Understanding the Psychological Effects of Money on Spending Decisions

[Music] as a financial therapist I know you work with a lot of different people and I

want to know like of the different things that they come in and that they're dealing with and they share with

you how many would you say deal with like the psychological effects of money like how your brain can play tricks on

you when it comes to spending your money yeah I mean in my work I'd say it's 80% plus and research backs me up most of us

make decisions based on how we feel rather than the facts of the matter and this is true in and out of our personal

finances for example most of us know we shouldn't be like scrolling on our phone before bed CU it's bad the blue light

messes with our sleep but uh rais his hand most of us still do it before bed because we're like ah it kind of feels

good it's my little habit yeah yeah yeah I know it's not good for me but I'm going to do it anyway and when it comes

to money psychology plays a huge role in what we do and the research says that about 80% of our decisions that we make

are based on how we feel not on our spreadsheet not on our budgeting app not on our you know very cute smart goals

that we've laid out our brain takes over and hijacks with a bunch of different ways and tricks us a little bit to do

things that might not be the wisest long term but feel really good in the moment one of the big feelings at least that's

common is fear so like fomo right hash fomo fear of missing out how much do you think fomo plays a role in a lot of the

irrational decisions that people tend to make yeah so when we're thinking about fomo the psychology term we'd use is

social norms social norms are fomo this is the fear of missing out and this is where you might be tempted to spend more

money than you planned or buy things you didn't want to buy because of the pressure of wanting to fit in so this

can look like going shopping I don't know about you Yan but when I go shopping by myself I'm much better about

like sticking to my list but if I bring a couple of my girlfriends all of a sudden I'm buying a ball gown even

though I have absolutely no reason to be purchasing the ball gown because my friends are like oh you look so cute in

it you know whatever you look great you should buy it and that is an example of how those social norms kind of pressure

us into spending money that a we didn't plan to or spending money outside of the ways that we really want to be spending

our money yeah that's a good example I definitely can relate to that one because when I was in college I had a

lot of friends who I had to mindfully stop spending stop going shopping with because they would convince me to buy

stuff that I had no business buying and so I think that's a good one what other examples do you feel like are really

common for fomo yeah when it comes to fomo it's also this sounds irritating but it's so true it's the brands it's

what brand is trending right now every time I'm on Tik Tok I'm being served a new Tik Tock Shop link to stay on top of

the latest Trend whether it's a water bottle or a pair of sneakers or a cute outfit it doesn't matter there's always

something new and it's not just the look of the thing it's also the brand of the thing and branding is often what we pay

for when we look at something like the brand of water that you drink look at liquid death right they're water they

can charge a little bit more for it even though it's the exact same thing inside of that can because they have really

lean Into The Branding that feels edgy and fun and exciting yeah it's that Viral the verality fact they like oh but

but it's hot right now yes and it's hard to stay on top of right like that fomo is so real not just the brands but also

a social media wanting to go to the trending restaurant you know how like when a Tik Tok blows up some certain

restaurant and people are waiting like 5 hours in line for a sandwich or something like that we do that too and

we might be spending a lot more on that viral sandwich than we would from you know a random sandwich down the

corner now I know one of the big things too is that when you see it you want it like in that moment right and like

that's that instant gratification piece like where does that come in and how much does that affect us like on our

day-to-day yeah that instant gratification what we would use in Psychology is called present bias which

is this feeling of this thing in this very moment is more important than anything in any other moment right so if

we think about outside of money this is staying up late before an exam before a big paper is due before a test because

you just need to get to that next level in your video game even though you know you're going to be tired the next day

and probably won't perform that well because it feels so good in the moment so present bias also shows up with that

instant gratification when it comes to our money so the way that I see this show up are with things like the buy now

pay later I know yall did episode on that um doing things like putting things on credit cards maybe your auntie gave

you 50 bucks on your birthday and you know you want to save up some money for uh a car or something like that in the

future but it feels so good to have that money in the moment and you're like whatever I'm going to go get a new

eyeshadow palette right that's the thing it's like the waiting is annoying it's it's like I don't want that I rather

just get it right now and I see that a lot but at the same time there be some people who like are the totally other

way like on the flip side they want to like hold on to all their money and they don't want to spend like is do you feel

like that's common too where you have some people maybe some personality types that just go the total other way and

they really want to cling on to money and not spend absolutely the the term we would use for this is called loss

aversion and basically what research shows is that it's more painful to lose something than it is to gain something

they've literally put people in brain scanners and those different parts of our brain that are associated with

feeling physical pain light up when we lose things whether we lose money whether we lose a parking space it

doesn't matter losing doesn't feel good and so when it comes to money and saving even though on paper yes we do want to

be saving up for our future s sometimes we are so fearful of the pain of spending or buying or investing that we

keep it underneath a literal mattress and you and I both know that that makes sense if depending on like how you were

raised but also it is not insured it is not protected it it isn't the best place for your money to go um so we can see

this all the time yeah I definitely relate to that I feel like it's a little bit like of I don't want to let it go

cuz I don't know if I'm going to get it back yeah and what we see you know as we do more and more research on financial

psychology and on how people engage with their money and use their money what we see is that people who come from

backgrounds where they grew up where money was tight in their household it makes perfect sense that they're going

to want to hold on tightly to that money because of exactly what you just mentioned I don't know when I'm going to

have more money I don't know when I'm going to get paid I don't know if my auntie is going to give me money on my

next birthday so I want to hold on to it because it does feel really safe yeah that makes a lot of

