It is getting to be too easy to transact. Advances in technology are reducing the amount of effort needed to buy goods and services, transfer cash and sell securities. An updated Apple Pay may even figure out which card gives you the best reward at a given store or restaurant, according to NPR’s Marketplace. For those familiar with behavioral finance, this evolution is worrisome.
A recent shopping experience at Trader Joe’s sheds light on my concern. As the cashier was ringing up my goods, I noticed that the store was now accepting Apple Pay. So, I placed my iPhone above the cash register’s touch screen, scanned my finger, selected pay by credit card and walked out with my groceries. The entire process was far simpler than I can could ever explain. It also took less time than it would have had I reached for my wallet, grabbed a credit card and physically swiped the card. Paying by cash or check would have also taken longer.
I didn’t buy anything on impulse, just bananas, apples and yogurt. Okay, the peanut butter and jelly yogurt was impulsive, but I would have bought a different flavor anyway. (And the PB&J yogurt was surprisingly delicious.) It’s a good thing that I stuck to my shopping list, because when the process is painless, it’s easy to transact—and that’s really bad for a person’s finances (checking accounts, credit cards and portfolios alike).
Consider the Apple Watch. Fidelity and E*Trade have already released apps for the device that integrate with a person’s iPhone. Brokerage startup Robinhood lists “buy and sell stocks” among its Apple Watch app’s features. I expect that it is just a matter of time before other brokerage firms follow suit.
Think about this for a second. An alert pops up on your wrist. You tap a button on your wrist and sell (or perhaps buy). Then you go back to what you were doing with a barely a blink of the eye. No time spent thinking about the actual transaction; just a quick reaction to an alert from your watch.
If transacting by merely touching your wrist sounds convenient, it is—and that’s why it is dangerous! Nobel laureate Daniel Kahneman theorized that our brains operate with two systems. System 1 is reactive and intuitive. System 2 is thoughtful and deliberate. When we pause to consider our actions, we are operating in System 2. Econs, as Richard Thaler likes to call people who always act rationally and in their financial interests, tend to spend more time in System 2.
Whenever you react immediately to an alert on your wrist and then quickly then go back to doing whatever you were doing before the alert, you are operating in System 1. You made a quick decision and moved on. The easier it is to transact, the more likely you are to make financial decisions with System 1 and less likely you are to act like one of Thaler’s econs. Given that numerous studies have shown that humans often make reactive and emotional financial decisions, as opposed to rational decisions aligned with their long-term financial interests, making transacting easier may lead to even more bad decisions.
This is not the fault of technology; it’s how our minds are programmed. We humans evolved to cope with a very different environment than one with smart watches and digital transactions. As such, we need to adapt our behaviors accordingly. A simple, but very effective, step is to take a deep breath before every transaction and ask yourself “why I am about to buy or sell this?” Just doing this should trigger your System 2 and help you make better decisions.
The Week Ahead
We’ll get our first look at second-quarter earnings as a group of seven early reporters within the S&P 500 announce their results. Those companies are: Adobe Systems (ADBE) on Tuesday; FedEx Corp. (FDX) and Oracle Corp. (ORCL) on Wednesday; Kroger Co. (KR) and Red Hat (RHT) on Thursday; and CarMax (KMX) and Darden Restaurants (DRI) on Friday.
The Federal Open Market Committee will hold a two-day meeting, starting on Tuesday. The meeting statement will be released at 2 p.m. ET on Wednesday, followed by updated committee member forecasts and a press conference with Fed Chair Janet Yellen at 2:30. A rate hike is not expected to be announced at this meeting. San Francisco president John Williams and Cleveland president Loretta Mester will speak at separate events on Friday.
Elsewhere on the economic calendar, May industrial production and capacity utilization, the June Empire State manufacturing survey and the National Association of Home Builders June housing market index will be released on Monday. Tuesday will feature May housing starts and building permits. The May Consumer Price Index (CPI) and the Philadelphia Fed’s June manufacturing survey will be released on Thursday.
The Treasury Department will auction $7 billion of 30-year inflation-protected securities (TIPS) on Wednesday.
Friday will be a quadruple witching day, meaning both options and futures contracts will expire.