Episode 85: How to Tame Volatility with Katy Milkman

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This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

 

 

Tom Wheelwright:

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Speaker 2:

This is the WealthAbility show with Tom Wheelwright. Way more money, way less taxes.

Tom Wheelwright:

Welcome to the WealthAbility show. There are always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder, and CEO of WealthAbility.

So, we have, in my memory, not since I was a little tiny kid in the sixties, do I remember a world that was in such a volatile tumultuous state as we are right now. We have social instability. We have political instability. We have health instability. I mean, there's so many instabilities. You go, where do you even start? And what I hear the most of is that question, “What do I do? I mean, where do I even begin to get a handle on this?” We just spent a year in a pandemic and we're starting to come out of it, but it seems like the world's not coming out of it. And It seems like politically we're far from out of it.

What we're going to discuss today and what I'd hope we'll learn today is really how to handle that volatility around us, that we can't change and by changing our behavior. With that, we have a behavioral scientist with us. A specialist in this area, Katy Milkman from the Wharton School of Business, certainly a very prestigious university, prestigious school.

It's just great to have you here, Katy. And if you would, just tell us a little bit about yourself and what brings you into this field.

Katy Milkman:

Yeah, no, I'd be delighted to him. I'm delighted to be here. Thanks for having me. I'm a Professor at the Wharton School. I study the science of change. My background is in both Economics and Computer Science. Also some Psychology blended into my work and I co-direct the Behavior Change for Good Initiative, which is an interdisciplinary research center that tries to advance research on this topic. So that's just a little bit about me and I wrote a book called How to Change.

Tom Wheelwright:

Very exciting.

Katy Milkman:

I'm excited about that.

Tom Wheelwright:

How to change. I love that. I mean, if we're going to improve, we're going to change. Right? But what we want to be careful of is we don't want to change as a result of everything around us. We want to be the causation of whatever changes we make. We want to be purposeful about the changes we make. And so, one of the questions I have right off the bat is we talk a lot in WealthAbility about strategy, having a plan of action, really being very focused and centered on what we're doing.

When you talk about change, Katy, how important is having that center in that focus and really being centered to being able to deal with change and then make constructive change?

Katy Milkman:

Yeah. I love that question. I love your focus on strategy because that is really the core message of my decades of research and of my book, is that one of the reasons that when we want to make purposeful change as he put it, which is a great way of explaining it, rather than change, that just sweeps us away, purposeful change towards a goal. One of the biggest mistakes people make is that they don't approach it strategically the way we would approach trying to win a sports game. For instance, too often, we sort of reached for a shiny strategy that isn't suited to our opponent, if you will.

So there's all sorts of gurus out there telling you just visualize success or set big audacious goals. But a problem with most of the things that they're offering is that they don't actually take into account, what is the specific obstacle that you need to overcome to achieve the change you're trying to achieve and then surmount that obstacle. They're like a one size fits all. And it's quote unquote a strategy, but it's not as strategy in the sense that it doesn't recognize the obstacle that needs to be surmounted. So that's really what the book is about. And what science has shown me is that is absolutely critical to making progress. I'm happy to get into some of the obstacles and strategies, but I love that high level.

Tom Wheelwright:

Well, so let's talk about personal obstacles because to me, one of the things I've learned over the years is that the best way to improve things financially, personally, business-wise is to improve me and to really do that personal introspection, to make sure that I'm solved, that I'm centered. I'm a big fan of yoga, big fan of really being centered. How much of a role does being really that our strategy of taking care of ourselves, and focusing on who we are? How much do you think that plays in how we deal with those obstacles?

Katy Milkman:

I think it's really important. I mean, there's a lot of luck in life. There's a lot of variability to what comes your way, what the world throws at you and all you can control is how you deal with it, and how prepared you are. And so getting those things right, and laying the foundation, so that you're as well prepared as you can be to deal with those ups and downs. It's the best we can hope for.

Tom Wheelwright:

Well, let's talk about that foundation. I love the word foundation. What type of foundation, when you look in your work? What type of foundation are you suggesting in your book or in your studies that people create in order to have that stability?

I think about a foundation. I think about building a building, right? You start with the foundation and if you have a bad foundation, then the building's going to fall down. You know, it's never going to look right. You're going to have cracks, et cetera. You're going to need to repair it on a regular basis. But if you have that strong foundation, then it's pretty easy to build from there. How does that work in our personal lives?

