Professor Glenn Wilson, Gresham College, London THE PSYCHOLOGY OF MONEY.

Professor Glenn Wilson, Gresham College, London

THE PSYCHOLOGY OF MONEY

GRESHAM’S LAWGood money drives out bad.

When Henry VIII “cut” 40% of the silver in coins with base metals people used the debased ones and kept the old (or transferred them abroad), thus depleting the State’s silver.

Same applies to any debased, clipped or counterfeit money but only if it can be distinguished.

Government counterfeiting (“quantitative easing”) works only because newly printed money is indistinguishable from the rest.

It may, however, fuel inflation.

THE HERDING INSTINCT

INVESTMENT BUBBLESBull markets follow a typical progression. Smart investors buy in the dip, initiating the rise. Joe Public enters late in the euphoria but gets caught when institutional automated sell-points are tripped and the bubble is burst (Rodrigue, 2006).

CONFIRMATION BIASPeople tune to information that confirms already held views and justifies previous behaviour (seeking to avoid unpleasant feeling called cognitive dissonance).Having made an investment, people search selectively for reassurance that it was a good one. After selling, investors look for evidence that the stock went down.Race course studies show that people who’ve already placed a bet rate the horse’s chances of winning as better than those about to place a similar bet (Knox & Inkster, 1968).

WISHFUL THINKINGAn optimistic bias operates in business, generating certain false beliefs (Kahneman, 2011).Illusion of control - belief that we have a grip on events and are not victims of luck.Planning fallacy – we underestimate the costs and completion times of projects and overestimate their benefits.

Optimism is usually good: for individuals (more resilient, stronger immune systems, live longer) as well as the wider community (driving capitalism).

The Sydney Opera House was started in 1958. It was supposed to be completed in 1963 and cost $7M. It was finished 10 years late and cost $102M.

SUNK COSTSThe tendency to “throw good money after bad”. We are reluctant to abandon a project that we have invested a lot in.This irrational behaviour is more typical of adult humans than either non-humans or young children. May be dissonance avoidance, or overgeneralisation of human “waste not” rule (Arkes & Ayton, 1999).

Shortly after Concorde was begun in the 1960s it became clear it would never pay its way, yet billions more were spent over several decades. It was finally shelved on safety grounds . Retained as a design icon or for national pride?

BIG MONEYPerception of money is easily distorted. Bruner & Goodman (1947) found that poor children see coins as bigger than rich children (more valued?). Not reliably replicated but sparked other studies of apparent coin size.Furnham (1983) : people think of old pound notes as bigger than new ones (result of inflation).Judgements of the size of a Euro coin depend on which country’s it is. German Euro is seen by Germans as bigger than Portuguese (Molz, 2007).

FUNNY MONEYRedenomination of currency suggests unstable finances (e.g., Zimbabwe).

Euro-illusion: perception that Euro-changeover fed inflation (Gamble, 2007). Largest in countries where exchange rate was extreme (Italy vs Ireland).

Also related to ease of conversion. Charity donations in Netherlands up 11% in 2004 because 1 euro = 2.2 guilders and people thought in terms of dividing by 2.

Tourists underspend when local currency is a multiple of their own (SP$3 = £1UK); overspend when it is a fraction (.33).

(Raghubir & Srivastava, 2002)

MONEY AS A DRUG Why does a person rolling in money want more? Keeping ahead of the Joneses?Our behaviour towards money goes beyond its utilitarian value. People sacrifice other areas of their lives (e.g., family, friendship, freedom) to acquire more than they need.People have a conditioned emotional attachment to money – they are attached to its form and resist alterations.Money provides a buzz that is craved like an addiction (Lea & Webley, 2006).It also doubles as food; when hunger is aroused people become fiscally tighter (Briers et al, 2006).

MONEY MAKES US MEANReminders of money (e.g., on a background screensaver) cause people to be less kind and sociable (Vohs et al, 2008). The idea of money triggers a sense of self-sufficiency and promotes social detachment. It reduces dependency and induces a desire to distance ourselves from others. Evolutionary significance? Animal that acquires food takes it off to where competitors cannot steal it before eating.

HOARDING Many animals (esp. rodents and birds) store food for times of scarcity. Suggested that this could be an evolutionary basis for human hoarding of money (Bouissac, 2006). But animal hoarding is more akin to saving - putting money aside for a later purpose (e.g., going on holiday or buying a house).Compiling money for its own sake, without the intention of ever spending it, is more like OCD.Psychoanalysts relate “parsimony” to overly-strict toilet training but no real evidence for this idea.

ATTITUDES TO MONEYVarious attitudes to money have been identified by factor analysis of questionnaire responses and these related to personality. Yamauchi & Templer (1983): focus on the power and prestige provided by money goes with “Machiavellianism”; concerns about security and the future reflect Anxiety; money retention (hoarding) is an obsessional trait.People high on “Work ethic” are more obsessed with money, more retentive and believe it to be gained by effort and ability (Furnham, 1984).Low income goes with frugality and anxiety; high income relates to planning and saving (Baker & Hagedorn, 2008).

DELAY DISCOUNTINGThe value of a monetary reward diminishes with delay in delivery (Green & Myerson, 2004). Poorer people discount more (prefer immediate reward to saving/investing).

DD also a measure of impulsiveness. Extraversion, smoking, alcohol abuse and drug addiction all go with greater DD.

Even children of smoking mothers show higher DDs.

From Reynolds et al (2004)

COMPULSIVE SHOPPING“Shopaholism” is an impulse control disorder similar to OCD (Black, 2007). Can result in considerable debt problems.Mainly female (80%); related to low self-esteem, depression and fear of appearing unattractive. Clothing, shoes & jewellery most popular items for women (electronics for men).Mood-enhancing – relief felt when purchase made. Peaks in PMS phase of female cycle.Treated with CBT or SSRIs.

