Edition 15 - The odd psychology of money.

Hello folks ??

I hope you’ve had a wonderful week and managed to get some rest over the weekend, if you can remember that far back!

To be honest, mine hasn't been great, but I always try and put it in perspective that it isn't the worst week I've ever had and that I still have a chance to make it my best. More to come on that at another date.

Thanks for the feedback last week. Many of you needed the reminder that sadly people don't care about PFM (Personal Financial Management) or banking! Glad you enjoyed it.

I come to you again on another Wednesday. The hump day of the week. I purposely publish this newsletter on a Wednesday so that the time from where you’ve come from at the start of the week is equal to the time ahead of you to close it out.?

Whether the week is half gone or half to come will come down to what you’ve got to do, whether you’re engaged in what you are doing (beyond just its obligation), and the make-up of your psychology.?

This psychology, your mind and collection of perceived logic and behaviours, leads to an understanding for you and others of why you do what you do. Or, more to the point, why you might not always do what you set out to!

Specifically, people's psychology plays a huge part in how they think about money, and it is a rather odd thing. How we feel about money and how we think about financial services can be impacted by a vast range of things, and this is the subject of this week’s edition.

I hope you enjoy it.?

The odd psychology of money.

I’ve sat through thousands of hours of jobs-to-be-done interviews, focus groups, usability testing and more to realise that people's understanding and grasp of money is, at best, odd and sometimes downright outrageous.?

I've conducted research where people have said they thought higher APR was a good thing, where people didn't know what basic percentages were, where bizarre financial models have been put in place to control their habits and even one guy who said he buried gold because he didn't trust the banks!

Odd habits, old habits, poor financial education and generations of quirky ideas passed on have warped many people's thinking when it comes to money.?

Sadly though, these things are not just cute little foibles; they can dramatically alter someone’s ability to move from just getting by to getting on with their lives.?

Understanding their psychology is a massive part of unlocking their potential.

When a pound isn't a pound, what is it?

I want to try something with you now, and let's see if it works.?

I want you to imagine you need a new pen for your bag. So you pop into a WHSmiths to pick one up. You spot your favourite brand of everyday pen and grab two of them to be sure you have a spare, but notice that they are ￡4 more expensive than where you usually get them 5 minutes down the road.

Now, what would you do? Would you walk 5 minutes to save yourself that ￡8?

In almost 99% of cases, I am guessing that you would. You would say to yourself, “these pens are usually 99p; spending ￡8 is a silly thing to do and I'm not silly therefore, the walk is worth the hassle”.

Now try that exercise in your mind again. You've popped into your local BMW dealer as you fancy a new ride. The salesperson listens to the research you've done and guides you to that new BMW of your dreams. It has everything you need and more so the things you want also. She gives you a moment to think about it and googling quickly; you find one down the road for ￡8 cheaper.

What would you do? Would you walk 5 minutes to save yourself that ￡8?

Again, in almost 99% of cases, I am guessing that you wouldn't. Instead, you would say to yourself, “￡8 difference isn't a lot, and actually, it shows this price is good and comparable, so I’m going to go for it.”

Weird isn't it? I mean that ￡8 is the same as ￡8. In a digital age, it's not even distinguishable from the other pounds in your bank account. It's just ones and zeros, but the context makes your feelings towards whether they are equal or not somehow different. Of course, you would have worked the same, toiled and gone to the trouble to earn those pounds, but how it is used then requires context.

Rational and Irrational Money

What if I told you that the pen from WHSMiths was needed urgently to sign a contract? Would it decrease your commitment to walk and save that ￡8? Becoming rational with a good rationale would help you contextualise the decision, wouldn't it?

What if you only wanted that BMW to show off to your friends and really the ￡8 wasn't the issue but the other ￡60,000 you couldn't afford. How do those things shape your thinking towards that spending? Was the ￡8 the problem or were the other parts the things that motivated you?

While my example was a dumb trick, I’m guessing it worked on you. Sadly we fall for this stuff every day.?

Humans are predictable at scale in our ability to not learn these lessons and continually be impacted by such tricks. We buy something in droves at 99p, but it becomes psychologically different if it were a ￡1.

We supersize meals for 20p not because we want more fries or ice but because it seems like a bargain. We see a ‘30% off’ sale price and are more likely to buy a product not because we think it's worth the cost but because we believe we are being smart.?

Organisations continually use these tricks to get us to part with our hard-earned money. Why do you think teaser rates are called teaser rates?!

Therefore, context and rational thought are critical in our ability to make good decisions when it comes to our money. Hell, in life more broadly also.

Oddly though, research has shown that being a cold-hearted machine in rational decision-making harms the potential for returns. This is caused, it seems, because too much or too little logical thinking are where issues come into play, and this is how risk is best calculated, in a range.?

If we want a chance to become wealthy beyond our dreams, we have to take risks. We need to be aware that we are being played front, left and centre by those businesses who claim to help us but equally, we need to be able to know where the limits are and spread the risk across the book. Spread betting in a sense.?

So…

So what do we learn from this? You are intelligent people, and you fell for a simple trick. We all do almost every single day of our lives. Some of those tricks cost us silly things, but some cost us and others significantly.

I write this in the same week that the global cryptocurrency market entered its worst phase ever, with Bitcoin dropping below $30,000 per coin and leaving millions of investors in a panic mode.

Bitcoin was more than 55% down since its all-time high of $69,000 in November. Other digital coins also suffered double-digit-percentage drops, led by Cardano (20%), Solana (16%), XRP (13%), BNB (16%), and Ethereum (10%).

Why has this phenomenon, let alone NFTs and many other digital assets, spread like Covid19? Simple tricks.

Growing up, I was taught by my dad, who was a big horse racing fan, that knowing the difference between gambling and betting is the best way to get ahead in life. In truth, he said, the only real difference is that you shouldn't gamble money you can afford to lose and should only invest money in a manner where you don't risk losing it all.?

So much more to unpack in this and something I will come back to in the future.

See you next week.

Dx