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Episode 2734:
Explore how our quirky brains influence our financial decisions in Kristin Wong's enlightening piece. Delve into the psychological triggers behind spending habits, and learn about the strange ways our environment and even the condition of our money can impact our financial behaviors. Gain useful insights to help you harness this knowledge for better financial management.
Read along with the original article(s) here: https://www.getrichslowly.org/weird-ways-our-brains-control-our-money-habits/
Quotes to ponder:
"If you speak a language that doesn’t distinguish strongly between the present and the future, you save a lot more because the future feels closer. If you speak a language that separates present and future events, the future feels more distant, which makes it harder to do things to care for your future self like save money, exercise, and eat better."
"In experiments the authors found that people in a cluttered room were more likely to pay higher prices for products, such as a TV or movie tickets, compared with people in an organized room."
Episode references:
Keith Chen's exploration of how language affects savings behavior is well captured in his TED Talk: https://www.youtube.com/watch?v=lw3YTbubyjI
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[00:00:54] This is Optimal Finance Daily episode 2734.
[00:00:58] Weird Ways Our Brains Control Our Money Habits
[00:01:02] by Kristen Wong with getrichslowly.org.
[00:01:05] And I'm your host and personal finance enthusiast,
[00:01:08] Diana Merriam.
[00:01:09] Now let's get right to it and continue optimizing your life.
[00:01:17] Weird Ways Our Brains Control Our Money Habits
[00:01:20] by Kristen Wong with getrichslowly.org.
[00:01:25] I'll admit it, I'm a sucker for money psychology studies
[00:01:29] and it's not just because I write about money.
[00:01:31] On a sheer curiosity level, they're fascinating.
[00:01:35] But they also serve as a great reminder
[00:01:37] that money is more about mind than it is about math.
[00:01:41] It's interesting to see exactly how our brains work
[00:01:43] when it comes to habits like spending and saving.
[00:01:46] And not only is it interesting, it can be helpful too.
[00:01:50] Understanding how we're wired helps us
[00:01:52] have a better understanding
[00:01:53] of our own individual money habits.
[00:01:56] This is why articles on sneaky marketing tactics
[00:01:59] are so popular.
[00:02:00] They're helpful.
[00:02:01] It helps to know how our subconscious is manipulated
[00:02:04] to spend more so we can consciously do something about it.
[00:02:08] I was impressed when April Deichmann
[00:02:11] wrote about Keith Chen last year.
[00:02:13] He's the behavioral economist who studies the link
[00:02:16] between language and savings rates.
[00:02:19] Basically, Chen's findings were enough for him to assert,
[00:02:22] quote, if you speak a language
[00:02:25] that doesn't distinguish strongly
[00:02:26] between the present and the future,
[00:02:28] you save a lot more because the future feels closer.
[00:02:32] If you speak a language that separates present
[00:02:34] and future events, the future feels more distant,
[00:02:38] which makes it harder to do things
[00:02:40] to care for your future self,
[00:02:41] like save money, exercise, and eat better, end quote.
[00:02:46] Obviously, this isn't to say
[00:02:47] we should all change the languages we speak
[00:02:50] to get rid of our concept of the future.
[00:02:52] We've talked about linking
[00:02:54] our present and future selves before.
[00:02:56] And it does help to be aware
[00:02:57] that our language can be yet another barrier in doing this.
[00:03:02] But it doesn't stop there.
[00:03:03] I've come across quite a few seemingly weird ways
[00:03:06] our financial habits are affected.
[00:03:09] Here are three more that I came across recently.
[00:03:12] Number one, disorganization leads to impulse spending.
[00:03:17] Here's one advantage to being a neat freak, I guess.
[00:03:20] Researchers from the University of British Columbia
[00:03:23] and the Chuan Kong Graduate School of Business
[00:03:26] found that a disorganized environment
[00:03:29] can lead to impulse spending.
[00:03:31] According to the Chicago Tribune, quote,
[00:03:34] in experiments, the authors found
[00:03:36] that people in a cluttered room were more likely
[00:03:38] to pay higher prices for products,
[00:03:40] such as a TV or movie tickets,
[00:03:43] compared with people in an organized room.
[00:03:45] According to the study, environmental disorder
[00:03:48] leads to self-regulatory failure.
[00:03:51] Researchers predicted that if a person was responsible
[00:03:54] for his or her own messy environment,
[00:03:57] rather than ones created by researchers in the experiment,
[00:04:00] the effect would be even more depleting
[00:04:02] to their self-control, end quote.
[00:04:05] The idea is that organization makes you feel more in control.
[00:04:09] And when you have more self-control,
[00:04:11] you're less likely to give into impulse shopping decisions.
[00:04:14] You wouldn't typically think cleanliness
[00:04:16] and spending affect each other,
[00:04:18] but your environment can have a subtle impact
[00:04:21] on your feelings of self-control.
[00:04:23] Number two, we're more likely to spend dirty money.
[00:04:27] A study from a couple of years ago
[00:04:29] found that our spending is also affected by
[00:04:32] simply the way our money looks.
[00:04:35] Researchers from the University of Guelph
[00:04:37] found that we're more likely to spend dirty,
[00:04:39] crumpled up bills and hold onto our new bills,
[00:04:43] except in social situations.
[00:04:45] When we're trying to impress someone,
[00:04:47] we usually reach for those new good-looking bills.
[00:04:50] According to the university, quote,
[00:04:53] in five different studies,
[00:04:54] the researchers gave subjects new or old bills
[00:04:57] and asked them to shop and spend.
