Behavioral Finance and Your Portfolio

18Emotional Bias #3: Self-Control Bias

Self-reverence, self-knowledge, self-control: these three alone lead to power.

—Alfred, Lord Tennyson (1880)

Bias Description

Bias Name: Self-control bias

Bias Type: Emotional

General Description

Simply put, self-control bias is a human behavioral tendency that causes people to fail to act in pursuit of their long-term, overarching goals because of a lack of self-discipline. Money is an area in which people are notorious for displaying a lack of self-control. Attitudes toward paying taxes provide a common example. Imagine that you, a taxpayer, estimate that your income this year will cause your income tax to increase by $3,600, which will be due one year from now. In the interest of conservatism, you decide to set money aside. You contemplate two choices: Would you rather contribute $300 per month over the course of the next 12 months to some savings account earmarked for tax season? Or would you rather increase your federal income tax withholding by $300 each month, sparing you the responsibility of writing out one large check at the end of the year? Rational economic thinking suggests that you would prefer the savings account approach because your money would accrue interest and you would actually net more than $3,600. However, many taxpayers choose the withholding option because they realize that the savings account plan might be complicated in practice by a lack of self-control (i.e., one might overspend and then the tax money ...