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Fairness is emotionally rewarding, a study finds

Fairness is emotionally rewarding, a study finds – Los Angeles Times

Linked above is an article on another interesting study on how we are neurologically wired about money issues. The research was done at UCLA’s Semel Institute for Neuroscience and Human Behavior to measure how our brains react to financial situations that would be considered “fair” or “unfair”. Side note: I was told many years ago the personal definition of “not fair” was not getting what you wanted. The research showed that getting a fair deal stimulated the same parts of the brain as do earning money and looking at attractive people.

I found the method and results of the study very interesting. Students were offered a split of found money, $10. Those who were offered $5 registered a fair reaction in their brain activity and took their split. Of those who were offered a $2 share 50% registered neural activity signalling disgust and refused the money. The other 50% took the money but did not show “fairness” brain activity. I find it interesting so many refused free money because they believed the deal to be unfair.

So how does that affect us? It appears that fairness in a financial transaction affect us as strongly as the actual financial figures. I sold cars and trucks for several years and it was well known by salespeople that the happiest buyers were usually the ones the salesperson made the most profit and commission on. Buyers who felt they were getting a too high or an unfair price usually were getting a very good deal, but little the salesperson or dealership could do would convince them of that. We all want to feel like we got a fair deal, but each person’s perception of fair is different and may be quite skewed from reality.

This study shows me that it is difficult for us to stay rational about big financial purchases, such as cars, homes or engagement rings. Some research before we go to make our purchases may give us a better framework where the fair price lies and allow us to make a rational purchase and feel we were treated fairly in the transaction.

5 Ways our Brain Works to Wreck our Finances

1. Redefining Needs

Perhaps it’s marketing or perhaps it is our culture, but we’ve gone from wanting certain possessions to NEEDING them. Whether it’s a top model car or a specialty coffee, we confuse the difference between wants and needs. We only really NEED food, shelter, companionship, and a job to pay for the food and shelter. That’s it.

2. Psychological Addictions

Not all addictions are physiological. Some are much more complex. Smoke breaks are both times to smoke and a break. Often it’s the “break” aspect that helps people relax. The same applies with coffee breaks, impulse shopping, or gambling. These things make us feel better in our brain, and as a result, we become addicted to that feeling.

3. Unrealistic Understanding of Risk

Whether it is through denial or simply overconfidence, people often invest money they can’t afford to lose in investments that are at a higher risk Or, we assume because an investment has performed will in the past, it would

4. Procrastination Rationalization

Our brains are often magnificent at rationalizing actions or lack of them. This can keep us from acting at times that would most benefit us. We avoid making changes in the present that can benefit us in the future, and we always have “good” reasons.

5. Inability to Admit Mistakes

Because we often attach our own self worth to the effectiveness of our decisions, mistakes are viewed as diminishments of ourselves. Because of this and many other reasons, we tend to avoid admitting when we’ve made a mistake, which prolongs the time until we work to resolve it.

Scapegoating the Credit Card Industry

While the review itself is on the later side, I’m happy at this review I found for the movie “Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders” because it deals with an important aspect of psychology and finances.

For those of you who don’t know, MaxedOut is one of the many documentaries that came out over the last few years. If you’re interested in reading the review, you can click here to see it.

By the use of “predatory lenders” in the title, it’s pretty clear that MaxedOut describes the darker side of the credit card industry. Now, up front, I want to honestly say that I haven’t seen this movie, it just provides a wonderful introduction to my concept.

Having worked in the financial industry, I’ve seen from experience that customers often blame the industry for their problems. I’ll be the first to say, banks, credit card companies and check cashing stores are industries that can often maximize their profit at the expense of their customers. However, I don’t think that they are the biggest problem. I think our fundamental failing as a society is the lack of basic financial education that we provide. The biggest issue with scapegoating a particular financial industry is that we then avoid attacking the real problem.