Katy Milkman:

Well there's a lot. It depends a little bit on what you're worried is lacking in your foundation. But one thing that I think is really important and commonly overlooked is the importance of the social foundation that you create. So the people who we surround ourselves with and the people we choose to try to pursue our goals with and spend time talking to are really, really important to our success. They show us what's possible. They either support us in our dreams and tell us they believe in us, or they can also rip us down or they can show us what's not possible all the bad things that could happen. So I think being really thoughtful about who we choose to spend time with and also how we learn from them is important.

One study that I particularly love to point to on this topic is just a really simple analysis of how your college roommate that you're randomly assigned to live with freshman year changes your own GPA. And it turns out that if by the luck of the draw, you end up with a college roommate who did worse on the verbal SAT, your grades suffer. Likewise, if you end up with someone who did better, your grades improve. So there's a lot of research like this. If you spend time around people who save more in their 401(k)s, you're more likely to save more and so on.

So choosing those people carefully and then looking for ways we can emulate what's working for people who are good role models in our lives can be incredibly, incredibly important.

Tom Wheelwright:

That makes sense. So I was in Mormon missionary for two years, when I was 19,20,21 and in Paris, France.

Katy Milkman:

Wow.

Tom Wheelwright:

You didn't get to choose who your companion was. So you're thrown in with them. I think everybody who's ever had that experience with either as a missionary or in the military or something else, the people that you're around really do have such a big impact on not just your success, but you know, how happy you are and there's so much about that.

Well, one thing that we talk about is having a team. So, you mentioned have these people around you. There's a lot of people that say, “Well, if you're going to do it right, you have to do it yourself.” And I'm a big believer that if you're going to do it right, you're going to get somebody who knows how to do it better than you do, because I don't know that much. So I'm going to have a lot of people that who know things that I don't know. But have you looked at that into, how does the team, let's say whether it's a business team or a financial team or whoever those people are around you that are focused on your goals, how important is it that not just be on your own, but to have other people surrounding you?

Katy Milkman:

Yeah, so mostly I study individual decisions, but I'm at a business school and surrounded by people who study groups and teams. So I've soaked up a bit of their knowledge on this over the years.

One of the things I find most interesting is that it turns out for team success and for team creativity in particular, that having a diverse set of people who bring really different ideas and different perspectives is incredibly important, not just a group of talented people, of course, the higher quality your teammates, the better. But if they bring different perspectives that strengthens you, because each one then has something new to offer and you have complimentary skills rather than overlapping ones. So looking for teams that can support you in that way, I think is also incredibly important. And we often look to surround ourselves with people who remind us of ourselves, right? Where, “Oh, we went to the same college.” “We have the same interests.” “We studied the same major.” “I love this person.” But it's actually really important to seek out those. I love your humility. People who know more than you do about different things and to bring in that diverse portfolio of perspectives.

Tom Wheelwright:

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One of the things that we talk about a lot is being focused and not getting distracted. We were talking about this a little bit before we started, but can you address that part of those individual decisions about not being, like we say, “Don't chase a return, rather focus on a particular type of asset you're going to invest in from a financial standpoint,” but can you talk about focus in general and how important is that to grounding and centering yourself in this crazy world?

Katy Milkman:

Well, one of the things that can be a major obstacle to change is when we're pulled by temptation to do things that aren't in our long run best interests, but feel good in the moment. Those things could be anything from, making a really impulsive decision about your investments, to spending too much time on social media when you should be focused on your work, to eating the wrong foods or not exercising regularly, right? So these are all different temptations that can make us less successful when it comes to achieving important goals.

And there are a number of strategies we can use to try to overcome that challenge. But one that feels particularly relevant to your question is something called a commitment device. It's very counterintuitive because it's basically imposing rules and restrictions on yourself, the way someone else would usually impose them on you. Like we're used to the state saying, “No, you can't drive faster than this,” or “You can't take care when they're trying to protect you from yourself.” But it's strange to imagine protecting yourself from yourself, but that's what a commitment device does. It's a tool that helps you set some constraints or restrictions. Maybe you limit your screen time by downloading an app that only allows you to spend so much time on certain sites that you don't want to be on or on your screen at all, or there's commitment devices in the domain of saving that I find really interesting that you can encourage other people to use and adopt yourself.

One study I love shows that when people were offered a savings account, that didn't allow you to remove money from it, unless you would reach a predetermined date or savings school that you self-selected. And that was a savings account with exactly the same interest rate as your standard savings account. Giving you access to that extra type of account that was essentially locked, increased people's savings 80% year over year.

