Nigel Latta on why humans are 'super-flawed' with moneyby Michele Hewitson
Our brain plays tricks on us, Nigel Latta tells Michele Hewitson.
Humans have been around for about 70,000-ish years, and over that time our brains haven’t really changed at all because it’s just a blip in evolutionary terms. So that means our brains, which evolved to hunt and gather, are now being asked to do abstract financial things with money, which is itself an abstract and very recent invention. So where once some of the most complex decisions we made were things like, “Is that going to eat me?”, now we’re having to decide whether to fix or float our mortgages. We can make complex decisions and solve complex abstract problems, but we’re not naturally good at that. It doesn’t happen automatically; you have to deliberately set about thinking things through. People like the psychologist Daniel Kahneman have spent their entire careers looking at just how flawed human decision-making is, and it’s super- flawed when it comes to money.
And how does that primal money brain work, in practical terms, in today’s world?
We don’t have a special part of the brain for dealing with money, so when you see a sign in a store that says 50% off the price of something, your cave brain tells you you’ve saved money, when really all you’ve done is spend money. The reality is if you spend $50 on a fancy hat that was reduced from $100 on sale, you didn’t save any money. In real terms you spent $50. What we try to do in the series is show people all the hidden, weird, irrational things your brain tries to do to you when it comes to money, because if you understand the tricks your brain is playing on you, then you can play a few tricks back.
Is there a psychology of money? And if so, how might it be explained?
The series drew heavily on the discipline of behavioural economics, which is a very substantive body of knowledge about humans and money. For us it was like a dream come true: a huge pile of peer-reviewed knowledge that no one else had really got their teeth into. The beauty of behavioural economics is that instead of thinking of humans as rational decision makers, it describes us as we really are, with all our weird flaws and irrationality laid bare. It also meant that we had a way to make people feel better about some of things they do with money that may not make sense. The truth is, we all do.
Some generalisations: Do you think many New Zealanders hate thinking rationally about money?
It’s not so much that we hate thinking rationally about money, it’s just that it’s not natural to be rational. So, for example, our brains experience saving money pretty much like we’d chucked it in a hole and buried it. Saving money feels like losing money. The experience in our brains is one of loss.
Are many of us are wilfully ignorant about money?
Financial happiness is a pretty simple formula: spend less than you make. We all know that. The real mystery is: why don’t we do it? What we try to show people in the series is that there are a whole bunch of forces acting against you when it comes to money. Some of those are about how we think about things, and some of that is the world exploiting our flawed irrational natures to get our money out of us. For a long time, the only way you could spend money was to take it out of your pocket and hand it over to someone, but now you can spend it without doing anything. Uber is a perfect example of that, because I can get into the car, it takes me somewhere, and I get out, and I feel like I didn’t spend anything, when really the app is taking the money from me without me even having to push a button.
Are attitudes to money partly cultural?
Without doubt there are cultural differences in how we think about money, and there are huge and complex debates about why all of that is. One of the more interesting arguments I’ve heard is that language differences between, say, English and Mandarin explain the differences in savings performance between the Western countries and the Chinese. We save about 2%, while they save an impressive 30%. So clearly there are some fairly significant cultural differences that impact on what we do with money, but there is still a huge amount of debate about exactly why this is.
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