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The Mind-Wallet Connection

Is there such a thing as an unemotional money decision? Researchers don't think so. Psychologists and economists are making the case for a clear mind-wallet connection. The consensus: Not only are we irrational about money issues, we are predictably irrational.

Schools across the nation -- from Princeton University, MIT, and Carnegie Mellon to Stanford Business School -- have researched what makes us and our wallets tick. The things that trip us up? Everything from the way an expenditure is calculated and what currency we use to make a purchase to how much we want to avoid a financial loss.

Take, for instance, the example of public television pledge drives. Public television stations have long relied on the fact that they can get higher pledges by calculating the per-day amount of a donation (and the free mug/umbrella/canvas bag with a logo). After all, 41 cents a day is pocket change compared with $150 a year. Same amount, different context. It works like a charm. Nearly every time.

Our irrational behavior depends on not only how we calculate our expenditure but also what method we use to pay for it. Casinos use chips because the perceived losses seem less daunting to gamblers. After all, it's just 10 red plastic disks, right? Drachmas have the same effect. People spend more on items when they're shopping overseas because they don't rationally equate the Monopoly money with American currency.

The damage to our bottom line plays out fairly predictably in the stock market, too, where investors make decisions based more on emotional attachments than rational analysis. ("I just LOVE my Home Depot stock!") Studies show that investors systematically hold onto poorly performing stocks because they don't want to acknowledge a loss. On the other hand, many investors play it too safe because of an exaggerated perception of the stock market's risk. As a result, they put too much money in bonds and too little into stocks.

The Fool's opinion on these findings? Before making major (or even some minor) financial decisions, try to examine your options in several different contexts. And if that doesn't work, there's always group therapy.


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