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2011-04-21 09:38:09
By Megan Lane
The US has its debt downgraded, UK inflation suddenly falls, the Eurozone
interest rate rises and China's growth rate stabilises. Ordinary people across
the world are faced with a wealth of economic news, but are their decisions on
money really governed by emotion?
Money is emotional. Debt sparks worry. A windfall is exciting. And many people
dose up on retail therapy, shopping to feel better.
"Ask people what emotions are most frequently associated with money, and this
is the rank-ordered list: anxiety, depression, anger, helplessness, happiness,
excitement, envy, resentment," says psychologist Adrian Furnham.
He is co-creator of BBC Lab UK's new Big Money Test, which explores links
between personality and money behaviour.
Because even financially astute people have bad money habits, he says, and
there are five archetypes:
their money
- and get a short-lived high, often followed by guilt
make them happy
expected to pay full price
even when losing - as a win brings a sense of power.
Brian Capon, who in the 1970s was assistant manager at Midland bank branches in
the UK says state of mind affects the way people approach financial decisions.
"Someone who has just found the car or house of their dreams can be so focused
on borrowing the cash to buy it that they might not be too bothered about the
interest rate they pay, or how accurate the information is.
Start Quote
'Mood' spending had to be in cash - so if you didn't have the cash, you
couldn't spend it
End Quote Brian Capon on the 1970s
"Often the focus can be much more on getting the cash rather than whether they
can afford to repay it," says Capon, who now works for the British Bankers'
Association.
In his day, a bank knew customers' lives - and money habits - inside out.
"The manager or assistant manager used to look through all the credit slips and
cheques every day, and over a period of time could build up a picture of
customers' spending habits.
"The general feeling was that you shouldn't spend what you didn't have, and you
should save up to buy something you wanted. Because not many people had a bank
account or easy access to credit, 'mood' spending had to be in cash - so if you
didn't have the cash, you couldn't spend it."
How times have changed.
Britain's debt mountain, including mortgages and credit cards, is 1.46tn,
close to a record high - even though homeowners paid off more of their mortgage
borrowings in 2010 than in any other single year.
Rows of Edwardian terraced houses in Sussex Instead of spending, many are
paying off mortgages
Levels of personal debt started to shoot up in the 1980s when relaxation of the
rules made lending and borrowing far easier than ever before. But this hasn't
been matched with success in educating people to manage their money well.
While today's school pupils are taught how to read bank statements and unpick
financial abbreviations, Which? consumer magazine money editor James Daley says
those schooled before this curriculum change rarely seek advice - unless they
hit crisis point.
Too many people are in denial about their finances, he says, because thinking
about it makes them feel bad.
"In Britain we have a tendency to be spenders rather than misers. People get
locked into a lifestyle they can't afford. They should meet somebody who's been
made bankrupt and find out how awful it is."
Start Quote
In Britain we have a tendency to be spenders rather than misers
End Quote James Daley Which? money editor
The government should switch from campaigns, like patiently explaining annual
percentage rate on loans, to shock tactics, he says.
"I'm surprised we don't have public safety films about over-spending and debt
like the ones for smoking. That would break through to the older generations."
Open University psychologist Mark Fenton-O'Creevy, another co-designer of the
money test, says a little knowledge can be a dangerous thing.
"People whose higher education had a financial component are more likely to
make mistakes with their investments. They think they know what they're doing,
and make rash choices.
"Think about how people get into financial trouble. A person told their credit
card is about to be taken away because of serious debt cheers themselves up
with a spending spree while they've still got it."
Men loaded with shopping bags The national pastime
They know this will put further strain on their parlous finances, but shopping
is their way of dealing with stress of debt.
He's involved in the pan-European project xDelia to test whether innovative
techniques such as immersive games might help people gain the necessary skills
to make better financial decisions.
The aim of the money test is to test the theory that how we manage our emotions
- particularly when stressed or in an unpleasant situation - affects how we
manage our money.
Because knowing what APR means - or how to work out the best discount, or read
a bank statement - is just a part of it.
In my view most people are sheep and are led. Prior to the late 70 s money was
tight, you had to fight for a bank loan then they realised that people spending
on credit generated profit and fuelled a false economy for which we are now
paying. As a result people no longer understand their own responsibilities as
someone will bail them out and no one is held accountable for their actions any
more.
The real problem is a disconnection in many people's minds between entitlement
& obligation. Because of bankruptcy losing stigma, there is no reason for
people to take responsibility for their own actions. Even the comments logged
before this one blame the banks and marketing for borrowers' bad habits. If the
issue discussed was booze or drugs, we would be quite clear where the real
problem lies
If people were rational about money then they would stop buying all the rubbish
they don't need. This would be an economic disaster. In this case I think we're
literally better off being irrational.