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? We need time to get addicted to the stats!

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