The Observer Effect and Your Money

Recently, I’ve been trying to carefully track my working time in order to get some sense as to how I spend my time, what times of the day I focus best, and so on. The goal is to make my work as efficient as possible.

What I’ve found, though, is that the simple act of tracking my time is actually causing me to be significantly more efficient in my work. Since I know that I’m tracking my work, I have this subtle tendency to be on my “best behavior” regarding work.

This phenomenon is known in physics as the observer effect, something that’s familiar to anyone who’s taken a high school physics class or even anyone who has checked the pressure in a car tire. Here’s Wikipedia’s summary of the observer effect:

“In physics, the term observer effect refers to changes that the act of observation will make on a phenomenon being observed. This is often the result of instruments that, by necessity, alter the state of what they measure in some manner. A commonplace example is checking the pressure in an automobile tire; this is difficult to do without letting out some of the air, thus changing the pressure.”

This effect is also known as the Hawthorne effect, particularly when applied outside of the field of physics, which I mentioned briefly in a similar context several years ago.

It doesn’t take much of a leap of the imagination to see how the observer effect shows up pretty strongly in personal finance. In fact, we can actually use the observer effect to great benefit.

Imagine, if you will, that you have some piece of software that records every transaction you make and then, once every day or two, you have to go in and mark each transaction as “read,” to show that you reviewed it, akin to how you read your email. You’d not only want the number of transactions to be nice and low, but you’d probably also not want to look at really wasteful transactions. The idea that you’re “observing” your transactions adds another little element to the decision to buy and provides some pushback.

This exact thing happens for anyone who uses a software package like You Need a Budget. I’ve felt that “observer effect” myself when using it.

That effect is even stronger when you’re manually recording your expenses in a pocket notebook. I really don’t like writing down silly expenses in my pocket notebook. In fact, I try my best to completely avoid doing so, and I’m not alone in doing it. The same thing is true for any journal that records your behavior; if you’re keeping track of what you eat, fore example, there’s real resistance to writing down that you just knocked back a pint of Ben & Jerry’s which can guide you instead to just eat a little or eat something else entirely.

This is why careful logging of your actions is a vital part of turning around any negative life habit, but it works particularly well for personal finance. The simple act of having to write down every mis-step keeps you from making as many mis-steps. The data from such a log is still useful as a record of what you’ve done, but the act of creating the log pushes you in the direction of good behavior.

Here are some specific ways to make this “observer effect” work well for you.

The first, of course, is to write down each and every expense in a pocket notebook. If you spend a dime, write it down in the notebook. It doesn’t matter how big or small the expense is, it should be written down in that notebook. If you get a receipt for a bunch of items at once – like a grocery receipt – you can just slip that receipt into the notebook, though writing down each item can be really powerful, too.

I highly recommend writing down not only the item itself, but where it was purchased and what it cost, including tax. That way, as you’re looking back through it, you can not only see what it was that you bought, but where you bought it and how much you paid for it.

If you feel resistance in terms of writing things down in that notebook, use that as a sign that’s telling you that the item you’re about to buy is not a good use of your money. If you dread the thought of writing down an expense and then having to see it again later, that’s almost always because you know on some fundamental level that the expense isn’t a smart one and that you should be doing something else with your money. The resistance is your guide; it’s a way of translating a questionable purchasing decision into another action that really shows you when you’re making a mistake.

Once every day or two, then, review the recent entries in that notebook. For each entry, ask yourself whether this purchase still makes sense. Was it a good choice? Could I have done something better with my money (and time)? Was there a more efficient way to achieve the same ends?

Don’t be afraid to recognize that you didn’t make the best decision in the moment. We all do that. I do it all the time. The value here is that you see that you didn’t make the best decision and that you see a better decision that you could have made, something that you know you can do going forward. The big “win” is that you’re starting to shape a better instinct and life pattern for yourself, one that pops up when that situation or something similar to it occurs again. That’s a good thing.

The value of the “observer effect” doesn’t fall away after just that quick review a day or two later, either. You can take all of your spending logs and use them later down the road to get a broader view of your spending.

So, for example, at the end of the month, you might take all of your spending logs and categorize all of the expenses, sorting everything into neat categories that you can evaluate separately. How much did you spend on tea? How much did you spend on scrapbooking supplies? How much did you spend on meals at restaurants?

That broader observation can actually be pretty powerful, too, in terms of creating an “observer effect” in your daily living. Knowing that this kind of broad review is coming can push you toward thinking about your spending in a full category over a period of time. If you’ve bought tea four times this month, do you really want to buy more and see that total amount spent on tea reach ridiculous heights? If you’ve gone to restaurants several times this month, do you really want to toss another one on the list and see that restaurant total add up to a number you’re really uncomfortable with? This is that same observer effect, just pulled out to a broader scale.

I find the “observer effect” to be really valuable for any habit I’m trying to establish, whether it’s finance related or not. If I’m trying to get in shape, for example, I’ll track my step count or the number of days in which I do a Darebee routine, and I don’t like recording low step count numbers or not marking off days of exercise. Near the end of a month, I push myself to really get that step count up so I have a number I can be proud of and I find myself pushing really hard not to miss a day of exercise. I use it to encourage myself to read by keeping a “reading log” and I feel good when I add books to that log, so having that log – which definitely counts as observing – often becomes a subtle nudge for me to read more to make sure I can keep adding books to that log.

How can you get started? The easiest way is to just start carrying a pocket notebook and a pen or pencil with you in your pocket everywhere you go, then jot down every time you do a particular thing – spending any money at all is a really good one for personal finance. Review it once or twice a day just to make sure you really are writing everything down. Then, once every few days, review that notebook. Go through every entry and make sure it’s something that makes sense and that you’re proud of. Ask yourself if there was a better way to achieve the goal of that entry. Then, once a month or so, tabulate the results, look for patterns, and see if those patterns are telling you anything.

This simple technique takes the observer effect and puts it to work for you. It will encourage you to make better decisions in the moment about your spending or about whatever habit it is that you’re trying to improve. Good luck!

Trent Hamm

Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.