If I was to give you $1000 right now with no strings attached I wonder how you’d choose to spend it? Would you make wise choices, perhaps saving or investing it? Would you pay off some debts or buy a family car? Maybe the only answer is simply one long pool party until the cash runs out!
Lets say that after receiving your $1000, I then offer you two options. Option one: flip a coin. If it lands on heads I give you an additional $1000, but if lands on tails you end up getting no extra. Option two: I simply give you an extra $500, again with no strings attached. Which option do you choose?
According to Yale Professor of Cognitive Science Laurie Santos, the majority of us would pick option two and receive an extra $500 dollars with no risk.
Turning The Tables
No let’s say I give you $2000 dollars right now, and offer you two similar options. Option one: flip a coin again. On heads you lose $1000, on tails you lose nothing. Option two: you simply hand back $500.
Which would you choose?
Dr. Santos found that this time the majority of people would choose to flip the coin and take the risk. Even though the amounts of money and the choices given here have exactly the same outcomes as the first experiment, we choose very differently.
When there is a gain involved, we play it safe. Only when we risk losing something are we more inclined to roll the dice.
An Evolution Of Irrational Thinking
Dr. Santos tracked this behavior through 35 million years of evolution by studying the behavior of today’s primates. This irrational thinking is therefore part of our brain’s natural wiring!
And it makes sense when you think about it. How can such an incredibly intelligent race as human beings be so consistently dumb when it comes to making financial decisions? The recent crisis of credit is the most obvious modern example.
How Does This Help us?
The first way of solving any problem is acknowledging that there is one. Once we accept that there’s a problem, we can look at the causes and adopt habits to help us change.
By nature we make slightly selfish, instantly gratifying financial decisions. We do this irrationally because of our brain’s wired-in assumptions about risk, gain and loss. This is our problem. And we know it doesn’t just come from context or the complicated world that we live in because we see comparable behavior in other primates.
Hack The Cause And Fix The Problem
Dr Santos’ findings tell us that when there is a gain involved, we tend to play it safe. However, when we might lose something we tend to take more risks. This irrational behavior is more of a knee-jerk reaction than a considered approach, and when it comes to money that’s bad.
Look back at the initial thought experiment. Would you choose the same options now? Would you play it safe in both instances or take a risk both times? Whatever you choose, at least now you will make the decisions with more information.
Now that we know we’re just a little bit dumb with money by nature, we will not be as blindsided by it when money choices come. Let’s learn to look financial decisions directly in the face, hack the cause and fix the problem.
You never know – perhaps in another 35 million years our more highly evolved descendants will thank us for it!