Duncan Ville

Archive for the ‘Finance’ Category

Another downside of our silence about money is that we become even more likely to make financial decisions based on emotion rather than on logic or research. In Why Smart People Make Big Money Mistakes (Simon & Schuster, 1999), a terrific book that I recommend to all my friends and clients, journalist Gary Belsky and psychologist Thomas Gilovich summarize a new branch of economic research, called behavioral economics, that examines many of the most common traps that lead us to make poor money decisions.
Let me give you just a few examples. If you tend to treat your hard-earned income differently from the way you treat other money—say a tax refund or a lottery winning—you’re guilty of what behavioral economists call mental accounting. This concept, developed by Richard Thaler of the University of Chicago, describes our tendency to categorize and value our money according to its source or how we spend it. Mental accounting can be dangerous, because in reality one dollar is worth just as much as the next. One hundred dollars that you get from a windfall will buy you just as much as one hundred dollars you’ve saved. Likewise, if you feel much freer spending money when you use a credit card than when you pay in hard cash, you are likely practicing a form of mental accounting.
There’s also what the behaviorists call the “sunk-cost fallacy.” If you’re the type who continues to pour money into an old rattletrap, you should train and discipline yourself to think hard before you throw any more good money after bad. If you wouldn’t want to buy the car today, knowing that it needs repairs, why would you want to waste money fixing it up just because you already own it?

What does money represent to you and your loved ones? For some of you it means success. For others it may signify independence, freedom, security, or something else entirely. To find out Dr. James Cottfurch, principal of Psychology of Money Consultants, a Los Angeles—based company, suggests in his workshops that you try and think of a single symbol that encapsulates how you feel about money. It could be anything from a soft, warm, furry bunny to a runaway train. One of my friends sees money as the sun, because of its ability to make
things grow. Actually, the sun s not a bad metaphor, as it can also burn you if not treated with a certain amount of respect and restraint.) This friend even surrounds herself with sun images, from a decorative tile in her kitchen to a copper and brass sculpture on her desk, to remind her of the positive role that money plays in her life. It’s her way of staying focused on what she’s trying to achieve and of keeping some of her more negative and self-defeating money attitudes at bay.
What you adopt as your money symbol may surprise you and may reveal attitudes about money that you didn’t even know you had. Or not. Either way, comparing notes with those close to you, or even brainstorming about financial symbols together, might prove to be very insightful.