What should the annual performance of your 401(k) be? How much of a raise should you get next year? What percentage of your income should you be setting aside in savings?
Now answer this: What do all these numbers all have in common? And what does any of it have to do with running marathons?
For any goal or expected payoff you have, you're probably using a reference number. These numbers are important because they tell you a lot about whether you view your situation positively or negatively.
For example, if you're expecting your 401(k) to return 8% per year, and yours makes 10%, you'll probably be pretty happy. But if you're expecting your 401(k) to outperform the S&P 500 every year, and the S&P 500 returns 12%, your 10% gain might not look so great anymore.
In other words, reference numbers can tell you if you're winning or losing.
Where do they come from?
You can construct a reference number in many ways, but they tend to share a few characteristics: We typically pick round numbers, and our numbers are often arbitrary.
For example, marathon runners tend to use round numbers when setting their goal times. Interestingly enough, when researchers studied how runners worldwide actually performed, they found that finishing times also tended to be clumped just before prominent round-number times like 3:30 and 4:00. In fact, there were spikes before almost every half-hour finishing time.
The researchers concluded that marathon runners tend to set a goal time and, if they're close, adjust their effort in order to come in under the wire (the use of radio-frequency identification tags on runners, which tracks their pace throughout the race, makes this conclusion possible). It also looks like a lot of runners adjust their expectations and effort to come in under the next round number, rather than hurrying up.
In other words, for a marathoner there's a big difference between finishing under 3:30 or finishing under 4:00, but there isn't a world of difference between 3:35 and 3:55.
Runners adjust their effort to reach round numbers -- even at the expense of time!
Another study previously found that only about 26% of marathoners finish at their stated goal time. That means most goal times are optimistic.
Combine this with the results above, and you have an interesting factoid: When runners can't reach their initial goal, they seem to slow down in order to finish before another round-number time instead of pushing to finish as close to the previous round number as possible.
This means runners are putting in less effort than they could in the interim.
Are your reference numbers making you lazy?
This means whether it's the number of new clients you bring on board, the amount of money you save, or the percentage of winning stocks you pick for the next five years, your goals are an important predictor of the effort you put in.
If, like a marathoner, your initial goal is too optimistic, and your fallback goal is too easy, you might be losing out on a lot of motivation and effort in that middle ground.
Setting good goals
That might not matter to the average marathon runner, but it could very well matter to you.
This study drives home the importance of setting a good initial goal and not letting round numbers give you permission to slack off.
We love round numbers, and understandably so -- they're easy to remember and they have a nice, well, evenness to them. But to set a good goal, it helps to back your way into your number rather than justify a number you picked out of thin air (this is far more common than you think).
For example, how can you calculate your new sales goal for the month? Perhaps you should take your previous sales, adjust for the season and the market, and demand a little bit of improvement.
By choosing a goal that's challenging but attainable, you'll be more likely to exert a bit more effort to reach it. And if you don't reach it, make sure you have a fall-back goal that isn't too far off the mark -- even if it's not an easy round number. Otherwise, you might fall into the trap of lowering your standards considerably, or even giving up altogether.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.