The Stroop Effect and Your Wallet

Let’s try a little psychology experiment. In the image below, read out all of the colors, not the words themselves. You can say them out loud, or in your head.

stroop easy

Now, try the same for this batch of colored words. Remember, say the color, not the word itself.

stroop hard

It’s at least a bit harder, isn’t it? This effect is called the Stroop effect – it’s a classic psychological tool that demonstrates the power of selective attention. In other words, it demonstrates that it can actually be quite difficult to look at a complex situation (the miscolored words), throw out some of the information presented to you (the actual words), and evaluate only what remains (the color of the words).

Here’s the interesting thing, though. Many aspects of personal finance actually rely on a person’s selective attention.

Take grocery shopping. You’re walking down a grocery aisle, looking for a particular item. All around this item are colorful variations on the same thing, all clamoring for your attention – you have to be selective. When you do finally find the item, the selective attention is still important, as there are varying sizes of that item.

Take investing. You flip on CNBC in order to find out how your stocks are doing, and you’re inundated with lots of talking heads touting particular stocks, breathlessly covering market news, and perhaps yelling a lot and throwing chairs.

It’s easy to see selective attention at work in many of our personal finance choices. Buying a car. Choosing a bank or a credit card. Shopping online.

This leads to an obvious question: how can we improve our selective attention (or at least use our own nature to our advantage), especially when it comes to personal finance choices? Here are three strategies that work well for me.

Use a shopping list. A shopping list changes the focus of your attention from the items on the shelf to the list in your hand. Instead of wandering down an aisle with lots of distractions, your focus can be on the list. What’s next on the list? Where can I find this specific item? The subtle shift of focus makes it much harder to be distracted by the items on the shelf because, simply, you’re only looking for a very specific item and the rest doesn’t matter. On the other hand, if you walk the aisles without a specific mission, you’re much more open to having your attention pulled away from the task at hand – and that results in a lot of unnecessary stuff in the cart.

Use the ten second rule. If you’re about to make a purchase, stop for ten seconds. Breathe in deeply, breathe out deeply, and focus on nothing but the item. Think about whether or not that item fits in what you’re doing with your money and ask yourself if it’s really necessary. To put it simply, you’re actively focusing your attention on this one specific purchase, not on the next thing you need to get, the next shiny thing in the store, or any other distraction.

Filter your news and information. Instead of being blasted with the fire hose of color and activity and information one might find on CNBC, consider instead using other tools to just get the data you want. Instead of hitting CNBC to catch the numbers on your stocks, set up Google Finance to just watch the stocks you’re interested in. Instead of just hearing what CNN wants you to hear, use Google News and focus only on the specific stories that matter to you.

In short, much of personal finance success comes from the ability to focus your attention properly, and the most effective and simple way to do that is to recognize distractions and find ways to block them out. Do that regularly and you’ll find your finances getting into better shape.

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