Essentially, what we’re doing when we create negative stereotypes of financial institutions is undergoing the “Texas sharpshooter fallacy” (Texas sharpshooter fallacy — the fallacy of selecting or adjusting a hypothesis after the data is collected, making it impossible to test the hypothesis fairly.). We make our judgments on these industries based on the fact that people have bad experiences with them.

The other issue we encounter is a vast social ignorance when it comes to the damages that can be caused by something as simple as a credit card. We require licenses to drive cars and training to operate heavy machinery, but on the scale of human suffering, that small piece of plastic is just as dangerous and can ruin lives just as easily. For as long as there has been money, there have been people who didn’t handle it well. This isn’t new. However, as we’ve made the monetary system more complex we haven’t taught people how to properly use it.

Feel free to watch MaxedOut. I’m a big fan of documentaries myself and might look it up. There are indeed some genuine tragedies in the credit card industry. People down on their luck with no where to turn, who were brought there through no fault of their own will always exist, and they should be helped as much as possible. However, a great number of people with credit problems are people who make mistakes that eventually snowballed on them, or are just victims of poor choices.

Neuroscience of Retail

I would like to highlight a few of the findings on how much research retail companies put into their effort to discover what the customer wants to buy:

  • A university study recently published in Psychological Science magazine revealed people are willing to pay up to 4 times more for an object after they are shown a “sad” video than after viewing a “neutral” video.
  • Research shows people do get a “high” from shopping, as the brain releases positive feeling chemicals when we find something new and exciting.

Sometimes, aspects of the shopping experience such as friendly sales clerks, eye-catching displays or aisles that are easy to navigate can trigger brain activity that brings about these “euphoric moments,” says Dr. David Lewis, director of neuroscience at Mindlab International, a United Kingdom-based consultancy whose clients include athletes, retailers and advertising companies. “The brain is turned on by novelty.”

  • Studies show up to 6% of women and 5.5% of men show symptoms of compulsive buying disorders. I would call this a shopping addiction.

I think we can learn a couple of inportant points from this video and article. The first is that retailers are using advanced neurological studies to discover ways to enhance the shopping experience and get us to buy more. So when we shop we should analyze ourselves to determine if we are buying things we really want or need or just buying for the thrill of getting something new!

Second, shopping to get rid of the blues is dangerous. If we are sad, the studies show we are much more prone to pay a higher price for things we do not need. The uplift a sad person may get from shopping probably does not outweigh the additional financial costs such as increased debt.

Separating necessities and luxuries

Memorial Day Weekend is almost over. Are you satisfied with however much money you spent for it?

$4 gas prices have significantly affected people’s spending habits in a way that hitting the $3 mark didn’t, Marketwatch says. There are articles all over describing how people have been trying to save money on Memorial Day weekend–though not always by canceling plans. “You can’t make financial decisions based on happiness,” said a man whose family used their economic stimulus refund to fund their family gathering (but decided not to buy steak for it).

Money may not buy happiness per se, but it can buy some things that will make you happy–a plane ticket to see your family, or food for a birthday party, or that painting you’ve been wanting for your bedroom. And, of course, money also supplies the necessities of life–food, clothes, medication–without which we find it harder to be happy.

The problem comes in defining and obeying the line between discretionary spending (luxuries) and autonomous spending (necessities)–particularly if you are used to a certain level of discretionary spending and are finding yourself required to reduce it. (more…)

Depression and Finances: Can Money Buy Happiness?

Can Money Buy Happiness?

We’ve spoken a bit in this blog about how the brain can effect our financial decisions, but what about hour our financial health can effect our mental health?

Make Love, Not Debt bills itself as a Relationship Finance blog. It’s a bold statement, but at the same time an interesting perspective to take. Recently, the author has taken to speaking about depression, as he has been diagnosed with it.