[00:05:00] In all the studies, people spent more
[00:05:02] and took more chances with older worn money.
[00:05:05] Basically the physical appearance of money
[00:05:07] matters more than traditionally thought,
[00:05:10] said Theodore Noseworthy,
[00:05:12] a professor at the university's
[00:05:13] Department of Marketing and Consumer Studies, end quote.
[00:05:18] They go on about how we tend to think of money
[00:05:21] as symbolic rather than a product itself.
[00:05:23] But this study shows that we do see
[00:05:25] some intrinsic value in money, in and of itself.
[00:05:29] And this is weird because a dirty $10 bill
[00:05:31] will buy you the same amount as a clean $10 bill.
[00:05:34] We know that, and somehow we still value the clean bill.
[00:05:39] We can use this knowledge to our advantage
[00:05:41] when it comes to paying with cash.
[00:05:43] You might try to only keep crisp,
[00:05:45] new bills in your pocket, for example.
[00:05:47] It might seem impractical and silly,
[00:05:50] but if these studies are any indication,
[00:05:51] human behavior often is impractical and silly.
[00:05:56] And number three, we're less likely to spend larger bills.
[00:06:01] Similarly, we're less likely to spend larger bills.
[00:06:04] Researchers conducted a series of studies
[00:06:06] that found when people had larger bills,
[00:06:08] they were less likely to spend it
[00:06:10] than people with smaller bills or coins.
[00:06:13] But there was an interesting twist.
[00:06:15] When the subjects did decide to spend money,
[00:06:18] those who made purchases with large bills
[00:06:20] spent more overall than those with small bills.
[00:06:23] It's actually been coined denomination effect.
[00:06:27] In their paper, the researchers conclude,
[00:06:29] quote, the results suggest that the denomination effect
[00:06:33] occurs because large denominations
[00:06:36] are psychologically less fungible than smaller ones,
[00:06:39] allowing them to be used as a strategic device
[00:06:42] to control and regulate spending, end quote.
[00:06:46] In an article for Psychology Today,
[00:06:48] researcher and author Art Markman
[00:06:51] explains that this happens
[00:06:52] because of how we associate different values of currency.
[00:06:56] Simply put, small bills remind us of small purchases,
[00:06:59] like buying a cup of coffee.
[00:07:01] Large bills are associated with large purchases.
[00:07:05] Our brains make these associations
[00:07:07] and the associations affect our spending.
[00:07:10] Markman suggests a pretty simple way
[00:07:12] to use this information to your advantage.
[00:07:15] Quote, if you're the sort of person
[00:07:17] who tends to blow through a lot of money
[00:07:20] making lots of small purchases,
[00:07:22] then you should probably avoid
[00:07:23] carrying lots of small bills with you.
[00:07:26] If you're the sort of person
[00:07:27] who tends to make large purchases on impulse,
[00:07:30] that is your penny wise and pound foolish,
[00:07:33] then you may want to avoid carrying around large bills.
[00:07:36] Instead, you should probably carry around
[00:07:38] a small amount of money in small bills
[00:07:40] to keep yourself from overreaching, end quote.
[00:07:44] A lot of this seems ridiculous, right?
[00:07:47] Our brain should think practically and logically.
[00:07:50] We should understand that five $20 bills
[00:07:52] are the same as $100 bill.
[00:07:55] But again, money is more about mind than it's about math.
[00:07:59] This is why as silly as it may seem,
[00:08:01] the envelope method works.
[00:08:04] Often our brains aren't practical, they're weird.
[00:08:07] Rather than try to deny that fact,
[00:08:09] it might make more sense to understand it.
[00:08:12] These studies are always debatable,
[00:08:15] but a little awareness about human nature
[00:08:16] can help you work with your habits and develop better ones.
[00:08:24] You just listened to the post titled,
[00:08:25] ''Weird ways our brains control our money habits''
[00:08:29] by Kristen Wong with getrichslowly.org.
[00:08:32] And I'll be right back with my commentary.
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[00:10:25] It's interesting how our brains
[00:10:27] can rationalize certain behavior when it comes to money,
[00:10:30] even when it's in direct opposition to our goals.
[00:10:33] For example, I recently read about mental accounting.
[00:10:37] This is when we mentally put our money
[00:10:39] into different categories,
[00:10:41] like treating windfall money
[00:10:43] differently from our regular income.
[00:10:45] So if you win big at the casino,
[00:10:47] you might feel more inclined to blow it on a lavish vacation
[00:10:51] because hey, it's not like it came
[00:10:53] from your paycheck, right?
[00:10:54] Or the ostrich effect.
[00:10:57] This is when we bury our heads in the sand
[00:10:59] and ignore financial problems
[00:11:00] instead of facing them head on.
[00:11:03] Like when you've got a mountain of credit card debt
[00:11:05] but would rather binge watch Netflix
[00:11:06] than review your transactions and work on a budget.
[00:11:09] Or how about overspending
[00:11:11] when you think you're getting a deal,
[00:11:13] like a limited time offer or a buy one get one free deal.
[00:11:17] We all get tripped up from time to time with these things,
[00:11:19] but I think the key to making better decisions
[00:11:22] in the future is to foster a sense of awareness about it
[00:11:25] and to slow down when it comes to making financial decisions.
[00:11:30] And that should do it for today.
[00:11:31] Have a happy rest of your day
[00:11:33] and I'll see you for the Thursday show tomorrow
[00:11:35] where your optimal life awaits.