So there's all sorts of ways we can use these kinds of strategies to think about setting deadlines and making ourselves accountable to other people based on those deadlines. Creating bank accounts that are separate from the usual setting money. They're cutting up the debit cards, trying to forget it exists to cash commitments where you can literally put money on the line, that you'll forfeit if you fail to achieve a goal. And you name a referee and their websites like stick.com and Beeminder that let you set these up and by creating those kinds of constraints and planning and figuring out, okay, this is what I want to achieve. I recognize that I might run into some temptations along the way, or get off track. What if I put a price on my vice, so that it'll be even less tempting when the moment comes, and there'll be this really big reason not to give in that can help us stay focused.

Tom Wheelwright:

Interesting. So that of course would be the argument for the 401(k) not being able to be withdrawn until you're 59 and a half.

Katy Milkman:

You got it. That's a state sponsor. Right. It's interesting because commitment devices are like we can do for ourselves what policymakers wisely often do fast.

Tom Wheelwright:

I would much rather do it for myself than let the government do it.

Katy Milkman:

There you go. Yeah. It's very appealing. Yeah.

Tom Wheelwright:

I'm the youngest of six children. So I don't like being told what to do.

Katy Milkman:

You can tell yourself.

Tom Wheelwright:

Exactly.

Katy Milkman:

You can tell your future self and that's what a delightful without commitment devices.

Tom Wheelwright:

Well I think that's probably like Tom Brady, right? I mean, why is Tom Brady still? I mean, why is he winning a Superbowl in his forties? Well, it's because he puts those types of rules, right? And they're rules for him. They're not rules for anybody else, the rules for him. And that's what makes him so strong and why he can handle that, when a lot of football players they're washed out at 32, 33, 34. He's in his forties, who knows he could go another decade. He could be our first 50 year old quarterback in the NFL. We don't know. But it really does seem to be that he is so totally focused on what he's trying to achieve and what he's doing. He's willing to put those rules on. I can't imagine a Tom Brady having a pizza, I just cannot even fathom.

Katy Milkman:

He's going to do it sometimes because he got to give into temptation every once in a while.

Tom Wheelwright:

He's very, very focused. He's very, very focused.

Katy Milkman:

Yeah.

Tom Wheelwright:

I admire that about him. And we're not all easily that focus and so I like the idea. One thing is I like is I like to have team members around me that helped me focus as well, so that they know what my goals are and they know what I'm trying to accomplish. And then they can actually, you know, there's some social…

Katy Milkman:

Accountability. Yeah, absolutely. Accountability is so powerful.

Tom Wheelwright:

You know, we talk about that in business all the time, having accountability, but having social accountability for your own self can be a really helpful when you talk about something and you're transparent about who you are and what you're doing. It's a little easier, you know, I always say, if you want to lose weight, tell people that you want to lose weight and have them hold you accountable. Right?

Katy Milkman:

Totally.

Tom Wheelwright:

Because there is some social pressure there.

Katy Milkman:

Absolutely.

Tom Wheelwright:

So let's go to the next step. You've got a lot of, we got a lot of social upheaval, a lot of political upheaval that's going on. What do you do about that? I mean, just on a daily basis, are there things that you can do, things that we can do to keep us from getting spending too much time on those social media, et cetera? But keep us from just getting wrapped up and overwhelmed by what's going on in the world.

Katy Milkman:

Some of the things that help most with maintaining our well-being, especially in the face of stress or not dealing with those problems directly, but rather just setting ourselves up for success by dealing with our own goals. So for instance, exercise is one of the best things we can do to reduce our stress, getting a lot of sleep, having a really strong social network and social supports, those kinds of things matter immensely.

And so I would sort of say just for, as a win-win when making sure you're focusing on that kind of wellness is really important when dealing with the kinds of turbulence we're facing right now. It's actually kind of miraculous how much exercise and sleep matter for well-being. It blows my mind when I look at the studies, but also if you see that there are specific things that are triggers, that are making it harder for you to focus, if it's social media or whatever. We talked about restrictions and setting constraints and thinking about what you want to put limits on, and what isn't good for you, and what isn't helping you reach your goals, feel productive.

You know, some people like being really well-informed and reading all the headlines and that's good for them, and for other people it's too much. And I think, you know, figuring out, right, it's not a one size fits all. What are the things that are fueling you to be successful and maybe have a social impact, because you want to read about what's going on and contribute? And what are the things that are distracting and keeping you from being able to achieve at your almost capacity? So that's how and we can set different limits for different people.

