Humans Are Bad With Money

| 2/4/2009 4:56:55 PM

Cash MoneyPeople can do their own taxes, control their spending, contribute to retirement funds, and psychologists will still think they’re irrational about money. And more than likely, they're are right.

In many situations, people think more about the size of numbers than what they represent, according to an article in Science Daily. Using studies on risk aversion, psychologists at Ohio State University showed that people think of 300 cents as greater than $3, even though they hold the same value.

People also think of money “in terms of percentages, not in terms of absolute numbers,” behavioral economist Dan Ariely told Marketplace. He gave an example: If a person found out that they could save $7 on a $15 pen by walking five blocks, many people would do it. If they were told they could save  $7 on a suit that cost $1,015, most people wouldn’t bother.

Both examples show how people can be entirely irrational, even when working with small numbers. When it comes to $700 billion bail out plans, I shudder to think.

J. Gordon
2/11/2009 11:33:34 AM

We may not be "totally irrational," but we are coming to recognize that we are pretty crazy when it comes to money. In fact, the 2002 Nobel Prize in Economics went to a psychologist (Daniel Kahneman), not an economist. And Kahneman apparently claims that he never took an economics course in his life. But he has been contributing to our knowledge of economic topics for many years. See:

2/11/2009 8:30:23 AM

Money is a human-made concept that came about when some folks had more stuff than they neeeed to use or eat in order to subsist on at the time in the areas the lived in along with other folks who weren't so fortunate, actively intelligent and/or visionary/hyperactive. Whatever the cause locally of this surplus being in the possession of some folks with other folks locally or at some distance with shortages of same, came bartering, trading and the idea of representing the value of goods and service with coins and other simpler objects arose and became acceptable here and there, until today we have a very complex and almost universal invisible (not even paper) money market and exchange rates for our global trades. Psychological fact is though that long ago we humankinds have forgotten (most of we) that money is our make-up, mark-up and make-one-another-believe-in semi-conscious or mostly-unconscious societal habit today. It's been that way a long long time actually, although it's accelerated so very much since our nation and other nations industrialized and small farming and local business communities where work and exchanges were visibly and viscerally obviously closely related, money has seemed-to take-on a-life of-its-own. "Seemed to" is where the psychology of money of course lies, and where it births ideals like "consumer confidence indexes" and other ever more abstract measurements of just what we're willing as a now global group of villagers to believe and trust in extending ourselves into and with one anothers' offeringss and buyers-into collectivities at any time. The time frames and the volumes of stuff to be traded both are today accelerating like-mad and so is the stuff being offered and built. So psychology is what money is about more than ever today; and we need to pause and reflect as well as act-out our now very grand and planet-affective impulses and learned-behaviors about what it is we actually do want,

JWT Meakin
2/10/2009 7:46:18 PM

re: percentages, not absolute numbers. True, but not the whole truth. To take the example of the pen and the suit, and to add some imaginary numbers of my own: I get through a pen a month and buy a suit every three years. Savings from the behaviour described: Pens: $84/year. Suits: $2.67/year. Not totally irrational.

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