Making Change Through Prospect Theory

Stop me. If you’ve heard this, heard this one before, just to stop me, change is hard. Have you ever experienced that you do? You have any personal experience with desiring change in your life and actually creating a plan for getting that desired change, attempting to put that change into action, only to have it not work, only to go back to your old ways. Of course, you have an incredibly human thing to do, something I do all the time. I am excellent at this. I’m excellent at at coming up with a great idea for something awesome, and then doing a little bit of research and making a decision about it, and then starting, and hey, that didn’t go quite as well as I wanted, or life got in the way. Or this that the other thing. But what are what is this, that and the other thing, why is it that we are so bad? That’s what that’s what it is we’re not good at making changes. We’re not really good at, on our own, without major accountability, making changes unless it’s to rust upon us, unless we are forced to do something we are bad at, just proactively making changes. There’s plenty of people running around who are awesome at it. We’ll call that. We’ll call that the, the the first, sure minority, maybe 10% of people are just incredible at you know, they decide to do something and they just do it. They don’t let anything stand in their way. And do they have something that is secret? Do they possess a secret knowledge or a secret skill that helps them to do these things? Where the rest of us struggle to do little things. We struggle to to drop weight or to keep the weight off. We we struggle with our our exercise programs. We struggle with our personal budgets, our household budgets, we struggle with this, we struggle with that. And I think that we all also know that it’s not a matter of I don’t understand how to do it. I’m smart enough and literally literate enough to get the idea that I’m supposed to spend less money than I earn, I’m supposed to consume fewer calories than I burn. I’m supposed to, you know, walk, get my steps in, go for a run, do some push ups or sit ups, or lift some weights, or, you know, whatever, do some yoga. Like, it’s not like, I don’t understand this stuff. I don’t think, I think that we all intellectually understand how to do this stuff. There’s just so much that is stacked against us. Apparently, it’s our human wiring, our conditioning, it’s all of these things. But what if? What if there was something that could help us to overcome this. And like so many things in the world, it’s all been under our nose this whole time. There’s nothing new under the sun. People have been working and trying to figure out this problem for a really long time. And the good news is people way smarter than me. Thank God, thank God, I’ve been working to solve this problem for a long time. Turns out that friend of the show, Daniel Kahneman, rest in peace, Danny passed away earlier this year, renowned economist, psychologist, won the Nobel Prize for his work that became Thinking Fast and Slow. And Danny became fascinated with why it is that we make decisions the way we do around money, and the big takeaway was that 90% of the decisions we make around money are based on emotion. So really fascinating with how that works, and just goes to show that so much of our decision making, it’s not rational, it’s not logical, it’s based on emotion, and it’s those are the main drivers that really push us forward. And when you’re able to zoom out and look at something from a global perspective, it’s easier to get our arms around it, which is odd, whereas when we’re in the thick of it and just going through life and executing our lives little decisions, we have a tendency to not make them as well. When I’m back and making plans and zoomed out, say, Okay, here’s what we’re going to do this year, this quarter, we’re going to lose five pounds. We’re going to, you know, read 10 pages a day. We’re going to cut down on sugar in our diets. We’re going to that all sounds great. That’s a good plan we’re going to execute, and then the rubber meets the road, and I am stressed out one night, so I have a piece of cake or an extra piece of cake, and I sleep in and I just get my workout. And then I, you know, I ended up spending more than I expected to, and that you. You, you get it. It’s an all too familiar story, and it’s all part of the human experience. I get it. But what if? What if there was something that could help us to address or counter some of these forces that keep pulling us away, further away from what we think we truly want? Because in the moment we are. We are captured by the moment. We are prisoners of the moment, prisoners of our emotions. Interesting. So turns out again, Danny Kahneman, Daniel Kahneman, and another gentleman named Amos Tversky, in 1979 developed something called Prospect Theory, and it is a psychological and economic theory that explains how and why we make decisions involving risk and uncertainty, mostly when it comes to gains and losses, and that’s what really what we’re talking about here is when we’re trying to make a change. It’s a beneficial gain that we are attempting to achieve, trying to lose weight, that is a net gain in physical health and well being trying to get out of credit card debt or just get out of debt, that’s a gain for our financial lives and everything else. So what makes Prospect Theory a little bit different is that

