The Hawthorne Effect and Better Money Management

I was reading an article in Wired Magazine about improving one’s health with new personal metrics devices such as the Nike+iPod kit, which is a neat device that helps you easily track and records details about your running. Did you know that all it measures is the amount of time your foot is on the ground? (That time is inversely proportional to your speed.)

The Hawthorne Effect
In the 1920s, the management at the Hawthorne Works factory decided to try some things to improve productivity. When they improved the lighting, workers assembled parts faster. When they were given more breaks, workers assembled faster. But then, the reduced the lighting back to normal, and productivity was still increased. After months of tinkering, when all the work conditions were set back to the original state, productivity remained higher. The fact that they were being watched was the primary reason things changed.

The idea that the act of observing itself will change the phenomenon being observed became known as the Hawthorne Effect (also known as the “observer effect”), and has since been confirmed by many other follow-up studies.

Application to Personal Finances
While this seems like common sense, it is actually quite powerful to know that simply noting down what you spend every day or month in itself may improve your finances. You could set a budget or analyze trends later, but don’t worry about that for now. Don’t judge your expenses. Don’t try to change them. Just track them.

On that front, online aggregation sites like Quicken Online, Yodlee, Mint, and Geezeo make the data collection easier, just like the Nike gadget takes away the stopwatch and logbook. They all pull up your transactions automatically (if you trust them with your passwords and data). Otherwise, I still see nothing wrong with using simple pen and paper and/or a spreadsheet.

Making a Habit
Nike also found that once a Nike+iPod user uploads five runs to the software, the user is much, much more likely to keep running and uploading data. Maybe it would be good to set a goal of tracking expenses for… 5 weeks? 5 months? We need time to get addicted to the stats!

Comments

  1. MMB,

    That is one of the main reasons I started my blog. I wanted other people staring at my stuff, as to make sure I keep up on it.

  2. I think the real reason those people worked harder wasn’t because they were being watched but because they didn’t want to lose their jobs.Thats why the slave master has a whip.

  3. I have to agree. I was 2 years out of college in a well-paying job, but never seeming to get ahead until I began to use Quicken. ever since then, watching the net-worth line move consistently up and to the right has been a self-fulfilling endeavor.

  4. The original Hawthorn study has been debunked. Here is a paper by Steven Levitt:
    http://www.nber.org/papers/w15016.pdf

  5. Agreed. That net worth line in quicken is a big motivator.

  6. This is probably the most valuable thing I learned in college – it was part of an Engineering Quality course. The concept can be applied to pretty much anything in your life; all you need is a metric to measure. Once you have graduated from simply recording that metric, you can take the next step of setting goals to meet for further improvement.

  7. Great connection. Makes me wonder if we should move to a world where money habits & net worth become more “open source” and less a “source of shame.” Would you publish your net worth/monthly savings/etc. for the whole interwebs or a group of trusted friends/strangers to review?

    With Zillow giving decent home price estimates, at least one piece of an individual’s financial situation has been revealed (though not completely.)

    Thought-provoking.

  8. “Nike also found that once a Nike+iPod user uploads five runs to the software, the user is much, much more likely to keep running and uploading data.”

    You suggest using services that automatically record the transactions for you, which I believe can be helpful. But it’s interesting that the person is required to upload their runs (I suppose by sync’ing?)

    Jonathan, do you think the chance of acquiring this useful addiction is increased even greater if we don’t rely on the automatic entry of our spending? Or do people throw in the towel at the prospect and never even start in the first place?

    The subject interests me in re: to further software development vs. really helping people change their behavior.

  9. Great post! Simple, yet so true. I also enjoy watching my net worth increase in yodlee! The % change, and asset allocation is great too!

  10. “Did you know that all it measures is the amount of time your foot is on the ground? (That time is inversely proportional to your speed.)”

    The scientist in me wants to say this is wrong. Elite racewalkers can hit 9 mph. With a minimum foot on ground time of 50%, since they must always have on foot on the ground. There are many people who jog at a speed lower than this and have less foot on ground time, because at some point both feet are in the air.

  11. ChrisMR says:

    I have logged about 750 miles with my nike+ (not quite long enough to make me an expert, but its a decent chunk).
    Anyway, I got it because it makes graphs and I like graphs and numbers.
    I really didnt run prior to getting it. Since, it has taken on a life of its own – if I dont run for a few days I start to get itchy. I just feel like I HAVE to get out there and move.
    It did the trick for me.

  12. Just to follow up on Andy’s link regarding the questioning of the Hawthorne Effect, here’s a link from the Economist discussing the same thing.

    http://www.economist.com/busin.....d=13788427

    Having considered this, I do agree that tracking your finances is a huge help in controlling your personal expenditures.

  13. The Gooroo says:

    This is probably the first time I’ve seen anything bout the Hawthorne Effect ever since my 9th grade teacher talked about it (3 years ago). She actually went really in depth explaining it, and for once, the majority of my class was attentive.

  14. I couldn’t agree more. I think that the productivity improved because the workers were being watched, but also because they made it a “habit”.

    So much about fixing one’s personal finances is about changing habits rather than some A,B, C list of ways to save money.

    Great post…looking forward to more.

  15. Pro2Pro Network says:

    Great observation! Tracking finances or a budget sets a goal. When the facts and statisctic are written out it’s hard to ignore them. Initially, watching the transformation or reaching short-term goals will be the motivatior, but over time it will be habitual. Creating the habit should be the ultimate goal!

  16. I work in an office with a MIA supervisor. He’s in the office less than 50% of the time. When he is in, he’s busy surfing the web.

    He’s not watching us. Nobody is watching him.

    90% of the people come in at least 10 minutes late every day.
    We have people not answering the phone, sleeping, and just watching TV.

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