Using The Peak-End Rule to Optimize Your Money Habits (Episode 162)

Updated: July 14, 2023

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The peak-end rule is a cognitive bias that suggests our memories and feelings about an experience are heavily influenced by the most intense part and the final moments of those experiences.

According to Wikipedia:

The peak–end rule is a psychological heuristic in which people judge experiences largely based on how they were at their peak (i.e., their most intense point) and at their end rather than based on the total sum or average of every moment of the experience. It occurs regardless of whether the experience is pleasant or unpleasant.

According to the heuristic, other information aside from that of the peak and end of the experience is not lost, but it is not used. This includes net pleasantness or unpleasantness and how long the experience lasted. The peak–end rule thereby comprises extension neglect and duration neglect.

Despite being a cognitive bias, it can be applied to optimize our good money habits.

As an illustration, it can be applied to budgeting by setting a small reward for ourselves during and towards the end of the month.

This is so that we will feel good about budgeting and thus sustain the motivation to continue the good habit.

Excerpts and Highlights:

Understanding the peak-end rule empowers us to make more strategic, balanced, and rational choices, especially when it comes to money management.

It’s about being mindful of our emotional responses and using that knowledge to navigate our financial journeys more effectively and, if possible, use this knowledge to our advantage.

The peak-end rule may be a cognitive bias, but it can be repurposed as a motivational tool for learning and sustaining good habits.

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