a lot of traditional theories assume that people are fully rational and always making decisions to benefit themselves long term. And that’s just not the truth with Prospect Theory. Prospect theory talks about that we often do the opposite. We often behave in ways that do not benefit or maximize our utility that do not maximize or benefit our overall well being so shocking, right? So what that tells me is that traditional economic theories are are kind of bunk, because Meanwhile, in the real world, when there’s human beings making human being type decisions, what it should not be shocking, and it’s not that we opt for a less utilitarian response, like if faced with a time crunch, and I’m a little bit stressed out and kind of bummed out, am I going to eat something that’s really delicious, or go for the thing that’s not? Probably going to do, do the thing that tastes the best? Maybe pep myself up a little bit, which over the long term, I know it’s not going to help, but it sure does help right now. So it’s Prospect Theory. It gives us a lens for understanding why it is that we struggle to stick to all kinds of different things. And specifically I wanted to talk about today household budget, because that’s something that we all struggle with, as well as as a fitness program. So it’ll sort of break down, or I will break down the different elements in it, and then talk about how what we can do to counter the way that our brain wants us to, wants us to kind of act. So it starts with this idea of reference points, and that is in terms of budgeting. It’s where we set our budget based on an idealized reference point. So this is, this is where we’re starting. This is our our reference point, kind of a true north kind of a thing, and you can think about it in terms of your finances, like your income or a future financial goal. So it could be that you’re saving for a vacation, or you’re trying to pay off debt. But the thing is that our current lifestyles, or the habits that we have when it comes to our spending, that is going to also create a difference, a different reference point, and that one is going to be more comfortable because it’s what we’re accustomed to. Newton said that an object in motion will stay in motion unless doc acted out on by an outside object, kind of a thing. So you’re already moving. You have familiar habits and patterns that we’re following, and that is our current that’s that’s our previous reference point. So we try to set a new one, just because we intellectually decide that doesn’t mean that we’re necessarily going to stick to it. So reference point is a really important part of this theory. So when we’re trying to stick to a budget, that means that we are are cutting back, and when we do that, that feels like a loss. So a big part of this is is, is wins and losses, gains and losses. So when we’re trying to stick back or stick to a budget and cut back, it feels like a loss based on what we were doing before, even though what we were doing before is not getting us we want. It’s still, well, now I don’t get to do this thing anymore. So it feels like a loss, even though it is, in a lot of ways. It may be, but in our new frame, in our new frame of reference, reference point, um. It would be a gain. I’ll spend a little bit of time talking about that as well. The second thing is, is the idea of loss aversion, which I think that we’re all familiar with, from an economic standpoint, that we feel the pain of a loss twice as as much it feels twice as bad as pleasure of of gain does. So that is a very real thing, if you didn’t know that, it helps explain a lot of things. So pain of loss is twice as powerful as the potential for gain. So when you cut out small luxuries like going out to eat or buying clothes, that feels like a big loss, even though sticking to your budget would eventually lead to the gains that you want or put you in the financial situation you want to be you want to be out of debt. You don’t want to be stressed about money anymore. That immediate impact in the moment way outweighs some perceived benefit that I’m going to get in the future, and that causes us to overspend and revert back to that reference point and feeling more comfortable. And isn’t that what it’s all about comfort? It’s discomfort. So we’re either going to pay through discomfort at some point. It’s either now or we’re going to pay later. So the third thing is, then