How psychology shapes our view of money

My wife was talking to our 7 year old this week about pocket money. They have been learning about the jungle at school and his class recently adopted an animal via the WWF.

He had asked if we could adopt a gorilla (which he named Godzilla after confusing the 2…) and they were discussing how he would pay for the regular donation. He has agreed to clear the table and put dishes in the dishwasher in exchange for pocket money, some of which will go to the WWF for Godzilla.

I was listening to this conversation from my office as they were next door, and was reminded of how our views on topics are shaped. Psychology teaches that 2 things are responsible for how we view any particular topic: the first experience we have, and the most recent. These biases, primacy bias and recency bias, shape our views of money as much as anything else.

Consider this: what is your earliest experience of money? For some people it will be family having money to do the things they want to do, take holidays, buy toys etc. For some, it will be abject poverty. Of course for many, myself included, the reality is somewhere in the middle. These early experiences shape how we interact with money for the rest of our lives.

Similarly, the most recent experience you’ve had will have an impact. I have clients who tell me of a friend or associate that has been made redundant or lost a friend, and they are deeply affected by the experience of the individual’s and their family. Often this prompts action. Perhaps an easier example to understand is this – when is the most common time to add a burglar alarm to your home? Unfortunately, the answer is immediately after you’ve been burgled. This is recency bias in action.

How then, does this apply to us all? Consider your earliest experience of money or investing, or pensions, or insurance. What happened? What do you remember of it, of the way you felt as it was happening? For me, the global financial crisis of 2008 is the first time I remember learning about investments and markets, back when I worked in a bank in Glasgow. I remember our customer’s fear, the transferring money to different banks within the FSCS limits, the decisions to move away from investments.

Think about your recent experiences of investing or personal finance. What has your experience been of the past 18 months or so? Everyone has their own experience, including me, and it shapes our response to events now.

So what can we take away from this? I think it’s incredibly important that we are aware of primacy and recency bias, not purely to understand some abstract theory of psychology, but to make sure it doesn’t adversely affect our decision making today.

We must factor these experiences into our decision making but always look to the future and to what is to come, rather than solely focus on what has happened before. That means deliberately deciding what is important to us and to our families and shaping decisions based on this, on everything from moving home to retirement to helping a younger generation of our family.

Which brings me back to our son. My hope is that his experience now of earning a little pocket money to do something he wants to do (with Godzilla) will help him understand that money isn’t free, and that to achieve his goals as an adult will require focussed effort in pursuit of something important to him.

Continuing this theme, something successful families do is agree family goals and values. This doesn’t have to be some formal process with a written plan or anything (although it might do). Simply deciding what is important to you, and what values you want to teach your children can be really helpful in how you approach issues with them.

For us, the connection between effort and reward is important. My wife and I work hard and want our kids to understand this is necessary for success. Our hope is that learning this now will make it easier for them to understand things later when work is required; through exam season at school or university, or through work afterwards, or beyond this to their own families.

The easy path would be for us to pay the small amount to WWF for the gorilla, but can our son really appreciate the value of it without the work? I don’t think so. Time will tell. In the meantime, I need to figure out where I’m going to keep a gorilla.

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