Transaction costs (also known as friction costs) are a very important term in economics and finance, representing costs of participating in the market. In economics, transaction costs are divided into three main categories, such as search and information costs, bargaining costs and negotiations, doing all the legal and paperwork, as well as policing and enforcement costs, representing the legal authorities that make sure everyone sticks to the deal. Transaction costs may also include transportation and communication costs. In short, transaction costs are all the opportunity costs in terms of the time, energy and money it takes to make a transaction on a market.
For example, when participating in the stock market, you have to pay the brokers’ commission, then there are payments to the bank, government fees, and so on. And if you go to buy one item in a different market-store, because the item is a little bit cheaper there, you have to consider transportation costs, that are again transaction costs and have an overall influence on how good deal you get.
Logically, transaction costs decrease the net result and financial returns. If you trade a lot, you want to make sure that transaction costs are as low as possible. Because of their impact on the net result, transaction costs play an important role when we’re deciding whether to make a deal on the market or not.
Very similar every activity that you (want to) do has some transaction costs, and they have a strong influence on your self-discipline. The higher the transaction costs, the more effort and discipline it takes to do a desired activity. The lower the transaction costs, the more easily you take action or enforce a new routine. Knowing that gives you the power to manipulate your discipline by influencing transaction costs. Let’s see how.
Discipline is like a muscle
Firstly, you have to be aware that willpower, discipline and cognitive abilities are like a muscle. You have a fixed daily dose of discipline/cognitive power and there’s only so much you can do to stay organized, disciplined, make good decisions and follow your desired daily agenda. It’s totally true that you can train your cognitive abilities and self-discipline (and you should) like you can train your muscles, but a maximum always exists. You aren’t a robot and once you reach your maximum, you simply have to give yourself a break; unproductive or old bad habits will start to prevail, no matter what.
You probably know the feeling when after following a strict diet for a long time, you say to yourself “I’ve had enough of this s*it” and open a bag of chips.
As I already mentioned, one way to be more disciplined is to train your discipline muscles. When you’re forcing yourself to do something, whether you like doing it or not, you train your self-discipline. You push yourself to stay more focused and better stick to actions that lead to your planed outcome (goals). The more you push yourself, easier it gets to stay disciplined.
Discipline and muscle training are very welcome, but a maximum still always exists. Even if you regularly train your discipline, you achieve your global maximum sooner or later. You simply can’t be disciplined 24/7. That’s why you also have to consider the second part of the equation. The less discipline and cognitive power every action takes, the more good actions/decisions you can do/make given your current maximum.
Let’s say you have 80 units of discipline per day. On average, it takes 5 units of discipline (with transaction costs) to make a good decision and enforce a desired new behaviour. You can make 16 disciplined decisions/actions, but after that, you’re out of willpower. If you train your cognitive abilities and discipline power, you can maybe reach 120 units of discipline per day. That means 24 disciplined decisions, and thus you’re making progress much faster. But if your (global) maximum is 120 units, there’s only one more thing you can do to get even more disciplined. You can lower the transaction costs in a way that every decision takes fewer units of discipline. If you manage to decrease them from 5 to 4, you get 6 new disciplined decisions, that is 30 in total. Going from 16 to 30 means being almost twice as disciplined and productive.
Transaction costs and your discipline
The easiest way to lower the necessary willpower and other resources for making good decisions and following a new desired behaviour is by decreasing transaction costs (or, in some cases, increasing them for undesired behaviour). By doing this, you have more willpower and cognitive abilities available to be more disciplined and organized in other activities during the day.
The formula for manipulating transaction costs is very simple.
- You want to automate wherever possible, and minimize the number of irrelevant decisions to zero, so there are no transaction costs at all.
- For a desired (new) behaviour, you want to decrease transactional costs to the minimum, really going as low as possible.
- For an undesired behaviour, you want to increase transactional costs to the maximum, always putting new obstacles in your way.
Let’s look at some practical examples.
You want to get in shape. Having a bag of chips at home means it takes you almost zero energy to start eating unhealthy food. All you have to do is take the chips out of the cupboard, open the bag and you can start stuffing your face with junk food. The transaction costs are almost zero. If you always have chips and cookies on the kitchen counter where you can just grab the unhealthy snack, transaction costs are nearly zero. Having cookies in your pocket means that transaction costs really are zero. You’re constantly tempted and undesired behaviour takes zero effort.
On the other hand, if you don’t have any junk food at home, the transaction costs are much higher. You have to change your clothes, drive to the grocery store or gas station, decide which junk food to get, buy it, come home, and only then can you enjoy your snack. It takes much more effort and energy, thus transaction costs are quite high. The further you have to drive, the higher the cost. At some point transaction costs are so high, you rather eat an apple than make all the effort to get to the junk food.
Let's look at another example from a different perspective. If you live close to the gym, if you always have your training gear near you, if you can just step through your door and start running or jump into the pool, the transaction costs to start exercising are low. It takes a minimum of your willpower, time and other resources to start training. But if you have to drive far to get to the gym, if you always have to call your friends to find a gym buddy, if your sports bag is not ready etc., the transaction costs are high and it takes a lot of effort to start the desired behaviour.
By decreasing or increasing transaction costs, you can manipulate your discipline a lot, especially in the beginning when you’re enforcing new desired behaviour and developing new healthy habits. Make sure that it takes a lot to perform an undesired behaviour and that there are almost zero transaction costs for the new habits you want to develop.
Here are some additional ideas for how you can manipulate your discipline with transaction costs:
- When you get your paycheck, automatically transfer a certain amount to your savings account. Automate paying yourself first.
- Don’t just impulsively buy expensive things with a credit card when you are in the shopping center. Make a system with many check points that you have to cross in order to buy an expensive item. For example, first you have to put the item on a wish list, discuss it with your partner, wait a few weeks, find the best price etc.
- Make your files, folders and apps that lead to your progress easily accessible with shortcuts, bookmarks etc., and delete all entertainment apps and folders that are constantly distracting you. You can also install a web-nanny that blocks your social networks if you use them too much.
- Unplug your TV and change your programs so you’ll never ever turn your TV on again.
- Always have a book with you and put one next to your bed. You can also do the same with banana.
- When you’re doing focused work, turn off your mobile phone (it takes quite an effort to enter all the pass-codes and PINs) and make it hard as hell to open e-mail or any other distraction apps
- Use e-mail templates with Yesware and automation apps like IFTTT.
- You can dress yourself the same every day, like Mark Zuckerberg or Steve Jobs did. That’s how you’ll save cognitive decisions and willpower for other, more important things.
There are many other ways of manipulating transaction costs. Think of the behaviours and habits you want to get rid of and make it as hard as possible to get started. On the other hand, make it as easy as possible to start and perform the good habits and enforce new behaviour. If you additionally manipulate habit triggers and rewards, you will become a superhero of self-discipline sooner or later.