The psychology of money

In a world chasing fame and fortune, it’s not such a bad thing to revise our plans for money, and perhaps even decide to have less.

Most business people (especially stand-alone entrepreneurs – or ‘soloists’) struggle in their relationship with money. Why is that? And how can we get back to a place where money serves us again?

Last year, Ethan Couch, a young man who killed four people in Texas, got away with ten years on probation plus therapy. He pleaded Affluenza, or at least his psychologist G. Dick Miller did. Miller asserted that the boy’s wealth kept him from comprehending the full implications of his actions. Right.

But it got me thinking. Could it be that our wealth similarly changes our awareness of others, or keeps us from understanding the full implication of our actions?

It turns out that money does have that kind of power.

Our brains don’t ‘get’ money

Why do most of us have a bad relationship with money? It’s because our brains don’t really understand money because it ain’t real. Not really, real. It’s what economists call ‘fiat money’ – vacant, empty or fake. But that ‘empty’ is linked to other psychological ideas like power, influence, attention, affection and so forth. So this sets us up for an ambivalent relationship with it – on again, off again.

Money also requires us to use higher mathematics (who loved that at school?). Our brains struggle with hyper-rational concepts like compound interest for example. Yes, we can understand calculus, it’s just not the default language our brains run on, especially as we walk through the mall.

Our brains also struggle with the concept of debt. We understand reciprocity – you bought coffee this time, it’s my shout next time. But our prefrontal cortex, our mental ‘sketch pad’ can’t work with vague ‘credit cards’. Our limbic system, the emotional brain sees the opportunity to spend, eat, party and enjoy but ignores tomorrow’s credit hangover.

This today/tomorrow struggle with money is reflected in the getting/giving paradigm too. We hate losing (giving) twice as much as we love winning (getting) and this sets up an aversion to loss. Amos Tversky and Daniel Kahneman who first discovered this (Choices, Values and Frames – 1984), went on to discover that paying for things in cash actually fires off our brain’s pain centre, but when you use your plastic card, they don’t!

The always rich-never rich problem

Rich is a hungry monster with an insatiable appetite. No matter how wealthy you are, you always think ‘rich’ is someone else. Wall Street Journal blogger Robert Frank notes that, “when people are asked how much it takes to be rich, they always give a number that’s twice their current net worth or income.” In Ghana, a street worker getting $1US per day says $2US would be rich. In Nairobi, Kenya a tractor mechanic on $5,000US a year says $10,000US would be rich. In Mexico the Real Estate agent earning $35k thinks $70k is rich. “Those with $100,000 in income say $200,000 and those worth $5 million say $10 million,” says Frank quoting research by the Spectrem Group (2008).

Getting money, more money, lots more money can also lead to unhappiness. Being richer means…

a) Being less compassionate

Wealth reduces compassion and empathy according to Michael Krause from UC-SF. Money is power and people with more power pay less attention to others; to their names and their faces says Jamil Zaki from Harvard (as a result of lower oxytocin – the bonding hormone).

b) More likely to flaunt the law

Paul Piff at UC Berkeley has found that the more luxurious your car, the more likely you are to flaunt the law (e.g. fail to stop at signs, ignore zebra crossings and speed limits). Money brings a sense of entitlement that others should bow to.

c) More addicted

Money is addictive. It’s not substance addiction, it’s process addiction according to Tian Dayton at Counsellor Magazine. The pursuit and reward loop of our limbic system (driven by dopamine and serotonin) gets tripped by getting money and it’s as addictive as cocaine!

d) Less generous

The richer you are, the less generous you become (as a percentage of income). Patricia Greenfield, in an anthropology study in Mexico over 40 years found that as people grew wealthier they became markedly less generous. The poor gave 150% more than the richest.

So … what are we to do?

I have two things to offer

1. Set a cap

Ed Diener of the University of Illinois, using the Gallup World Poll (2010) says the magic income for optimal happiness is $75,000US. Earnings over this have little or no effect on daily mood, (says Princeton economist Angus Deaton), but it does feel like you have a better life.

R. G. Letourneau, inventor of earthmoving equipment and offshore oil rigs, made millions of dollars a year. He decided to set his salary at 10% of earnings and give away the remainder to charity. He established a research foundation and a university.

C. S. Lewis, Oxford Don, professor, lecturer, and author; he capped his salary at £30k. He lived in a small stone cottage and gave away absolutely all of the royalties from his books.  

2. Create options

If you find yourself thinking about money a lot, (ie you’re under stress for your lack of it or burdened by your need for it), things may seem hopeless. We usually experience hopelessness, fear, and anxiety when we cannot see a way forward when there appear to be no options. So grab a sheet of paper and start writing down your options.

There are always options; always choices and avenues. Write down ridiculous things like selling an organ, going into prostitution (at your age?), selling the family house, having a garage sale for everything you own… now you’re started, keep going and see the possibilities open up before you.

In the end, we soloists need money to survive … and it also helps us have a life! But if we’re thinking about it all the time and it’s affecting our lives in a negative way, it definitely serves us well to understand our relationship with it a bit better. Don’t you think?

What’s your relationship with money like?