Financial insecurity makes you irrational

You know that when you have money worries (or any worries for that matter), they can seem all consuming.  You go to bed worrying about money and it’s the first thing that pops into your head the next morning.

So, it would seem logical that when we’re in this all-consuming money worries state, that we find it hard to focus on other things.  And more importantly, we find it hard to make sound rational decisions about anything, not just money.

Research has not only confirmed this logic, but has taken it one step further:

Money worries affect your intelligence!

I recently watched a video blog by Andrew Yang, an American entrepreneur, philanthropist, author, the founder of Venture for America and a USA 2020 presidential candidate.  He was recounting a series of studies organised by a team of social psychologists where they were able to show that the scarcity mindset or financial insecurity, affects your IQ.

This is a well known study, run in 2004 on 500 cane sugar farmers in the Indian state of Tamil Nadu.  Prior to the annual harvest, money is very tight and the farmers frequently have to borrow money to get them through to the harvest.

The psychologists gave the farmers a series of IQ tests throughout this period; the same farmers, same test.  The farmers were given exactly the same test a few months later once the harvest was in and payment received.

They found that the farmers did much, much worse on these tests towards the end of the year, when everything was starting to go towards empty and before they harvested crops.  When they ran the same tests after the harvest had come in, their IQs went up.

The question was, how did the same person’s IQ change throughout the year?

As interesting as this study is, most of us aren’t sugar cane farmers.  So, this next piece of research may be a bit more relatable to our lives.

The second study was based in New Jersey, USA.  The research participants were given a bunch of IQ related questions, then they were told they needed repairs on their car.  One group was told the repairs would cost NZ$2,800 and another group was told NZ$280.

Once the car repair bill was planted in their minds, they gave them the same IQ test again.

What happened was, the people that were presented with the fictitious NZ$2,800 a bill, actually had lower IQ scores.  The IQ results for the ones with the lower $280 bill, were marginally changed.

It turns out that not being able to pay your bills, has the functional equivalent of decreasing your IQ.

What the study found, is that you develop a scarcity mindset that is associated with situations when you don’t have enough money, or you don’t have enough time, or you don’t have enough food or you don’t have enough companionship.

When this occurs, it decreases your ability to focus on other things.

Psychologist Sendhil Mullainathan describes it as, “like when our internet can’t keep up with the traffic and there’s a lag when things are loading” (if it’s not the motorway, it’s the internet!).

As a result, it actually makes you less reasonable, less rationale, less generous and more subject to bad ideas and bad impulses.  In short, we find it hard to make sound rational decisions about anything (not just money).

Scarcity and Abundance

Now, the opposite of a mindset of scarcity, is a mindset of abundance, which is what most entrepreneurs have.  A mindset of abundance is a sense of optimism that if if you build it, it will improve, you will be able to get the resources, you will be able to get the customers, you will be able to hire the right people.

Abundance and optimism end up building onto itself and producing results if, the environment is right.

These scarcity and abundance mindsets are very much in opposition.  In many ways, we are programmed with a scarcity mindset because genetically, we were brought into an existence where things were scarce. For instance, if you ate too much in a particular period, maybe you wouldn’t have enough to eat later.

Studies tell us that right now, this tension is what most of us struggle with all the time.  Unfortunately, in most western countries, more people are suffering from scarcity mindset because they simply can’t pay their bills.  78% of people in the USA are living pay-cheque to pay-cheque and 57% can’t afford an unexpected US$500 bill.

So, there is a sense that there is a growing group of people that are getting less reasonable, less rationale, more subject to bad ideas and less open to other people.  This is related to the fact that the scarcity mindset is growing because of pervasive financial insecurity.

Is it any wonder that this is putting stress on relationships – 80% of couples who break-up blame it on money!

In changing from a mindset of scarcity to one of abundance, you develop a whole new and refreshing approach to finance and life in general.

Do you have money worries that are keeping you awake at night?

Now is the time to do something about them.

If you are struggling with financial anxiety and would like to explore how to grow your abundance mindset, take the first step and drop me an email.