There were two posts that caught my eye on the topic. The first “Depression is expensive, denial much more so.” deals with the idea that people often try to buy their way out of depression. This touches upon what some of the other blog posts here have discussed. The most telling post for me though was “Depression and Finances: Socioeconomic Status“.

What really jumped out at me from that post was this quote: “In one British study, actual poverty or unemployment increased the duration of any existing depression, but it did not appear to play any important causal role. Feelings of financial insecurity, however, both caused and prolonged depression.

Think on that for a second. It really is an immensely freeing statement. If you’re feeling depressed, and your feeling financially insecure, the two could be related!

So, to tackle the question that started this post, can money buy happiness? No. Not directly. However, managing your money and eliminating feelings of financial insecurity seems to help eliminate depression, so I think that’s as good of a reason as any to get your finances in order.

Addictions – Fatty Foods

We’ve looked at the addiction to caffeine, but are there other addictions that impact our financial and physical health?

When people are stressed, often we turn to our comfort foods. Foods that might help bring up happy memories, or just ones that we associate with relaxation.

A lot of food companies try to tap into this as well. They use different marketing tools to try and get us to associate relaxation with their chocolate brownie sundae, with their cake, or with any other “sinful” dessert treat that we “deserve”. Each of these treats comes at a cost, both to our health and to our pocketbook. Treats such as these are in excess of our ordinary food budget. A single chocolate bar a week adds up to about $50 per year. Make that a $5 dessert instead, and you’ve spent $250 on food you don’t need.

It’s easy to argue that it is needed. It’s a luxury. It’s something that makes us feel better. Well, some studies have shown that fatty food does in fact create a physiological response in the body that can help to reduce stress. So, you have something that you can eat which makes you feel better. That is definitely the definition of a comfort food, but also something to which you can become psychologically addicted. Why change your lifestyle when you can just eat something to feel better?

Now, the kicker to this is that this same positive feeling can be achieved WITHOUT the comfort foods. Comfort foods are an easy path to the result, but they are one of the many factors leading towards higher rates of obesity. This in turn starts a downward cycle of lifestyle. We then spend money to counter that downward cycle by joining gyms, buying exercise equipment and so on.

So, get out of the cycle. Rather than getting yourself a sundae for your stress, take a walk. Rather than having a chocolate cappuccino, get an extra half hour of sleep! You save yourself money in the short-term AND save your health in the long-term.

Gardening is good for the mind, body, and pocketbook

My garden is just getting into full swing. The lettuce and spinach are just about ready to pick; the onions and leeks are slender versions of their mature selves; the carrots and dill are putting out their delicate foliage. I’ve got squash and melon plants waiting for slightly warmer weather, but when that warmer weather hits, my yard will be full of good things to eat.

Why post this in Money and Minds? Because gardening is good for your mind, body, and pocketbook.

Digging in the dirt has actually been found to be beneficial for mood. A Neuroscience article last year described the finding that bacteria in the soil may have the same effect as antidepressants. Antidepressants work by increasing the amount of serotonin, a neurotransmitter, in the brain, which then goes on to affect various brain structures. Current neurotransmitters either reduce the brain’s ability to inactive serotonin (MAOs) or slow its ability to remove it from synapses where it does its work (SSRIs). These bacteria, on the other hand, cause neurons to release more serotonin. The result: if you’ve got your hands in the dirt, you may be happier.

Anyone who’s done gardening–any yardwork at all, in fact–knows it can be a workout. Researchers have found that any daily physical activity, including housework, gardening, and sports, is correlated with lower risk of psychological distress. The minimum level of activity that showed a benefit was 20 minutes per week, but the more activity, the better the mood. And being more active helps keep your body fit, which improves your self-image and, ultimately, benefits your bank account through fewer doctor’s visits and medications.