the framing of it. So framing is obviously a really, really important thing in every aspect of our lives. How we look at something makes all the difference. How you think about something makes all the difference. So how you think about your expenses certainly matters. Your framing of your expenses. So when we’re budgeting, each one of our decisions is framed as a potential sacrifice rather than an opportunity. So this is the loss aversion thing. If that’s how you’re viewing it is, I am sacrificing. It is a loss, versus this an opportunity, which is a gain that we’re just not going to go for it because that feels really hard. So instead of thinking I’m saving 50 bucks by not eating out, somebody might think I’m missing out on the thing that I want to be doing right now. So that negative framing right there makes it really hard. So if you were to try to shift that totally and say, okay, instead of I made the decision to not go out to eat tonight, instead of thinking, Well, I’m missing out on the dinner that I wanted. The thinking is I’m putting 50 bucks towards my savings goal. So framing in a lot of ways, we’re just trying to, I don’t want to say trick ourselves, but we’re trying to trick ourselves and just to shift our thinking away from something that is not getting us what we want, towards something that is getting us closer to what it is that we want. The fourth area Kahneman talks about and Tversky is diminishing diminishing sensitivity. Diminishing sensitivity. Say that five times fast, we are more sensitive to small financial changes, but less sensitive to larger financial changes, which is really interesting. So if you cut that 50 bucks, we’ll stick with the 50 bucks from your discretionary spending over the course of a month, which could be, you know, a week’s worth of coffee or a month’s worth of coffee. I don’t know what kind of coffee you’re drinking. That might feel significant to you, but once we are used to spending lots of money, cutting a few $100 might not feel that worse. So we’re already spending a ton. If we’re not spending that much, cutting small amounts, it certainly makes sense, because that feels like we’re really depriving ourselves. But if we’re in the habit of spending tons of money and then cutting hundreds of dollars versus just the 50 bucks, that doesn’t feel quite as bad. So as as we scale out the the the cutting doesn’t feel quite as bad, because we’re used to already overspending quite a bit, and then as we continue to go through the month or go through the year, and we’re not making the cuts at all, the bigger expenses, it’s kind of like I Got a case of the efforts, if you ever experienced that, you’re like, oh, you know what? Come this far and for a penny and for a pound effort, so you totally blow up your budget at that point. Versus, if you can just rash, if you can get your brain around, making those small little changes and sticking to that, it’s going to go way further than, than, than the danger, which is really positive thing. And then the flip side is that there’s the danger if you are overspending, then you feel a lot worse, lot less bad about way overspending and really blowing out your budget. So that’s a pretty interesting thing. And then the fifth step is mental accounting. And. Right? And this is when we categorize money differently depending on where it is coming from. So when you think about if you are viewing the income that you earn from your wages from a job, so your w2 income that’s coming in, and then you look at your tax return as just a different bucket of money all really, all together. And you think about, okay, well, this tax return is just money that I’m going to use to spend on something or a bonus. Just money that, instead of looking at money that is coming to you as money that you’ve earned or that’s due you, you break and segment it out versus, oh, this is, this is my real money that’s coming from my job. And then this extra money that I got from a tax return or a stimulus or a bonus or whatever, this is money that I can just blow. So it’s pretty interesting. And it’s, again, that’s, it’s, it’s, it’s, it’s a framing thing. And then the sixth one is short term versus long term gains. And prospect theory talks about how we overweight immediate smaller rewards like going out to eat or buying something, right just, just buying something on your line or online, we overweight that over larger,

