Money behaviours are often not about money
“Money behaviour and financial decisions are sometimes – rarely – about money” (David Krueger, A New Money Story).
I am very fortunate to have been trained by David Krueger, and he is also my mentor, so please indulge me this week, as I carry on with this topic and a bit more from his book.
Imagine you are at an auction with 75 other sophisticated looking people, all dressed in business attire. The next lot comes up, and the auctioneer holds up a $100.00 note. He explains, the person with the highest bid, wins the $100 note. The second highest bid has to pay, but gets nothing, by the way he adds, this is real money.
What do you think happens? This experiment has been repeated over 600 times, and the bidding has never stopped under $100.00. A bidding war often happens and the $100 is sold for as much as $465.00. The second bidder stops at $460.00 and gets nothing but still has to pay.
The Auctioneer is Professor Max Bazerman at John F Kennedy’s School of Government, and the bidders are investment specialists and economic gurus. Who I really think should know better and have more financial control than us mere mortals in the finance world.
The reason it happens is because of the way their minds work. Here are a few things that are going on.
Loss Aversion: “I’m not going to come second and get nothing!” We fear a loss twice as much as we do a win.
Sunk cost fallacy: “I’ve already bid $300, I’ll got just a bit higher”
The brain of course has to join in,
The prefrontal cortex says: “Stop at $95.00″
The limbic system says: “this is fun, I’m excited, don’t stop me now!”
Of course, in the auction room, our states of mind are more vulnerable to emotional contagion there’s drama, excitement and high emotions going on, the herd mentality is off and running.
But even without all that distraction (emotional contagion), back to us mere mortals again.
Our prefrontal cortex will say: save for retirement, reduce debt, use your Xmas bonus to pay down your student loan.
Our limbic system says: Black Friday sales, let’s go shopping. I’m too young to think about retirement.
Greed, emotional contagion, and peer pressure trump logic. It’s not that we are stupid, we just aren’t very well regulated, and we make mistakes.
So, what is a state of mind and how do you regulate it to help you make better decisions?
A state of mind is a psychophysiological state, in other words a ‘package’ of feelings, expectations and attitudes. Each ‘package’ determines our thinking and behaviour, our emotion, how we access and express our memories. Managing our state changes and regulating our emotions determines our effectiveness, this doesn’t just apply to money.
We are constantly moving through different states of mind and changes without being aware of it, we can fluctuate through a huge range in a day, going from feeling totally energised and full of the joys of spring, to wanting to just lay on the couch and watch Netflix.
What we are aware of is for certain tasks, or roles, what state we need to be in. We know what state we need to be in when going into a job interview. Or when we get home at the end of day and have a toddler throwing themselves at you. Without really realising we are changing our state, we switch and prepare for the different state of mind on the drive home, or in the waiting room, or by going for a walk.
How do we regulate our state of mind when it’s not such an obvious scenario? There are two primary ways, physiology – how we use our body and focus- what you attend to.
One of the easiest ways to change your state is with some deep breathing, this taps into both the physical act of breathing, and focussing on the breath. This gives us the time to ask ourselves
What does this mean?
What should I do?
By putting ourselves in a different state, we can make a different decision.
How does this help us make better financial decisions? Let me share this story with you.
I was working with a client who was going through a very difficult relationship breakup. As much as he loved his daughter (who was a toddler at the time), the pickup and drops offs were really hard and he was often angry as he drove away. On this particular day, after yet another argument with his ex-wife, he and his daughter found themselves at that big red store, filling the trolley with stuff they neither wanted, nor could afford. About halfway round the shop, he stopped, we had been talking about state changes, and although he was somewhat sceptical, he decided to give it a go. He took a few deep breaths, calmed his emotions, looked in the trolley, looked at his daughter, and went back round the store putting most of the things back on the shelves.
From then onwards, he used that technique with numerous other financial decisions, including his property settlement.
Our moods and our emotions impact the decisions with make with money. Understanding what is going on behind the scenes, so to speak, helps us understand what is driving the decision. We can then choose whether we want to stay in that state or move to another, hopefully better one.
Try this experiment the next time you are going into a shop, before you walk through the doors, stop, check in with your emotions, take a few deep breaths, centre yourself, you want to feel calm and in the moment. Then go through the doors. When you leave the shop, check in again, being focused on what you were there to do, and not thinking about the US elections, what you are having for dinner, or did you remember to turn off the oven before you went out, change the experience and your spending behaviour? Let me know your thoughts and share your stories in the comments.