Money and Life
Several economists have applied this perspective on the “ghost” lingering in our financial consciousness to investment decision making (Housel, 2020, pp. 13-14):
“In 2006 economists Ulrike Malmendier and Stefan Nagel from the National Bureau of Economic Research dug through 50 years of the Survey of Consumer Finances–a detailed look at what Americans do with their money. In theory people should make investment decisions based on their goals and the characteristics of the investment options available to them at the time. But that’s not what people do.
The economists found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation—especially experiences early in their adult life.
If you grew up when inflation was high, you invested less of your money in bonds later in life compared to those who grew up when inflation was low. If you happened to grow up when the stock market was strong, you invested more of your money in stocks later in life compared to those who grew up when stocks were weak.
The economists wrote: “Our findings suggest that individual investors’ willingness to bear risk depends on personal history.”
Not intelligence, or education, or sophistication. Just the dumb luck of when and where you were born.”
In this essay, I consider many dumb-luck factors as well as other non-rational factors that influence our financial decision-making. Specifically, I consider the psychological factors that lead to the frequent prioritization of money in our lives. The authors I will cite come not only from the field of psychology but also from the emerging field of behavioral economics, as well as fields of sociology, political science, and religion. My sources include financial advisors who encourage careful and thoughtful budgeting, alongside psychotherapists who warn us about the psychological and financial side of money management that can be destructive. I conclude by returning to the matter of happiness and money.
Levels of Monetary Concern
While a fair number of books have been written about the management of money—and even the psychology of money (Housel, 2020)—the challenge associated with this management is quite daunting. This is not only because money is saturated with emotions and lingering childhood issues (as I will soon note), but also because the reality of money exists at multiple levels. On the one hand, we can carefully manage our food budget by selecting the generic brand of mac and cheese or soup rather than the fancy name-brand version. We can choose whether to visit our friends in a different state based on the current cost of gasoline. it is an entirely different matter when it comes to home redecoration or management of stock holdings. We save one dollar by picking the cheaper can of soup, but decide whether to spend four thousand or seven thousand dollars on our home improvement. The cost of eggs comes up or down by one or two dollars, while our stock portfolio shifts up and down by as much as five or ten thousand dollars per day. And then there is the matter of our national budget and decisions regarding the expenditure of millions of dollars. Our pocketbook is hit by decisions being made many miles away in Washington D. C. It is full-fledged madness.
