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Emotion and Money

How emotions rule our financial decisions and attitude toward money.

At Rutgers–Camden, (left to right) Robert Schindler is a professor of marketing at the School of Business; Sean Duffy is an associate professor in the Department of Psychology; and John Smith is an assistant professor in the Department of Economics.
At Rutgers–Camden, Sean Duffy (center) is an associate professor in the Department of Psychology; Robert Schindler (left), the author of Pricing Strategies: A Marketing Approach, is a professor of marketing at the School of Business; and John Smith is an assistant professor in the Department of Economics.

Most of us would like to think that our financial decisions are based on rational considerations—cost versus benefit, need versus desire—but economists are increasingly aware that we’re driven as much by our hearts as by our minds. Three professors at Rutgers–Camden, who have studied the psychology of money, explain why we may not be playing with a full deck—or a full pocketbook.
                                                                                                                                           — Leslie Garisto Pfaff

RUTGERS MAGAZINE: Many economic theories as­sume that people make rational financial choices. Is it even possible to make nonemotional decisions?

Sean Duffy: Emotion is part of almost every human decision, but the extent of the emotion depends upon the nature of the financial transaction. There is little emotion in buying a cup of coffee, but a lot in buying a house.

John Smith: Most economists would agree that people can behave in a manner that is not compatible with rationality. As a result, most of the work on economic theory attempts to account for such behavior.

RM: Do we know whether certain personality types are more likely to want to amass a lot of money as opposed to spending it?

Robert Schindler: Psychologist Miriam Tatzel has used the term “nonspender” to describe people who want to amass money. They can be worried, suspicious, and stingy. On the positive side, free from the lures of consumer culture and the needs of social approval, they may be especially individualistic, self-reliant, and self-controlled.

RM: What forces shape our attitudes about money and influence our financial decisions? Gender? Upbringing? Mitt Romney, for example, has a reputation for being exceedingly cheap despite his wealth. The story goes that, when a pair of pliers fell overboard during a boat-repair operation, Romney dove in and scuttled around until he retrieved them from the harbor floor.

Schindler: Research has shown that parents often pass on attitudes toward money to their children, something that’s particularly strong between mothers and daughters.

Duffy: In 2011 Mitt Romney made $13.7 million; that’s $26 a minute. So if it takes 30 minutes to go to the hardware store to pay $8 for a new set of pliers (total cost $788, not counting gas) versus two minutes to fish it from the water (total cost $52), the rational choice is clear. That’s why he’s a millionaire, and I’m a professor of psychology at Rutgers.

RM: What makes some people play the lottery obsessively while others, who assume that the odds are against them, rarely, if ever, play?

Smith: Some people, the so-called “risk averse,” don’t like risk; some, the “risk neutral,” are indifferent to it; and some, the “risk loving,” prefer it, and maybe this accounts for compulsive gambling. But this isn’t an entirely satisfactory answer. Econo­mists have offered models of temptation and self-control. For example, people make interest-free loans to the government in the form of the deductions from their paycheck, because they worry that they won’t save in order to pay their taxes.

RM: Does socioeconomics enter into this? And would a better understanding of the odds cause some people to rein in lottery spending?

Duffy: There is a strong association between socioeconomic status and the purchasing of lottery tickets; wealthy people typically make investments in less-risky instruments such as stocks and bonds. A better understanding of probability and sampling space—the vast number of possible outcomes—would help people. Buying multiple tickets increases the likelihood of winning, but not by a lot. If you buy a million Powerball tickets, you still only have one chance in 175 to win the jackpot—not great odds for so much money spent. That said, I bought two tickets myself recently.

RM: What are some of the ways in which retailers induce us to spend by taking advantage of irrational attitudes about money? Why are so many things priced at amounts that end in 99?

Schindler: Even if we always remember to round up 99-ending prices, we also interpret them as signals of low or discounted prices, laboratory and field studies show. However, in the minds of consumers, 99 endings also carry negative connotations regarding quality and seller integrity. Discounts and bargains, although much beloved, are probably more important examples of retailer manipulation.

RM: How does the recent real-estate bubble reflect irrational attitudes about money on the part of lenders, consumers, and government?

Duffy: People often rely on incomplete information to make decisions, and hope also muddles clear thinking: people truly wished the price of their houses would ascend into heaven. One problem is collective forgetting: the people who experienced bubbles forget or die, creating new generations of gullible people.

Smith: Consumer behavior was driven by the view that housing prices would increase indefinitely, so home-buyers would agree to make unsustainable mortgage payments. Sensibly, buyers should look at monthly mortgage costs the way they would rent payments or the way real- estate investors do: the attractiveness of real estate as an investment is diminished when the rent received only covers a small portion of the cost of owning the real estate. The regions that saw the greatest decrease in prices were those in which the difference between the rental and purchase prices was the largest. When the rent-buy difference becomes too large, people will rent and housing prices no longer increase.

RM: That almost sounds like a rational, rather than an emotional, decision.

Smith: Some of the economic mechanisms that led to the crash might have been based on rational behavior, but much of the behavior that preceded the crash was emotional. •