What do losing weight and saving money have in common? To start, they’re both issues that many people struggle with, often over their whole lifetime, without achieving desirable results. They’re also both issues that many people believe can be solved through psychological intervention.
So what can psychology teach you about personal finance? According to a school of thought called behavioural economics, quite a lot.
Your Irrational Mind
The basis of behavioural economics, as popularized by thinkers such as Daniel Kahneman, Dan Ariely, and Richard Thaler, states that our thinking is inherently irrational, and as such, our minds can often be our greatest enemies when it comes to achieving desirable goals such as losing weight or saving money.
One of the things we observe is that people living in poverty […] typically have very high levels of financial literacy. They’re very good with money.
Something else that not only behavioural economists, but other psychologists as well, have noticed about our brains is that more information or understanding about a certain issue doesn’t necessarily lead to any level of self-control. For instance, many people who have trouble losing weight know a great deal about how many calories are in certain foods; in fact, some people who are trying to lose weight probably know a lot more about healthy eating than the average consumer, yet they still have trouble achieving their weight loss goals.
The same principle applies to personal finance as well. Mark Burton is a psychologist living in Manchester, England, who, along with other psychologists in Manchester, works directly with people facing difficult financial situations.
“One of the things we observe is that people living in poverty […] typically have very high levels of financial literacy. They’re very good with money,” he says.
So just like knowing how many calories are in your breakfast won’t necessarily stop you from gaining weight, more information about how to manage your money won’t necessarily help you get out of debt.
The Problem with Stress
Another common issue that psychologists identify about both weight loss and money saving is the problem of stress.
A 2012 study from Harvard Medical School found that when our bodies release stress hormones, we begin to crave foods with high levels of sugar and fat, and once we consume those foods, they help the brain shut down our stress hormones.
Today, money is a huge source of stress for North Americans. According to the American Psychological Association, an average of 70% of Americans or more find money and the economy to be the number one source of stress in their lives in any given year. According to behavioural economist Hersh Shefrin of Santa Clara University’s Leavey School of Business, stress actually impairs our ability to exercise self-control. So whether it’s eating too many cheeseburgers or spending more money than we actually have, stress can cause our brains to crave things that are bad for us.
Tricking Your Brain
Although your irrational mind can work against you when it comes to achieving certain goals, behavioural economists have a solution: tricking your brain into doing what you want.
This method can be seen at work with StickK, an app that helps people set and achieve various personal goals. StickK is different from most goal setting regimes in that it doesn’t restrict your behaviour in any way. Instead, it sets up real-life consequences, and involves a community of other people who are both cheering you on and helping you stay accountable. This takes advantage of two principles of behavioural economics, loss aversion and social accountability, in order to keep participants on track.
So for example, you might wager $100 that you can lose ten pounds in a month. Through the app, your friends can track your progress and give you support. Then, once the month is over, if you haven’t achieved your goal you forfeit your $100 to a friend or charity.
According to StickK’s own internal studies, their methods seem to be working. They found that people have a 29% success rate when they sign a contract saying they’ll achieve a certain goal, and an 80% success rate when they involve their friends and create a financial consequence for missing their goal. These methods have helped many people achieve significant financial goals, such as putting more money into savings or getting out of debt.
The Bigger Picture
Burton, however, is not convinced that our society’s money problems can be reduced to a matter of psychology.
After years of studying psychology and economics and working with people in debt, Burton finds himself taking a skeptical approach when it comes to offering psychological solutions to financial issues. “Psychological interventions to deal with the problem of debt are often misplaced,” he says. “I think most of the problem is not psychological; most of the problem is systemic.”
“I think most of the problem is not psychological; most of the problem is systemic.”
Although Burton doesn’t deny that stress is a major factor in leading people to make poor financial decisions, he believes that the issue is more complex than that. “I think that’s probably a simplification, and in effect a psychologization of the problem,” he says, “and by psychologization I mean it is locating the problem within the individual rather than the interaction between the individual and their context.” The context he refers to is a context in which many people have diminishing wages, but at the same time, are living in a society where our identity is “very often bound up with what we have rather than what we are.”
So while we can trick our brains into helping us achieve the results we want, that doesn’t deal with the issue of why we get so stressed out about money in the first place. So in the end, according to Burton, the problem could have more to do with the value we place on material goods (and on ourselves) than the methods we use to achieve our financial goals.
Either way, this shows that changing the way we think about money can change our financial situation. Whether it’s tricking your brain into helping you achieve your financial goals, or taking the broader approach of redefining where you get your value from, there’s a lot that psychology can teach you about how to manage your finances.
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