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The Psychology of Everyday Life: Motivation and the Search for Happiness - The Psychology of Money

9 important questions on The Psychology of Everyday Life: Motivation and the Search for Happiness - The Psychology of Money

What is the theory of rational economic man?

Ever since the 1700s when the seeds of modern economic theory first developed, economists have assumed that people have a very simple relationship with money. The rational economic man is seen to act more or less like a calculating machine.

Financial decisions regarding how we spend, borrow, and save, are based on a rational assessment of our losses and gains. We compare the value of what we pay out to the value of what we take in and make decisions accordingly. If we make mistakes in these calculations, we eventually recognize them and correct our behavior.

How much debt are Americans carrying?

The table below is based on data taken from the Federal Reserve and shows the nature and amount of Americans' debt in 2007. The third column shows the percentage of American families (perhaps more accurately referred to as households) that hold each kind of debt. The fourth column shows the median amount of debt of the households that hold debt. Remember the median refers to the amount that equally divides the top and bottom half of the population.

What role does evaluation of risk and reward have in financial behavior?

Every financial decision involves risk and reward. The risk is the loss of money, for example, through a bad investment or through spending too much on something of little value. The reward is the possibility of making more money or the purchase of something we value.

How important are our emotions in our decisions about money?

Although we may think we make financial decisions through thoughtful analysis, in truth it is our emotions that do the lion's share of the work. Brain imaging studies show that the emotional parts of our brain are extremely active when we make decisions about money. In fact, the emotional brain is frequently more active than the parts of our brain involved with thought.

Therefore, in order to understand the psychology of money, we have to understand how emotion affects our decisions about money.

What role do fear and desire play in the psychology of money?

These are the primary emotions involved in financial decisions. Our fear motivatse us to avoid loss, in this case the loss of money. Desire motiveates us to pursue reward, such as money or the goods that money can buy. When desire for money becomes excessive and poorly controlled, we call it greed.

What problems do our emotions cause us when making financial decisions?

Even though our emotions have evolved over millions of years to help us adapt to our environment, they are not perfect tools and can often lead us astray.

For one thing, our emotions are geared almost entirely toward the present. Our emotions can tell us a lot about our needs in the present, but they are not good at telling us what we will need in the future. For that, we need thought and careful analysis.

Secondly, our emotions are stimulus bound, in other words they are highly and sometimes excessively responsive to cues in the environment.

What does it mean to be stimulus bound?

Not only are we primed to put immediate considerations over long-term ones, we are primed to respond to cues in our environment that signal immediate risk or reward. These cues (NL: signalen) can then influence our appraisal of risk and reward - and sometimes throw us entirely off course.

For example, when are people most motivated to stick to a diet: when they are in the store trying on bathing suits or when they are walking past an ice cream parlor.

How well do we evaluate the probability of risk and reward?

Our emotions are not very good at considering probability. We are highly attuned to the intensity of a risk or reward and get emotionally aroused by high value rewards or risks, but we do a poor job of balancing the intensity of a consequence with its probability.

For example, many people are more afraid of a terrorist attack than of hypertension, although far more people inthe developed Western world will die from heart disease than from a terrorist attack.

So does cognition play any role in financial decisions?

Of course we do use thought when making financial decisions. There is more to our psychology than just our emotions. We use cognition when we plan for the future, analyze complex situations, and calculate numerical amounts (after all, money is based on numbers). However, there are important limits to our analytic capacities and these limitations play out in our financial decisions.

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The Handy Psychology Answer Book | 9781578593545 | Lisa J Cohen

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The Psychology of Everyday Life: Motivation and the Search for Happiness - The Psychology of Money

9 important questions on The Psychology of Everyday Life: Motivation and the Search for Happiness - The Psychology of Money

What is the theory of rational economic man?

How much debt are Americans carrying?

What role does evaluation of risk and reward have in financial behavior?

How important are our emotions in our decisions about money?

What role do fear and desire play in the psychology of money?

What problems do our emotions cause us when making financial decisions?

What does it mean to be stimulus bound?

How well do we evaluate the probability of risk and reward?

So does cognition play any role in financial decisions?

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