And the benefit of vegetable gardening to the pocketbook should be evident to anyone who’s buying food these days. When you’re saving money by shopping for produce in your backyard instead of your local grocery, rising prices of gas and bread aren’t quite so painful. A packet of lettuce seed, for example, will cost you around $1.50, but contains enough seeds to keep you in salad for as many years as the seeds will last (around 5 years if you store them cool and dry). A single tomato plant, also around $3, will typically yield around ten pounds of tomatoes. And the taste is far superior to anything you can get at the grocery store.

Gardening gives you exercise, fresh vegetables, and a good mood, both from the serotonin and from the feeling of empowerment. Anyone with access to sunshine, water, and seeds can do it. You might have a few startup costs, but the price of a couple of bags of soil and a spade will be more than offset by the cheap, delicious, nutritious vegetables you can grow. If you’ve never gardened before, a book from the library or a search of the Internet will help you. Here are a few sites to start with:

It’s not too late to start a garden. We’ve just come upon the last frost date for many regions, which is when you want to wait to plant most vegetables. So consider digging in a bit of earth, growing some cheap food, and reaping the benefits.

Empowerment leads to better mental performance

A study in the May issue of Psychological Science looked at people’s cognitive performance when they were feeling high or low in personal power. Smith, Jostmann, Galinsky, and van Dijk randomly assigned participants to a low-power or high-power group and then tested their executive functions, processes in the brain that guide behavior according to one’s goals and organize and sort information.

They found that people in the low-power group were less able to focus on their goals and to plan out strategies to meet them. High-power participants were more efficient and made fewer mistakes, even though motivation and effort were the same between the two groups.

Smith et al. suggested that their findings have direct impact in the workplace–that empowered employees will also perform better–and demonstrates how hierarchies persist: the people in power do their tasks well, while the people without power do poorly and can’t become empowered. This could also have social and economic implications. We’ll pass over the social aspect, but consider the impact this might have on your financial decisions. If you don’t know much about finances–and nobody starts out knowing a lot–you won’t feel empowered. And if you don’t feel empowered, you’ll make mistakes, mistakes that could cost you money and peace of mind.

Some people say, “I don’t get investing,” and let it go at that, but doing so could cause more problems than you might think. When people feel likely to fail at something, they tend to stop trying and find an external source to blame, something like “finances are too hard” or “it wasn’t my fault, I never learned about this.” This is called self-handicapping: behavior that deliberately (if subconsciously) sets up oneself for failure in order to proactively find something else to blame for the failure.

The lesson here? Avoid unconsciously handicapping your financial future. Empower yourself when it comes to finance. Simple steps will give you a feeling of knowledge and control.

  • Ask experts. Your banker and your stockbroker and even your employer’s HR department (in the case of 401ks) are there to help you learn more about your money and the things you can do about it. Banks will sometimes offer seminars on the basics of investing and retirement funds.
  • Read. The bookstores and libraries are awash in personal finance books. The Internet is full of advice–good and bad–and sites to give you information and personal experiences.
  • Talk to the people you know. Maybe your parents have a nice mutual fund. Maybe your brother knows what buying margin means. Maybe your best friend’s sister tried credit card arbitrage and can explain where she went wrong.

The most important thing to remember is that feeling overwhelmed will cause you to make mistakes…and it’s easy to correct. Learn all you can. Knowledge is power…and power is, apparently, a big part of proficiency.

Why does negativity sell?

This is a rant and a question about something that really bugs me. I spend quite a bit of time reading financial news, primarily on the Internet, and I am struck by how much writers and commenters wish for bad economic news, the worse the better. It is a widely accepted belief that if you want to start a successful paid financial blog or website it is better to concentrate on a negative subject.

