Weird Ways Our Brains Control Our Money Habits

Neat freaks save good-looking money, and other quirky money rules we keep.

Jul 19, 2014 at 3:12PM

I'll admit it. I'm a sucker for money psychology studies. And it's not just because I write about money. On a sheer curiosity level, they're fascinating.

But they also serve as a great reminder that money is more about mind than it is about math.

It's interesting to see exactly how our brains work when it comes to habits like spending and saving. And not only is it interesting, it can be helpful too. Understanding how we're wired helps us have a better understanding of our own individual money habits. This is why articles on sneaky marketing tactics are so popular — they're helpful! It helps to know how our subconscious is manipulated to spend more so we can consciously do something about it.

I was impressed when April Dykman wrote about Keith Chen last year. He's the behavioral economist who studies the link between language and savings rates. Basically, Chen's findings were enough for him to assert:

"If you speak a language that doesn't distinguish strongly between the present and the future, you save a lot more because the future feels closer. If you speak a language that separates present and future events, the future feels more distant, which makes it harder to do things to care for your future self like save money, exercise, and eat better."

Obviously, this isn't to say we should all change the languages we speak to get rid of our concept of the future. We've talked about linking our present and future selves before, and it does help to be aware that our language can be yet another barrier in doing this. But it doesn't stop there. I've come across quite a few seemingly "weird" ways our financial habits are affected. Here are three more that I came across recently.

Disorganization leads to impulse spending

Here's one advantage to being a neat freak, I guess.

Researchers from the University of British Columbia and the Cheung Kong Graduate School of Business found that a disorganized environment can lead to impulse spending. According to the Chicago Tribune:

" experiments the authors found that people in a cluttered room were more likely to pay higher prices for products, such as a TV or movie tickets, compared with people in an organized room, according to the study, 'Environmental Disorder Leads to Self-Regulatory Failure.' Researchers predicted that if a person was responsible for his or her own messy environment — rather than ones created by researchers in the experiments — the effect would be even more depleting to their self-control."

The idea is that organization makes you feel more in control. And when you have more self-control, you're less likely to give in to impulsive shopping decisions. You wouldn't typically think cleanliness and spending affect each other, but your environment can have a subtle impact on your feelings of self-control.

We're more likely to spend dirty money

A study from a couple of years ago found that our spending is also affected by, simply, the way our money looks.

Researchers from the University of Guelph found that we're more likely to spend dirty, crumpled up bills and hold onto our new bills — except in social situations. When we're trying to impress someone, we usually reach for those new, good-looking bills. According to the University:

"In five different studies, the researchers gave subjects new or old bills and asked them to shop and spend. In all the studies, people spent more and took more chances with older worn money...'Basically, the physical appearance of money matters more than traditionally thought,' said Theodore Noseworthy, a professor in Guelph's Department of Marketing and Consumer Studies..."

They go on about how we tend to think of money as symbolic rather than a product itself. But this study shows that we do see some intrinsic value in money, in and of itself. And this is weird, because a dirty $10 bill will buy you the same amount as a clean $10 bill. We know that, and, somehow, we still value the clean bill.

We can use this knowledge to our advantage when it comes to paying with cash. You might try to only keep new, crisp bills in your pocket, for example. It might seem impractical and silly, but if these studies are any indication, human behavior often is impractical and silly.

We're less likely to spend larger bills

Similarly, we're less likely to spend larger bills. Researchers Priya Raghubir and Joydeep Srivastava conducted a series of studies that found when people had larger bills, they were less likely to spend it than people with smaller bills or coins.

But there was an interesting twist: When the subjects did decide to spend money, those who made purchases with large bills spent more, overall, than those with small bills.

It's actually been coined "denomination effect." In their paper, the researchers conclude:

"The results suggest that the denomination effect occurs because large denominations are psychologically less fungible than smaller ones, allowing them to be used as a strategic device to control and regulate spending."

In an article for Psychology Today, researcher and author Art Markman explains that this happens because of how we associate different values of currency. Simply put, small bills remind us of small purchases — like buying a cup of coffee; large bills are associated with large purchases. Our brains make these associations, and the associations affect our spending.

Markman suggests a pretty simple way to use this information to your advantage:

"If you are the sort of person who tends to blow through a lot of money making lots of small purchases, then you should probably avoid carrying lots of small bills with you...If you are the sort of person who tends to make large purchases on impulse (that is, you are penny wise and pound foolish), then you may want to avoid carrying around large bills... Instead, you should probably carry around a small amount of money in small bills to keep yourself from over-reaching."

A lot of this seems ridiculous, right? Our brains should think practically and logically. We should understand that five $20 bills are the same as one $100 bill.

But again, money is more about mind than it is about math. This is why, as silly as it might seem, the envelope method works. It's why the debt snowball method works.

Often, our brains aren't practical. They're weird. Rather than try to deny that fact, it might make more sense to understand it. These studies are always debatable, but a little awareness about human nature can help you work with your habits and develop better ones.

This article Weird Ways Our Brains Control Our Money Habits originally appeared on GetRichSlowly.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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