Theory and practice can help us better understand human behavioral responses to changes in physical environments and economic conditions. I, for one, can appreciate a logical breakdown of human reaction. While theory and practice cannot fully anticipate behavior due to cognitive deficiency or emotional distress, they offer compelling examples of order, explanation, and probability.
Money is an interesting topic. It’s straightforward, and yet human response and interaction complicate it. Applying the Broken Windows theory to financial education can benefit and simplify money management.
Broken Windows Theory
The Broken Windows theory is a criminological theory, but its concept can extend to many aspects of our lives, including our finances. Originally introduced by James Q. Wilson and George Kelling in a March 1982 issue of The Atlantic Magazine, the Broken Windows theory essentially states that visible signs of neglect and disorder lead to increased criminal behavior in any given community.
For instance, let’s say a disgruntled individual decides to release his anger by smashing a window. Someone else passes by a few days later and helps himself to the contents previously hidden behind that window. Another person walks by and breaks another window, just for fun. After a few weeks, the conditions remain the same. There has been no effort to repair the windows. In this case, it appears that no one cares about the property. Soon, more windows become broken, graffiti appears, trash accumulates, and the area becomes ridden with derelicts.
To try to maintain order and prevent further criminal activity, the window should have been quickly covered or repaired after the initial break.
Recognizing and combating disorderliness and minor violations, even when they are not immediately obvious or indicative of deviant behavior, promotes order and lawfulness in the community.
Check Your Perimeter
So, how are the windows on your financial house? Have you checked your surroundings lately? The Broken Windows theory can be used to study the connection between behavioral responses and finances in the same way that it studies the relationship between human behavior and physical environments.
Poor financial decisions and habits represent broken windows. These decisions don’t usually happen all at once. In fact, financial hardship frequently results from a series of failures – a trickle-down of disorder and delinquency, so to speak.
From Top to Bottom
How many broken windows exist in the U.S. Department of the Treasury? With a national debt of $31.46 trillion, I’d say the Treasury Department probably feels more than a bit drafty. Since our country promotes overspending and normalizes debt, it is understandable how one could let their own financial house fall into disarray.
To be in good standing, one should know how much money comes in versus how much goes out. If you’re operating without a budget, then you have a broken window. Are you paying the minimum on credit cards and racking up interest charges? It looks like you have a second broken window. If you’ve skipped a payment, then you have another broken window. When things fall apart and aren’t soon repaired, it can be easy to accept neglect and decay as a state of normalcy. Once that ball starts rolling, it can be really difficult to stop it.
Other signs of broken windows and disarray could be:
- No emergency fund
- Maxing out credit cards
- Overspending on housing
- Failing to negotiate prices
- Not having appropriate insurance coverage
Does your perimeter check result in finding disorder? If so, the next step to restoring your house is to take inventory from top to bottom. You don’t need to fix everything all at once, but it’s helpful to take note of each poor financial habit or area of improvement. Then, you can focus on repairing your “broken windows” one by one.
Broken Windows Fallacy
The Broken Windows Fallacy originates from French economist Frédéric Bastiat. In his 1850 essay, “That Which Is Seen and That Which is Not Seen”, Bastiat suggests that destruction and its associated costs do not benefit the economy. He asserts that in “fixing a broken window”, one actually fails to take into account the opportunity cost of the destruction. In essence, fixing a broken window doesn’t build wealth.
Bastiat uses the example of a boy breaking a window. The town believes that this benefits the community by stimulating the economy since work was created for the town glazier. The fallacy in this scenario is that the window repair costs time, money, and effort to replace what was, instead of stimulating production or creating new opportunities. It redirects resources toward repair rather than production.
Let’s return to the list of broken windows we’ve discovered in our financial house. While the Broken Windows Fallacy claims that there is no economic gain from repair, I think that it’s worth noting that repairs (and improvements) are necessary in order to create a strong foundation suitable for wealth-building.
Balance is critical in recognizing destruction and adjusting for repairs. As mentioned earlier, you shouldn’t repair all signs of disorder at once. It’s important to note the opportunity cost of each repair.
Each broken window should be covered and repaired as soon as possible. How severe is the break? Can you remedy it with a temporary fix and repair it later down the road? Prioritizing and redirecting your time and money to the most beneficial repairs will encourage and eventually help you build wealth.
Recognizing opportunity cost within your financial house could look like:
- Downsizing from two cars to one to reduce or eliminate unnecessary payments
- Living with roommates to cover the cost of a mortgage
- Paying off high-interest debt to free up cash for flexible saving/spending
- Refraining from purchasing things you don’t need to eliminate wasteful spending
Relating the Broken Windows theory and the Broken Windows Fallacy to finance can help identify poor financial habits and their subsequent opportunity cost.
Successful money management is about accountability. One small infraction can snowball into greater damage. Unfortunately, access to fast and easy credit, endless advertising, and online convenience create the ideal environment for compulsive spending and other destructive habits.
We must police and manage our behaviors in order to ensure financial wellness. To rectify signs of neglect or destruction, one must make different choices and adopt new habits. As a result, order is restored and caution is heightened, which helps minimize infractions and promote future wealth-building opportunities.
When was the last time you checked your perimeter and took a look at your windows?