The High-Stakes Way To Keep New Habits

Research shows creating a contract with yourself that includes financial penalties is the best way to form lasting habits.

The High-Stakes Way To Keep New Habits
[Photo: Flickr user Tony]

Dean Karlan was pioneering research in the developing world on how commitment contracts could help people save money and improve their living conditions when he struck upon an unexpected personal connection. More than 8,300 miles away from the Philippines where his research was helping locals save money toward home improvements, Karlan realized the very same approach could help him tackle his own problem back in the U.S.: losing weight.


Over the course of his time getting a PhD in economics at MIT, Karlan had put on close to 40 extra pounds. When he graduated in 2002, he and friend from school with the same problem decided they’d help each other lose the weight.

Their solution was to draw up a contract together, complete with high financial stakes: lose 1.5 pounds a week or forfeit 50% of your annual salary. As grad students they were making about $30,000 a year, which chalked up to a $15,000 penalty—extreme measures for such a small slip-up. But they stuck with the agreement, each losing their target goal of 38 pounds.

The only problem: once their contract was up, they gained the weight right back again. This time they drew up another contract to help keep the weight off using the same stakes: Lose your half of the bargain and pay up.

Part of the deal in creating these “commitment contracts” as Karlan calls them, is that they’re non-negotiable. Karlan stuck to his weight goal, but when his friend’s weight spiked a bit, he had to pay a $15,000 fine. Karlan spent the money on his kids’ school tuition and donated some of it to charity. He doesn’t feel bad about having taken the money. As far as his friend is concerned, he calls it a “long-term investment in his health.”

At the time, Karlan realized he was onto something. What if people had a place they could go to set their own goals, create contracts with themselves, set the stakes, and be held accountable to follow through? He envisioned a kind of online “commitment store” where people signed contracts to reach personal goals—losing weight, finishing a book, quitting smoking—whatever it might be—and if they didn’t meet their goals, they’d have to pay up to a charity of their choice. In 2008, he teamed up with lawyer and economist Ian Ayres, and together they launched just such a site, calling it stickK.


The Data Behind Creating Contracts With Yourself

In his research, Karlan found that creating a commitment contract, or binding agreement that you sign with yourself, has measurable effects when it comes to achieving personal goals. For instance, adding a referee, or someone who monitors your progress, to your contractual agreement doubles your chances of reaching your goal, and creating financial stakes ups those chances as much as three times.

The reason it’s so effective? Put money on the line and you’re suddenly losing more than just your pride when you don’t reach a goal. The loss becomes a lot more quantifiable. It’s the psychological power of loss aversion, as economists call it, coupled with accountability that come together as powerful drivers of behavior change.

Building Long-term Behavioral Changes

Having a contract in place to reach a goal is all well and good, but what happens when the term is up? Research has shown people tend to fall back into their old patterns of behavior once they’re no longer held accountable. Take for example, the ever-challenging dilemma of forming and maintaining an exercise routine.

A recent study by University of California, Santa Barbara economists looked specifically at the difference between creating reward incentives and setting financial penalties in terms of the ability each has to help people maintain an exercise routine over time.

The researchers spent two years studying the exercise behavior of 1,000 employees at a Fortune 500 company. The participants were initially offered a one-month incentive plan that rewarded them with $10 per visit to the company’s gym for up to three visits a week. The hope was to give people more of a reason to go to the gym and it worked. Gym attendance in that month doubled thanks to the incentive.


Rewards Verses Penalties—What Works Better?

The problem of course was that after the month was up, most people didn’t keep up with their gym commitment. Two months later, the numbers were back down to where they’d been before the program started. Anticipating this drop, the researchers had performed an experiment with half the group, having them sign up for what they called “self-funded commitment contracts” for the two months immediately after the incentive ended. If employees didn’t maintain their gym attendance for those two months, they would have to forfeit a certain amount of money to charity. The researchers found that for those participants who signed up for commitment contracts, the shift in behavior carried through even a year after the initial incentive program was over.

Their takeaway: holding people accountable for goals rather than simply rewarding them with incentives can have a more lasting effect when it comes to long-term behavior change. But that doesn’t mean there’s no place for incentives. Everyone likes to be rewarded for their effort. The researchers concluded that combining incentives and commitment programs could be the best way to promote long-term habit formation.

Where To Start?

By the time Karlan, now an economist at Yale, teamed up with Ayres to launch stickK in 2008, he had terminated the weight maintenance contract with his other friend and had put on 15 pounds in five months. He knew he needed a new contract if he wanted to lose and keep the weight off, so he wrote one up, choosing Ayres as a referee. That contract is still in place to this day, with $1,000 at stake each week should Karlan not maintain his weight as promised.

Since its founding, stickK has attracted users with goals ranging from brushing their teeth daily to saving for retirement, to cleaning out the garage. Each user chooses a goal, sets their stakes (how much money they lose and to what organization if they don’t follow through), and selects a referee to work with. They then track their progress through weekly reports.

According to Karlan, there are a number of key components that make creating commitment contracts actually work:


1. Be Specific And Realistic

It’s easy to set lofty goals, which is why Karlan says it’s critical to think about what you can realistically accomplish. Setting the goal of “saving enough money to put my kid through college,” for example, is too broad and big a goal. “Be specific and be realistic,” says Karlan. A goal like committing to open a college fund by the end of the month is a lot less intimidating and manageable.

What next steps would help you further that goal? Maybe you can commit to setting up an automatic money transfer to a savings account each month. Make sure you’re not setting yourself up for failure by making your goal too vague or out-of-reach.

2. Take Time to Self-Reflect

A big part of creating a contract with yourself is deciding how much potential money loss it would take for you to stick to your goal. “Suppose you want to stop eating dessert,” says Karlan. “How much would that dessert have to cost so that you have to say ‘no’ to it?” That number will be different for everyone. It might be $100 for one person and $1,000 for another. Think about what financial stakes are high enough that you would not be willing to slip up.

3. Create Accountability

Setting goals is the easy part. It’s following through on them that’s most difficult. Once you’re exhausted from a long day, your judgment is impaired and slipping into old bad habits can become almost automatic. Say you’re trying to uphold the “no dessert” goal, but you’re at a restaurant, you’ve had a few drinks, and your inhibitions are down. Karlan’s advice? At the start of your meal, tell the maître d’ to charge you whatever your penalty price is—say $1,000—if you order a dessert. You need that accountability, or you’re not going to stick to your goal.

“The short run is right in our face and we put a lot of weight on it when making a decision,” says Karlan. That’s why having a referee who reminds you of your long-term goal is important. It keeps you accountable and focused on making smarter short-term decisions.


4. Seek Support and Encouragement

One of the features on the stickK site is a “commitment journal” where you reflect on your progress. Friends and family who sign up can get regular email updates and post on your commitment journal to cheer you on. Having that support is important in keeping you motivated toward your goal. “If you write it down and post it, you’re more likely to do it,” says Karlan.

It also allows you to celebrate your progress. Goals aren’t just there for discipline and focus, they’re also milestones of how far you’ve come. And what are milestones good for, if not to celebrate?

About the author

Jane Porter writes about creativity, business, technology, health, education and literature. She's a 2013 Emerging Writing Fellow with the Center For Fiction