Many times an article with a positive slant on the economy or job statistics or the housing market will be followed with numerous comments proclaiming the sector involved is in the middle of a deep recession that will last for years, decades, forever, etc. Here are some of the more virulent topics, first, with what I see as factual, followed by some common perceptions:

  • U.S. economic recession: Although government statistics show the economy is still growing, although at a slow rate and the historical average recession lasts 6 to 9 months many Internet opinions put us well into a deep recession that will last for many years.
  • Worldwide economic recession: Economic growth is healthy in most parts of the world with strongly growing economies in most regions. Again, however, many expounding on the Internet are convinced the U.S. ‘monster’ recession will drive the rest of the globe into recession or vice-versa.
  • Sub-prime credit crisis: The failure of the sub-prime mortgage market has hit many financial institutions hard and has caused a real recession in the housing market. Reading the internet and following the financial stocks would have one believe no bank will ever make a profit again or even survive.
  • Inflation/Stagflation: Rising commodity prices, especially oil, have caused many prices to increase. Many in the Internet world do not believe any government statistic on inflation and fear U.S. monetary policy will drive us deeper into the multi-year, multi-decade recession they are all wishing for. Or so it appears if you read enough of this stuff!
  • Housing market: From about 2002 until near the end of 2006 real estate prices and new home sales shot up at unprecedented rates. Since 2006 home prices have generally fallen and home building has been severely curtailed. Now home building rates and prices are back to somewhere around the 2002-2003 levels. Internet pundits keep comparing their data to one year ago or peak rates and project the current slow down all the way to zero. Many I read will not be happy until everyone’s home is worth $1,000.

This type of stuff really bugs me. First, of all I am a positive guy and want to make money by investing in positive ideas. An investment that goes up in value is positive. I do not see the value of all of the negative prognostication, especially on finance/investment internet sites. Excepting of course, the financial sites pushing this stuff and making some serious coin! Second, I have been watching financial news a long time, and everything goes in cycles, especially herd mentality and stupidity. And the herd includes everyone from bank CEOs to Wall Street numbers geeks to your neighbor getting-rich-on-investment-real-estate-with-no-money-down until it all collapses. The long term trend of economies and markets and real estate are to grow in value, but these are not straight line trends. There are many ups and downs along the way. As an investor, I want to find the places in the trends where I can make more money than putting my cash in the bank or T-bills. Projections of impending or current doom and collapse do me no good.

So my question again is: What is the appeal of all of the negative financial scenarios in the news? Why aren’t more people interested in stories that show them where things are positive and there are money making opportunities? Or are the positive money makers happy with their lot, and leave the doom pounding to those without the ability to find positive investment stories to help them make money? I look forward to reading any comments on this subject.

Investment perspective redux

“We’re putting all our spare cash into the stock market right now,” my coworker M said to me not long ago. “I figure that it’s cheap to buy right now, and prices are bound to go up.”

“We had twelve thousand dollars in the stock market,” my friend J said to me not long ago. “Then when everything came down it was ten. Now it’s back up to eleven. But we’re sure not doing anything with stocks until it gets back up to twelve at least. We can’t afford it.”

There are differences between M and J, of course–one is that M is in a household with two good incomes and J is in a household with (temporarily) one fair one–but they also have different perspectives on investing. Following up on Tim’s post, different people can look at the same world situation–a depressed stock market in which prices which had been rising have fallen and are slowly climbing again–and have radically different reactions.

As Tim said, the price you pay or how you feel about an investment doesn’t affect its outcome–but it does affect yours. Buying stocks cheaply now may well be a good move; but even if J had the money, she probably wouldn’t do it because she’s risk-averse and has just suffered a loss, which increases her risk aversion. M, on the other hand, is relatively risk-loving. If both of them were given the same opportunity–for example, the chance to buy stock in a company being touted as the next Google–chances are that they would react differently, even if they have the same information about the market and the absolute risk, based on their investment styles and their previous experiences.

It’s worth considering whether your previous experiences are coloring your thinking when it comes to investing. Maybe you lost money recently in your portfolio. (Chances are you did; most people have.) That doesn’t mean you’re going to lose money if you make another investment. It doesn’t mean you’ll make it, either, of course. It all depends on the market and world events; but not, as Tim said, on your action or your personal history.

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