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Sreelakshmi Prasad

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Understanding the “Habit Loop: Why We Do What We Do” And Applying It In Finance!

5 Aug 2020

 5-mins  Read

THE HABIT LOOP IN PERSONAL FINANCE

Have you wondered why we all tend to do things a certain way?

For instance, how we often feel the urge to shop, feel the urge to smoke, one might eat dessert after dinner or even to wear a certain outfit on a particular day.

We’ve all got one or more of these strange little habits, which may or may not be harmful. But why does this happen? How does this happen

It’s because of this little thing called the habit loop. Charles Duhigg, in his book – The Power of Habit: Why We Do What We Do in Life and Business, describes how there is a little pattern behind every habit. And understanding the loop will help one make and break habits.

THE HABIT LOOP

The habit loop is a loop created by our mind, which consists of three things: cue, routine, and rewards. Every habit is a result of these three things.

CUE: This refers to anything that triggers your habit. It could be any action, or feeling, or something similar. For example, if you have a sweet tooth, looking at images of sweets or dessert could trigger a craving.

ROUTINE: It refers to the behavior or habit that you would like to change. It varies from person to person. It could be drinking, shopping, binge eating, smoking, etc.

REWARDS: It refers to the positive feeling or thing you get at the end of the habit. It is this ‘reward’ that makes you want to continue indulging in the habit. This is usually the route cause for the habit to form in the first place.

The habit loop implies that there is a trigger, followed by a reward to every habit we develop. Therefore if you want to build a new habit or break an old one, the key is to identify the cue, routine, and reward and work around it.

Let us take an example!

If you have a habit of eating desserts every day after dinner, there will be a cue that triggers the action. This could be walking by your fridge, or watching cooking shows at night or something similar. In the end, you will have a reward. The reward could be the dessert itself or the feeling of having a burst of energy from the sugar, or just beating boredom!

Thus, the key to break this habit will be to admit you have a routine, identify your exact trigger, avoid it, and reward yourself with an alternative, depending on your personality!

APPLYING THE HABIT LOOP IN PERSONAL FINANCE

Most of our spending habits arise from such habit loops. Most of our unnecessary purchases are usually triggered by some cue, followed by the routine and reward. So if you are in a quest to break any such habits, there is a simple 4 step formula we can use to understand our patterns and break them!

STEP 1: Identify the routine

The first thing you need to do is figure out the routine or the habit. It will be different from person to person, but it is the key to understanding why we have a habit and how to break it.

If you closely observe your spending habits, you may notice some habits that lead you to spend more. For instance, if you are a habitual shopper who shops too often, you’ll notice it burns a hole in your pocket. So then you may decide to shop less often or occasionally. But every two weeks or so, you may find yourself going back to the mall or online looking up things to buy. You might write down reminders or even set alarms, but you may find yourself making purchases every other weekend! Now, this is a routine or habit. Identify the pattern so that you can work on it.

STEP 2: Figure out the cue/trigger

Once you spot a pattern, you must now determine what triggers the routine. To figure out the cue, try and track your behaviour whenever you feel the need to indulge in the habit. Answer the following question every time you feel the urge:

  • Where am I?
  • What time is it?
  • What is my emotional state?
  • Who am I with?
  • What was the last thing I did?
 

For example, in the case of a shopping habit, answer the above questions whenever you feel the urge to shop. Over some time, you will have to review an answer. There will be some recurring points. If you shop because you feel de-stressed, you may see that you might have been doing some stress-inducing tasks just before you felt the urge. Or if you do it because of a certain friend who shares the same urge, you will notice that you were with that person when you feel the urge to buy. Thus, you will know what your cue or trigger is.

Using this trick, you can identify the cues to any habit you want to break. Once you figure out the signal, it’s much easier to break the habit.

STEP 3: Experiment with rewards

Every habit is motivated by some reward. Always! This is crucial to forming the habit. You can perform a simple experiment to identify the reward. Instead of pressuring yourself to stop indulging in the habit, experiment with yourself. Pretend it’s a science experiment. Replace your usual routine with different ones and see if you still feel the urge.

Let’s take the earlier example of the shopping problem. The reward could be the time you spend with your friend, or it might be a way to beat boredom, or maybe the feeling of unwinding and being de-stressed. The habit of shopping could be your mind seeking any of these positive feelings.

So now, as part of the experiment, you must attempt following different routines. If you usually shop in a certain mall, try and visit a different place this time. Go to the park or garden or even a different mall. Or if you usually shop with a particular friend, go by yourself or vice versa. If you are an online shopper, choose to read a book instead of browsing when you are bored. At the end of each experiment, you must write down what you feel. This will later help you figure out how you felt about each experiment.

The idea is to determine what drives the habit. You will be able to identify if you shop as a distraction, or if you do it because you enjoy talking to your friend, whatever the reward may be.

STEP 4: Make an alternate plan

Now that you’ve figured out the cue, routine, and reward, all that is left to do is make a change. As Charles Duhigg says, a habit is a formula our brain automatically follows: When I see CUE, I will do ROUTINE to get a REWARD. The key is to rework the formula.

Taking the above example, you would’ve identified what you cue, routine, and reward is. So now you need to make a new plan. IF your trigger is boredom, which leads to browsing and ultimately makes you feel better by beating boredom, switch up browsing with reading, or playing a game. Keep trying until your brain is tricked into following the new routine.

Changing up your usual routine might be hard, but it will be completely worth the effort once you realize that you have broken the habit you always wanted to break!

It’s often said that old habits die hard. But with an understanding of the habit loop and the 4-step formula, I think it is safe to say that the old habits are definitely going to die!

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