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This Is Your Brain On Money

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Yesterday I bought cashews, almonds, and snack mix, for a total of just 19 cents. The neurons in my brain immediately released endorphin, oxytocin, serotonin, and dopamine — because of the savings, not the nuts.

You see, that’s what happens when we feel happy. And for those of us who like saving money, that neuronal release of “feel good chemicals” encourages us, which is good for us financially.

But our brains also do some pretty strange things when it comes to money. Sometimes the effects are good for us, sometimes bad, and sometimes just, well, interesting.

For example, a subconscious tendency called “extremeness aversion,” makes us avoid the least or most expensive option. So a retailer can increase sales of an expensive toaster by simply adding an even more expensive one to the shelf, making us feel okay about the one that used to be the most expensive. That’s one of many subliminal techniques used to manipulate us.

Phenomena like this are studied in the emerging field of neuroeconomics. And some of the research gets really strange, as you’ll see.

This is your brain on money…

Money Makes You Meaner

Perhaps “meaner” isn’t exactly accurate but, as reported by Time, recent research does show that people with more money have less empathy.

Specifically, it was found that people of a lower socioeconomic status are better at reading emotions on other people’s faces, when compared to those with higher socioeconomic status. Previous research had shown that poorer people are more helpful and generous with others.

So there’s a strong correlation between greater wealth (or “socioeconomic status”) and less empathy. But correlation doesn’t prove causation, so we can’t say with certainty if having more money causes less empathy. An alternative explanation is that people with less empathy are more likely to become wealthier.

Still, researcher Michael Kraus suggests that it is circumstances that encourage or diminish empathy. He points out that, “Coming from an environment where you’re more vulnerable, you solve problems by turning to others.” That, in turn, probably encourages your own empathetic response to other people.

That makes sense, and I honestly think I was less empathetic when my income was higher. But I wouldn’t mind making more money again, just to try the experiment all over.

Money Can Cause and Relieve Pain

As reported by LiveScience, a series of experiments have shown that money can relieve both physical and emotional pain. It can also cause pain.

The experiments were simple enough. An example: Subjects counted either a stack of $100 bills or pieces of paper, and then put their fingers in hot water (122 degrees Fahrenheit). Those who had counted money reported less pain than those who just counted pieces of paper.

Another experiment cheated people playing a video game. Those who counted money before the game reported a lower “level of social distress.”

Then there was the experiment where participants wrote about their expenses. That caused an increase in pain when either sticking fingers in hot water or being cheated in a video game.

I’m getting a kink in my neck as I lie here writing this, so I think it’s time for a money-counting break… (Hmm… it seems to have helped.)

Making Money is Like Taking Cocaine

As reported by Investopedia, recent science shows that our brains react to making money in much the same was as they do to taking cocaine. fMRI scans show that the same areas of the brain become active in both cases.

But, presumably, making money is healthier.

Credit Cards Induce You to Spend More

You’ve probably heard that people tend to spend more when using credit cards versus paying with cash. You may have even personally experienced the effect.

But what causes it? Part of the reason, according to research reported on by Psychology Today, is that a credit card reduces the “pain of paying.” It does so by both allowing a delay in payment, and, more importantly, by lumping together purchases into one statement/payment, so no one thing can be blamed for the credit card payment.

Want some good news? Read the a research paper: “Debiasing Using Decomposition: The Case of Memory-Based Credit Card Expense Estimates,” which tries to create, “a conceptual framework to examine how consumers incorporate memory-based and context-based cues in estimating past and future credit card expenses.”

Okay, don’t read it; I did that for you. Here’s your takeaway:

If you mentally separate charges on your credit card statement into sub-categories (eating out, clothing, etc.), and remember these costs when planning future purchases, you’ll spend less.

This is presumably a way to increase the “pain of paying,” making it a masochistic solution, but apparently an effective one. In any case, I refuse to give up the feel-good neuronal chemical release that comes from earning cash-back and other credit card rewards.

We Will Pay to Punish Unfair People

Why are economists so fascinated with ultimatum games? Because they seriously challenge the long-established economic model of self-interest, which says people act in a rationally-selfish way (or at least try to) when it comes to financial decisions.

The basic version of the game is simple. One person is designated a “proposer” and another a “responder,” and they have a prize to share. The proposer can offer any split he wants, which the responder accepts or rejects. If the offer is rejected both go home with nothing, a fact which experimenters make very clear.