long term awards, like putting money into your 401, K or paying off a large amount of credit card debt. So the immediate that we get from spending is just so much more tangible. It’s more salient. While the future benefit of saving money down the road and having financial security when I’m older, that just doesn’t hit quite the same, which makes sense. It’s a bird in the hand worth two in the bush kind of a thing, so it but it’s 100% an inconsistency that will 100% lead us to overspending, and it will cause us to not stick to a budget, even though I intellectually understand the long term benefits of not buying the thing, not going out to eat, and continuing to put money into my 401 k instead. So that 50 bucks that I just spent out at uh XYZ restaurant, or the 50 bucks I just spent on the new gadget that I didn’t really know that I want, or I didn’t even know it it existed until Instagram told me about it this morning. That is way more exciting to me than is putting $50 into my 401, K that I’m not even going to touch for another 20 years, or whatever it might be. So, so there you go. Just put it into a different example. When it comes to budgeting, it is, if we have in our budget, we’re going to stick to a budget of 100 bucks to going out to eat this month. Now it’s it’s just a round number, but halfway through the month, we’ve already spent 80 80% of it. So 80 bucks we have 20 bucks left over. That 20 bucks that we have for the rest of the month, for the next two weeks, it feels pretty tight. That’s pretty restrictive versus, you know, I had 100 bucks a couple weeks ago, and now I only have 20. So that feels very much like a loss. And again, the pain of loss is twice as much as the potential for gain. So even though I know, I know I’m supposed to stick to this budget, and that means I’m only going to spend $20 you know, that means that I don’t get to go out to eat this week at all, or I don’t get to go out next week. That is a recipe for me not sticking to my budget overall. And the idea that it’s just, it’s just, it’s just a little bit more, just going a little bit over the budget. So I think we’ve all found ourselves in that situation, certainly. So what do we do? How do we actually overcome these challenges? What do we what are we doing here? George, you’re gonna give us some some examples, or, no, you’re gonna help us, or just tell us about why it is that we’re all screwed. Okay, well, we’ll try to come up with some proactive stuff here. So to counter our human behaviors, our tendencies to do the things that are not in our long term benefit, we can reframe our budgeting decisions in terms of gains rather than losses. So how do I shift that thinking instead of focusing on I’m depriving myself, I’m sacrificing, I’m losing out. Want to think about it as gains. So instead of thinking about what I can’t spend this week, I can focus on what I’m actually gaining. I like this idea of financial security, so our ability to invest in future goals, staying out of debt, those are positive things, and then breaking down our budget into smaller, achievable goals, or using some kind of reward system that I get for actually sticking in my budget can help me to mitigate the feelings of loss that often come with not getting what I want, not buying the thing that I want. Right? When I want it delayed gratification is such a tricky thing. So the prospect theory helps us to explain why sticking to a simple budget is way harder than it actually is. Rationally, it’s the whole loss aversion thing. It’s reference points and framing can make budgeting feels restrictive even when it’s to our benefit. So it is, it is the reality that the loss aversion, that it just hurts twice as much than the potential for gain. I know that I’ve said that a handful of times, but it’s true, and I know that I know how hard it is. I know that we do only live once. I know that delaying gratification is really hard, and I also know how important it all is, and I also know that once we are able to break through, once we are able to to reach that escape velocity of I have gotten to the point where I’m back at even so. If I’m 25 pounds overweight, it’s really hard to get that first five pounds off and then to get 10 pounds off. But once you get there, that’s when you get that momentum, and when you get back to even, you start making some gains. I think that that’s a matter of that’s that’s a form of escape velocity where I’ve broken through a lot of this negative patterning that Kahneman and Tversky talk about, and I’m showing myself that I’m capable of of doing these things now, like I was talking about with Newton, it’s easier to keep things going, and it’s really hard to stop something moving once it’s moving, and it’s really hard to get something moving once it’s stopped. So the whole thing here is it’s so important to recognize and to to embrace that this is a reality. These are real things, and the human psychology behind them, if we desire change, because if we desire change, a change is required. There’s just zero argument about that. And I’m guilty of this. I’m guilty of talking about budgeting in the form of a sacrifice is required. Like, that’s language I use, and now reflecting on it, I have had over the past couple of years, shifted that to an investment is required. And I did that without really. It was just sort of accidental, more so than it was basing it off of of brilliant thinkers like like Kahneman here, but the shifting, or rather the reframe and the shifting, I think can help a lot, whatever it is that you are trying and you’re struggling with. And I also know that from personal experience of having struggled with everything that all other human beings struggle with, being in debt, living paycheck to paycheck, being a credit card debt, being overweight, not exercising, eating crappy foods. Hey, been there, done those things and still do but, but have gotten to the point where financially successful or financially secure have gotten to the point where I’m no longer overweight and I’m very active and reasonably knock on wood healthy person, So I understand how trapped one can get pretty easily, how that feels and the struggle. And so the steps that we’ve gone through here, I’ve gone through today, I think can really help number one, it helps explain why it is that we do what we do. But then, more importantly, reframing things and and really keeping those things top of mind, and and not allowing ourselves to get so caught up in the weeds all the time that we’re just sort of doing and going through the motions, because when we do that, we have a tendency to make those mistakes. So it’s really important to keep things top of mind. Keep top of mind the things that are of greatest importance to you and of highest value, which is why you’re trying to budget, which is why you’re trying to exercise, which is why you’re trying to eat. Well, you want to be healthy. You want to be happy, as we all do. There’s just a lot that’s that that’s up against us, which is, okay, that’s That’s great. I’m not going to try to run away from my wiring, my psychology run right for it. The only way out is through. We’re not going to sidestep this stuff. We have to stare it right in the face and then put ourselves in position to do the things that we need to do in order to get get to where it is that we want I talk. It to no end. What is the term that I was searching for? Ad nauseam. I talk ad nauseam about the importance of trying to figure out what you’re here to do, what your purpose is, why you do what you do. Importance of knowing what your goals are, what you want. The only way to live how you want is to know how you want to live. Gotta be really clear what it is that you’re wanting, what it is that you’re doing hard things in service of because just doing certain hard things for the sake of doing hard things. I don’t think that that’s a recipe for sustainable success. I think that that’s a recipe for doing it for a little bit and then stopping doing it, which will then cause you to slide back into those old routines and habits, which will then cause you to waste more time and not move towards what it is that you truly want. And none of us have time for that. And then we need to understand what our beliefs are about these things. If I have some kind of a limiting belief about my ability to be financially successful or my ability to be physically healthy and strong, then I have a hard time doing it. And then I need to create good habits around these things. And that’s really what we’re trying to do when we looking for that escape velocity, is we’re trying to outrun our old habits and trying to create new habits.

