an interesting article from the early 20th century about a new management system employed at Pullman (the company responsible for manufacturing most of the country’s railroad cars in the 20th century).
Apparently, the folks at Pullman had a problem at their factory. As they tried to grow bigger and bigger, instead of efficiently building more railroad cars, the managers found that greater and greater time was spent dealing with communication overload.
One “big, bright room” had been filled with “desks, counters, wall racks and filing devices” where “back and forth along the rows of files quick-eyed clerks” were passing cards in some kid of elaborate accounting system.
This scene is probably familiar to many investors that spend their days busily responding to emails and moving documents and processes forward through careful attention to the inbox and some unseen steadying hand.
In fact, we can spend all day knocking down email requests and attending conference calls, only to get to that magical time of day evening when the chatter dies down and we can actually get some real work done.
You can think of your financial life in similar terms. There’s the convenience of having everything at your finger tips … and then there’s actually getting the work done.
For example, there are plenty of the cool Fintech tools that can automate your finances and be completely convenient. Some may even trick you into saving more by rounding up your purchases and squirreling away the extra money into a hidden bank account.
Even if you’re not using those tools, you may have all your accounts linked up in a clever way where you’re monitoring the latest stock market news and can execute a trade from the power of your iPhone.
But are those tools really providing value? Or are they just convenient?
You see, the Pullman problem is a century-old problem of information overload. Just like the modern knowledge worker, the Pullman engineers had inboxes and notifications filled with ad hoc messages. The problem has only been magnified over the years thanks to digital delivery of these messages.
The solution, of course, isn’t that you need your phone to ping you reminding you to invest some cash once a week. The solution is to take the approach followed by Pullman: they made it harder to communicate and less convenient.
The company hired managers who’s sole purpose was to handle the logistical issues that used to distract the factory workers. They also closed the management doors to the factory workers. If you had a request, you had to fill out a form and drop it off in a slot for one specific manager to process.
While certainly not convenient, the process worked and Pullman’s profit per train car jumped.
So when someone asks me why I deposit all of my excess paycheck into Vanguard and then make it extremely inconvenient to withdraw the money, I’ll just tell them now that I’m following the advice of the Pullman company. Making things harder isn’t necessarily bad. Come up with a simple plan, set it up on auto-pilot and then make it hard for you to interfere. You’ll get rich in the process.
Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Personal Capital keeping track of his money. He's also exploring real estate crowdfunding platforms like Fundrise which are open to both accredited and non-accredited investors.
When I buy snack foods, watching my day trades makes me shovel down a whole bag without noticing. I like to keep them out of the house now, that way I don’t gain pounds while I watch my dollars.
Hah, another reason not to day trade I guess. But interesting about how keeping them out of the house = not eating them. It’s a pretty good way to help control any bad habits.
Interesting approach. Basically the pay yourself first approach, only this one kicks it up a few notches. I am assuming when you say you deposit your extra paycheck, that is after expenses are paid and you allocated spending money for yourself? All in all, I support pay yourself approaches over anything else. It forces people to save. And cash is certainly locked in more in an investment account vs a savings account linked to a checking account. Great post!
I’m a big fan of examining the behavioral part of economics and personal finance. A long time ago I “set” my salary at amount that worked for me each month. Everything “extra” goes directly into Vanguard, where I make it difficult for myself to withdraw the money. I’ve given myself raises over the years but generally try to work within that budget. So long story short, yes – it’s a version of the pay yourself first approach.
Related: Biglaw Paycheck Flowchart
“The hard is what makes it great”
-Jimmy Dugan (played by Tom Hanks) in A League of Their Own (1992)
If only quoting useless movie quotes were a full-time gig…
“There’s no crying in baseball.”
I like it. Putting roadblocks in place to doing something besides the optimal thing, means you’re much more likely to do the optimal thing.
Make the best choices for you automatic, and the less ideal choices harder to do.
I was reading an article that talked about how much of the time we as humans just “go with the flow”:
“Our behavioral tendency to go with the flow reflects a fundamental truth about the way our brains are built. Of the 10 million bits of information that each of our brains process each second, only about 50 bits are devoted to deliberate thought–in other words, 0.0005%. We’re wired not to be ever-vigilant. We’re built to avoid continuous decision-making.”
Since we have a tendency to go with the flow and avoid continous decision-making, putting in place good automatic choices, and making bad choices harder to do means we’re much more likely to make good choices when we’re just going with the flow.
Thanks for making me think this morning!
Have you ever found yourself walking a certain path or driving a certain route and then all of a sudden realized you’re going to work when you intended to do something else? I completely agree. The brain is wired to avoid making decisions whenever possible. It’s still the greatest pattern recognition machine ever built (for how long, who knows). Most people seem to understand that putting investments on auto-pilot makes sense, but even if you make some unwanted behavior incrementally harder, you’ll likely save yourself thousands of dollars.
Related: Making 1 good decision is easier than making 26 good decisions
I wonder if the originators of the retirement accounts like IRAs and 401ks were thinking of this principle in order to make it more difficult for people to use their savings.
Tom @ HIP
Absolutely. The penalty isn’t even as bad as most people think it is. I ran the numbers and in many situations you’ll come out ahead by investing in a 401(k) and then paying the 10% penalty later in life. However, that 10% penalty keeps many, many people from withdrawing the funds until they’re 59 ½ (an even better outcome).
Related: The Dreaded 401K Penalty Clause
Great post! I definitely think this mentality is a good one to have. I think it highlights two principles. First, if something is easy for us to do we tend to neglect it. We have to work hard for the things that are important to us.
Second, if we have too many things that are easy to do we don’t work. Period. You said it very well, and I’ll be back to see what else you have to say.
One way to make investing harder is to give your spouse the password to your accounts — this means all investing decisions are joint decisions.
Interesting, although I don’t see how my spouse having the passwords makes it a joint decision automatically (she’d have to log in and undo my decisions). But we meet monthly to discuss stuff like this.