For example, if the prize is $20 the proposer can offer the responder $10, $5, or even a dollar, and keep the rest for himself. The responder can only say yes or no.

The average (mean) split is 60/40; the proposer gets 60% and the responder gets 40% of the money. Of course, as mentioned, a proposer is free to offer the responder as little as 1% if he likes, but he might feel awkward or worry about a rejection if he goes too low.

Rationally, any split offered should be accepted by the responder, since some money is better than nothing. But in experiment after experiment, if the offer is low, 20% of responders reject it and goes away empty-handed.

There are various hypotheses for why so many participants are willing to walk away with nothing rather than take a low offer. One possibility put forth by some scientists is that responders desire to punish the proposers for the “unfair” offers.

Interestingly, the amount of money at stake doesn’t appear to affect the outcome. Even with larger amounts many responders reject low offers.

So here’s a question: If you played the game as a responder, and the prize was $100, and the proposer offered you $20 (he keeps $80), would you take your $20 or would you prefer to give up that money just to see the proposer suffer?

I would take even a dollar… but don’t tell the proposer that.

Testosterone Makes for Irrational Money Decisions

The Economist reported on an interesting version of the ultimatum game created by Terence Burnham of Harvard University. The prize was $40, but proposers were allowed to make only one of two offers: Either $15 / $25 (responder keeps more than half) or $45 / $5.

Only men participated, and  saliva samples were taken from all of them after the game. These were tested for testosterone.

Of the seven responders with the highest testosterone level, five had rejected a low offer ($5). Of the other 19 responders who got a low offer, only one rejected it.

Furthermore, the average testosterone level of those who rejected low offers was 50% higher than the level in those who had accepted low offers.

Testosterone apparently makes it more important to “fight” against the other player than to make some money.

Hmm… Offering a $45 / $5 split may seem unfair, but I’ll take the $5 every time. It’s the rational response… and the money will help me pay to have my testosterone level tested.

Money Makes People More Dangerous

Does it sometimes seem like rich people are a little too aggressive in their driving? Maybe even dangerous? Well, it’s true, according to research reported by Time.

In one experiment, observers watched intersections for drivers who didn’t yield to pedestrians or wait their turn at lights. As a marker for socioeconomic status they noted the age, make and appearance of the cars. In other words, they figured rich people drive expensive cars.

The results? Paul Piff, the lead researcher says, “The drivers of the most expensive vehicles were four times more likely to cut off drivers of lower status vehicles.” And three times as likely to fail to yield to pedestrians who had the right of way.

The experiment was part of a study on social class and unethical behavior, which brings us to our next item…

Money Defeats Ethics

Are your ethical feelings getting in the way of success? Fortunately for you, just thinking about money can help you overcome those inconvenient impulses to do the right thing.

All sarcasm aside, the news just gets worse. Not only does money reduce empathy, but doing something as simple as repeating money-related phrases can increase one’s tendency to lie. That’s according to research reported on by MarketWatch.

Again, the experiments were relatively simple. Subjects created sentences using various “word clusters.” Then they were put into situations where they had to make ethical choices. Those who were given money-related words lied more and made more unethical choices.

Sigh… Is human behavior really so easily influenced?

Yes, apparently so. Read on…

Why You May Go Broke if Your Neighbor Wins the Lottery

You’ve probably read about lottery winners who go broke. It’s really not difficult to spend money. Back when I was a repo man I even repossessed a car from a woman who had partied away her million-dollar lottery win.

But did you know that when someone wins a lottery, their neighbors are more likely to go broke? That’s what researchers Sumit Agarwal, Vyacheslav Mikhed, and Barry Scholnick found when they decided to “test the hypothesis that income inequality causes financial distress.”

Okay, it isn’t a huge factor. People are only 2.4% more likely to declare bankruptcy if they live close to a lottery winner. But it’s a real effect, and the bigger the winner’s prize, the more likely it is that his or her neighbors will go broke.


The researchers found evidence of “conspicuous consumption as a mechanism for this causal relationship.” In other words, the sight of the lottery winner’s new cars, boats, and such causes neighbors to try to keep up. The resulting expenditures sometimes go too far.

Hmm… If you win the lottery you could be quiet about it to spare your neighbors the risk. Of course then you might miss the opportunity to see the palms of all those relatives you didn’t know you have.

If you have your own examples of how your brain affects your financial decisions, or how those decisions affect your brain, please share… and keep on frugaling!

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