Tom Wheelwright:

I Like that. So a few months ago I found myself like going nuts on the social media stuff, you know, apple news, all that kind of stuff

Katy Milkman:

Right around January? I think we're [crosstalk 00:18:58] because we're the same. We're all kind of worried. I think.

Tom Wheelwright:

There is like right around that time. And I finally decided, you know what, I'm going to pick one new source that I trust and that's what I'm going to read. I read it cover to cover. Okay.

Katy Milkman:

Yeah. Great. That's a great example of a commitment.

Tom Wheelwright:

I'm a Wall Street Journal guy. I trust the Wall Street Journal. It's middle of the road. It's not left or right. It's pretty middle of the road. And I just thought, you know what, I trust these guys, so I'm going to do this. It's really had a huge impact on my well being and focusing. I'm not so distracted anymore. I'm not going crazy about everything that pops up in that newsfeed. And instead I can go, “Okay, I can deal with this. I can deal with this. I can deal with this. I can deal with this.”

So I've just go along with what you're saying is that I've found that for myself to be very, very important to set those limits and set those patterns that I'm going to follow. And I find that when I do that, and the other thing that I find is that when I brought out a really good plan of action. So I know I'm going to only do these things. So I'm going to, you know, I've got this target say I do triathlon. So I've got a target of this triathlon. So I need to swim these days. I need to run these days. I need to bike these days. This is what I need to do. Then I get into that self-discipline and it seems to me to make a whole world difference, not just in my health, but in everything else that goes on around me. Do you find that?

Katy Milkman:

Absolutely. That there's absolutely strong evidence that when you feel good and healthy and when things are going right and are on track in one part of your life, there's spillover effects. I also just wanted to double click on what you said about the way you structure that, because that's so important too. I think it's pretty intuitive, but there is also great research supporting how important it is to make those really concrete plans about what you want to achieve. Not just abstract, you know, I want to run a triathlon, but okay, what does that mean each day? You know, on Monday at this time, this is what I have to, you know, this is the workout I need to get in on Tuesday at this time.

By breaking that down one, it makes it less overwhelming, because it's in the bite sized pieces of the things that you need to achieve to get through your goal, but also by creating the specific plans you think through obstacles, you make a firmer commitment and you're less likely to flake out and more likely to actually follow through. So that kind of if-then planning and creating, they're called Implementation intentions that have been studied by NYU's Peter Gollwitzer as just so powerful as a way to make sure you will achieve your goals.

Tom Wheelwright:

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Katy Milkman, if you will, just a few final words, two or three things. Just specific things that we can do on a daily, weekly, monthly basis, that you think will help us be more centered and deal with all this volatility going on.

Katy Milkman:

Find the things that you really, really enjoy doing and make sure you're making time for them, so that even when the world is giving us lemons, you're getting some lemonade out. Well, maybe not making lemonade out of the world lemons but you're still having something good going on.

So make sure you find time for the fun, build those social supports, so that you have strong friendships and role models to look to. And in times when they're tough, you have someone to talk to about it, who you respect and to deal with things with, and make plans to do the things that matter to you. Make sure that you have concrete if-then plans. This is when I will do it and here's how I'm going to make sure I do.

Tom Wheelwright:

I love that. So actionable items from a professor. I love that. We don't always get that. So I love that. Thank you so much for being so practical. So Katy Milkman, author of How to Change coming out. Very excited about your new book coming out, Katy. And if I've got this right, katymilkman.com. Is that right?

Katy Milkman:

You got it. The only important part is for listeners it's with a ‘y' like Katy Perry. And so katymilkman with a ‘y'.com

Tom Wheelwright:

Milkman, I think we got that one.

Katy Milkman:

That one's easy all the way. I always have to tell the pizza delivery person, you know, just like the guy who delivers the milk, they don't believe me.

Tom Wheelwright:

Well, most people never known what a milkman was, right? I mean, I'm at least old enough to have a milkman when I was little and, it's great. It's not, not Katy dumb Milkman. It's Katy Milkman. So we want to be clear with that.

Thank you so much, Katy, for joining us. Thank you everybody. These are just really tough times and I encourage you to listen to this podcast again and watch it again, because Katy just came up with some, just a really good solid things that we can do really focus on that strategy, stay focused, stay centered. And when you do, you're always going to make way more money and pay way less tax. See you next time.

Speaker 2:

You've been listening to the WealthAbility show with Tom Wheelwright. Way more money, way less taxes to learn more, go to wealthability.com.