THE PLASTIC TRAPThe only thing that can compensate for being poor is extravagance. (Oscar Wilde).

Pettit & Sivanathan (2010) gave feedback on task performance that was either reinforcing or ego-threatening. Those with damaged self-worth were 30% more likely to buy expensive designer jeans (as against ordinary jeans) and 60% more likely to use a credit card.May help to explain why consumers of low SES so often get into financial difficulty.Compulsive shopping is encouraged by availability of credit cards (Lo & Harvey, 2011).

THE CASHLESS SOCIETYEarly trade involved exchanges of real commodities like cattle and grain, then precious metals like gold and silver. Next came coins and notes promising to pay a certain amount (e.g., a pound of silver), which became progressively separated from commodities held in reserve. We are now moving away from currency towards credit cards and cashless transactions like web payments and mobile phone transactions. Tangible money reminds spender that something of real value is being exchanged. Cashless payments encourage extravagance, debt and inflation because there is less awareness of the amount that is being spent (Khan & Craig-Lees, 2009).

KLEPTOMANIAAnother impulse control disorder, characterised by repetitive thoughts, compulsive stealing, feelings of relief after doing so, perhaps guilt/remorse later on.Things stolen may not be needed and not necessarily taken for monetary gain (e.g., Winona Ryder).Associated with OCD, mood disorders, anxiety, sensation-seeking, eating disorders and substance abuse (Talih, 2011).About 3X more common in women (but men more likely to be jailed for shoplifting). As for compulsive shopping, may vary with female cycle.Treated with SSRIs, anti-opioids or CBT.

LOSS AVERSIONPeople are more sensitive to losses than gains. We hate losing things more than we enjoy acquiring them (Kahneman & Tversky,1979).Since selling is felt as a loss, this results in a buy/sell price discrepancy. Bonuses that diminish with poor performance are more motivating than those that increase for good performance.

FRAMING Messages drawing attention to potential losses are more persuasive than those offering gains. 43% chose to gamble in “keep” frames.

62% gambled in “loss” frames. (Note: outcomes are identical ).

fMRI showed greater amygdala activation to the loss frame.Effect of framing on consumer behaviour shown by Ganzach & Karsahi (1995): Bank customers with idle credit cards were sent letters either explaining the benefits of using the card, or the losses incurred by not using. Twice as many started using the card in the loss condition.

(From De Martino et al, 2009)

MENTAL ACCOUNTINGAccording to Thaler (1999) people place transactions into parcels that limit their rationality.You have paid £10 for a theatre ticket but lose it on the way. Would you buy another ticket to see the show? (46% say yes).You are intending to buy a theatre ticket at the door and you lose £10 on the way. Would you still pay the £10 to see the show? (88% say yes).

The two situations are economically equivalent, so why the difference? Buying a second ticket makes the show seem expensive; losing the cash is not posted to the mental account of the movie.Many decisions are illogical because of such bracketing.

THE ENDOWMENT EFFECTWe value things we own more than those we don’t. People want more money to part with their belongings than it would take to buy them. Deterrent to trade and driver of inflation (e.g., houses typically overvalued 12% by their owners; car owners insulted by trade-in offers).Could be due to loss aversion, or a discount for trading costs and risks (e.g., defection by other party).EE increases with goods owned a long time (sentimental value). Once we own something we become attached, so it’s “hard to let go” (Morewedge et al, 2009).

OWNERSHIP IN THE BRAIN fMRI activation of the anterior insula relates to individual differences in EE (Knutsen et al, 2008).Insula has previously been associated with experience of pain, feelings of disgust and anticipation of monetary loss.

fMRI activity of the insula correlates with susceptibility to the endowment effect (From Knutsen et al, 2008)

WEALTH AND HAPPINESSIncreases in income make people happier up to a point (around £50,000 yr), after which there is diminishing return (Kahneman & Deaton, 2010). Nations that are wealthy are generally happier than poor ones but the relationship is imperfect. In Western countries, incomes have increased considerably (even correcting for inflation) but happiness has not.The money-happiness connection is stronger for people on hourly rates than salaries (career satisfaction?).

RAINDROPS ON ROSES…..

Money interferes with people’s ability to enjoy the little things in life. Wealthy people and lottery winners report a loss of “savouring ability”, undermining the positive effect of wealth on their happiness. After experiencing the best of everything, little pleasures cease to excite.Experimental participants exposed to reminders of wealth (e.g., pictures of money) spent less time savouring a piece of chocolate given to them and exhibited less enjoyment of it.(Quoidbach et al, 2010)

UNDERMINING EFFECTSWhere behaviour is motivated by love or social responsibility, offers of money can be insulting.If your partner has cooked you a delicious dinner, or a stranger has saved you from drowning, asking “how much do I owe you?” is seriously rude. People paid a derisory sum for their services enjoy it less and perform less well than those doing it gratis (cognitive dissonance).Undermining of intrinsic motivation by performance-based incentive payments has been observed neurologically as deactivation of brain reward circuits (Murayama et al, 2010)

MORE BLESSED TO GIVE…The most reliable route to happiness from money is giving it away (Dunn et al, 2008). Gifts provide greater happiness to the the giver than personal indulgence or hoarding. The “warm glow” experienced with making voluntary contributions to charity (vs “taxation”) is also observed in brain dopamine responses (Harbaugh et al, 2007).Andrew Carnegie, Bill Gates & Mark Zuckerberg are among the wealthy philanthropists who have recognised that holding great wealth is not a source of satisfaction. Misers are indeed miserable.