Rules as Tools: Using Heuristics to Help Empower Financial Success

People often use simple mental shortcuts, also called heuristics or rules of thumb, when they make everyday decisions. And while the behavioral sciences tend to focus on how these shortcuts can backfire and create biases that lead us astray, much of the time these shortcuts lead to pretty good outcomes. But can these rules of thumb improve financial well-being?

Ryan Murphy, head of decision sciences at Morningstar Investment Management, discusses his recent research in which he studied commonly used rules of thumb in four financial categories--saving, spending, investing, and managing debt. Some rules were somewhat correlated to better financial well-being —that is, those who used a rule tended to report they were more on track to meet their financial goals—while for other rules, the opposite was true.

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