[Music] sense here's a vocabulary words from today's episode behavioral economics

this is how you engage with with money based on how you feel rather than the money

facts Financial therapy this is similar to regular therapy but with the focus on money it helps you to process the ways

that you think feel and behave when it comes to your money and the goal is to help you improve and make better money

choices cognitive bias this is your brain's tendency to influence you to act or feel a certain way now it's important

to know this is not a permanent thing so if you begin to recognize these patterns you'll actually have the power to change

them over [Music] time last year I was visiting a high

school in Los Angeles and I got some of the students there to help me with this experiment that basically shows you how

our brains can influence us to make decisions that don't really feel logical or rational all the time and this is

specifically when it comes to money so check it out all right so we have eight volunteers and this is how it's going to

work every other person in this line is going to get a piece of paper and a pen all right so turn and face your partner

if you have a piece of paper in your hand you are going to pretend okay pretend with me that this paper

magically just turned into $20 cash you you do not have to work for this $20 you don't owe me back this $20

this is there's no strings attached like pretend that you're walking down the street together and you found $20 on the

floor and you picked it up and said oh I just found $20 there's no one around so I'm going to keep it okay you don't owe

me back now the challenge and the rule of the game is that even though you found it yourself you're with your

friend so you have to give them some part of the money you can decide how much and write it on the paper but you

cannot write 0 and give it to them that's against the rules so you have to put some amount on the paper and then

offer it to your partner if your partner takes a piece of paper sees your offer and says Okay I accept this offer I like

this offer then you'll split the money according to the amount you wrote so if you wrote you know uh $2 on the paper

and your partner says I accept it then you'll get the rest which is how much y'all paying attention $18

right but here's a catch if your partner says I see your offer I don't like that I decline your offer I

don't accept it then nobody gets any money at all I know right it's good okay but

here's the thing you can't talk to your partner there's no whisper negotiation this is this all right with you no no no

no talking it's a completely silent activity I'm going to give you a few seconds to write your offer on your

paper and then when we're ready we'll hand it and you'll have a few seconds as the as your the responder to decide if

you accept it or not ready all right so you'll have time to start writing your offer now

go all right let's start over here what was your offer and do you accept it or not it was $10 and I accept all right

next she gave me $10 I ain't accepting for real you didn't no you said no wow okay how about over here he gave

me $7 and I don't accept it no what was the offer over here she offered me $10 and I accept all right so the last group

and the first group had a $10 offer that was accepted two other groups in the middle had an offer that was not

accepted three of the four groups offered $10 that three out of four that's

actually very common across the board this is an actually a game that is very very popular economists have done this

on college campuses with so many different groups this is called the ultimatum game and when this is

simulated hundreds of thousands of times with different groups of people the majority of people in the game do the

same thing they do a $10 offer why why did those who offer $10 choose that number because we found the

money together so why not split it equal down the middle okay equally it's a equal split it's even and fair almost

immed immediately the word Fair comes up the idea of fairness Fair meaning it's just it's right meaning that if the

offer is not $10 then it's not fair it's injust it's not

right so when you feel like there's an injustice and something's not right you feel some type of way you feel upset

maybe how did you feel when you saw a $7 offer at first I was a excited I was like yo $7 cuz it's my lucky number and

then I was like wait a second what who who are you to give me $7 what does that mean for you get the other the rest of

the money she said who are you why would you keep 13 and only give me seven and then

he said I'm like Mr Krabs I like my money so I'm Mr Crabs with my money I like to

keep my money here's the thing I love this reference to Mr Krabs from SpongeBob because

everybody knows Mr Crab is greedy so greedy with his money but the reality is it's not just

Mr Krabs it's you and me both it's all of us everybody has a human instinct of greed we all want more all the time it's

never enough for us we always want more so in this case the game was played here exactly the way it happens over and over

again people generally will'll split half and half they say it's fair it's good it's just but then people who get

less than $10 they feel some type of way they get upset oh you're trying to play me that's disrespectful you keep 13 and

give me seven what now I'm going to say no so now you don't get $113 but now you also don't get

$7 okay but what if what if I do this what if I run over to the table over there open my purse take out $7 and come

over here and say here you go you want $7 what would you do I would take it because that's free money that's also

free money no but but technically this is free this is a this is free $7 too right te technically like

it's technically the same thing I like being petty if I don't if I don't if he can't if he gets more money

than me then it's not fair so I don't think it's fair so this is not just you this is

almost every everyone who feels upset and feels like I'm going to be Petty you want to try to play me you want to be

disrespectful you get nothing but here's the thing you also now get nothing and even though in this activity you said no

to seven free dollar maybe 30 seconds later I offered you s free dollars and you said yes so you normally in any

other circumstance would say yes to S free dollars but in the context of the fact that someone someone else is trying

to play you now you change your mind and say no to seven free dollars that you normally would accept this is what

happens when our emotions get in the way of making rational choices with money what we do

rationally she would take $7 from me but this is not a rational exercise emotions came up she's feeling Petty she's mad

she's going to now do something irrational even though she's very rational cuz she accepted the seven

bucks that I offered her she's clearly a rational person but the game shows you how your emotions will mess with your

money all right give them another round of applause thank you so much y'all for volunteering

[Music]