And I know it’s possible. I wouldn’t just be I wouldn’t be talking about this stuff if it were a fool’s errand or it was a waste of time. I believe that everybody is capable of doing these things, with the right education, with the right support, the right accountability, the right resources, all of these things, everybody is capable of it, including you, brother, sister, friend. So I believe in you. Want you to believe in you. Let’s make some good changes. Let’s turn into a motivational pep talk all of a sudden, which is fine. Go get them. You’re the best. Look at you. You handsome son of a gun, you look great. Gonna have an awesome day. Get out there and make it happen as always. Do your part by doing your best. You.

george grombacher 16:00
So if I want my iPhone, and my Tesla and my Bitcoin to work, we need to get the metal out of the ground.

Pierre Leveille 16:07
Absolutely. Without it, we cannot do it.

george grombacher 16:13
Why? Why is there a Why has production been going down.

Pierre Leveille 16:21
Because the large mines that are producing most of the copper in the world, the grades are going down slowly they’re going there, they’re arriving near the end of life. So and of life of mines in general means less production. And in the past, at least 15 years, the exploration expenditure for copper were pretty low, because the price of copper was low. And when the price is low, companies are tending to not invest more so much in exploration, which is what we see today. It’s it’s, it’s not the way to look at it. Because nobody 15 years ago was able to predict that there would be a so massive shortage, or it’s so massive demand coming. But in the past five years, or let’s say since the since 10 years, we have seen that more and more coming. And then the by the time you react start exploring and there’s more money than then ever that is putting in put it in expression at the moment for copper at least. And what we see is that the it takes time, it could take up to 2025 years between the time you find a deposit that it gets in production. So but but the year the time is counted. So it’s it’s very important to so you will see company reopening old mines, what it will push also, which is not bad, it will force to two, it will force to find a it will force to find ways of recalibrating customer, you know the metals, that will be more and more important.

george grombacher 18:07
So finding, okay, so for lack of a better term recycling metals that are just sitting around somewhere extremely important. Yeah. And then going and going back to historic minds that maybe for lack of technology, or just lack of will or reasons, but maybe now because there’s such a demand, there’s an appetite to go back to those.

Pierre Leveille 18:33
Yes, but there will be a lot of failures into that for many reasons. But the ones that will be in that will resume mining it’s just going to be a short term temporary solution. No it’s it’s not going to be you need to find deposit that will that will operate 50 years you know at least it’s 25 to 50 years at least and an old mind that you do in production in general it’s less than 10 years.

george grombacher 19:03
Got it. Oh there we go. Up here. People are ready for your difference making tip What do you have for them

Pierre Leveille 19:14
You mean an investment or

george grombacher 19:17
whatever you’re into, you’ve got so much life experience with raising a family and doing business all over the world and having your kids go to school in Africa so a tip on copper or whatever you’re into.

Pierre Leveille 19:34
But there’s two things I like to see and I was telling my children many times and I always said you know don’t focus on what will bring you specifically money don’t think of Getting Rich. Think of doing what you what you like, what you feel your your your your your, you know you have been born to do so use your most you skills, do what you like, do what you wet well, and good things will happen to you. And I can see them grow in their life. And I can tell you that this is what happens. And sometimes you have setback like I had recently. But if we do things properly, if we do things that we like, and we liked that project, we were very passionate about that project, not only me, all my team, and if we do things properly, if we do things correctly, good things will happen. And we will probably get the project back had to go forward or we will find another big project that will be the launch of a new era. So that’s my most important tip in life. Do what you like, do it with your best scale and do it well and good things will happen.

george grombacher 20:49
Pierre Leveille 21:03
Thank you. I was happy to be with you to today.

george grombacher 21:06
Damn, tell us the websites and where where people can connect and find you.

Pierre Leveille 21:13
The it’s Deep South resources.com. So pretty simple.

george grombacher 21:18
Perfect. Well, if you enjoyed this as much as I did show up here your appreciation and share today’s show with a friend who also appreciate good ideas, go to deep south resources, calm and learn all about what they’re working on and track their progress.

Pierre Leveille 21:32
Thanks. Thanks, have a nice day.

george grombacher 21:36
And until next time, keep fighting the good fight. We’re all in this together.