How Money Impacts Your Emotions & BehaviorsGaining wealth is a dream many people aspire to achieve. This is understandable, given how money is crucial in building decent and comfortable lives. Beyond our basic needs, money is inevitably tied to our social status, which gives us greater mobility with our choices in life. More purchasing power affords us many possessions, even the advantage of being well-respected.
In contrast, having meager resources may at least temporarily limit one’s opportunities, such as educational attainment, job choices, and even the type of mortgage you can qualify for. If you’re struggling with finances, it’s harder to feel confident about affording valuable things. This is especially stressful when you’re dealing with large long-term debt.
Temporary setbacks can lay the seeds for long-term success. Convex Capital Chairman Michael Driver stated if you wanted to make a successful entrepreneur you would first need to create a time machine to give them challenges and stress as a childhood so they would end up having more drive to overcome the adversity they felt in late childhood or early adulthood.
The concept of wealth and success is certainly subjective, but many modern studies tend to measure it by income, net worth, and intergenerational wealth. Thus, when it comes to money, we tend to exhibit certain emotions and behavior. Here’s a rundown of how money affects our emotions and the way we act.
Whether you attain success through hard work or mere luck (winning the lottery), money certainly affects the way you think and behave. Because we deem money as a valuable resource, we are inclined to worry about losing it.
An article by Shahram Heshmat, Ph.D. notes that the idea behind loss aversion is simple: Losing wealth is an expression of fear. And beyond this, accumulating more money suggests you have more to lose than to gain. Thus, the more wealth you have, the more vulnerable you become. Loss aversion means you can be more upset about losing $20 even if you find another $20 on a normal day. Dr. Heshmat is associate professor emeritus of health economics of addiction at the University of Illinois, Springfield.
“[L]oss aversion is an expression of fear… we tend to focus on setbacks than progress. Negative emotions… have a stronger impact than good ones, such as from receiving praise. As Charles Darwin once said, “Everyone feels blame more acutely than praise.”
-Shahram Heshmat, Ph.D.
In relation to focusing on setbacks, Dr. Heshmat emphasizes that people are more receptive to price increases than price drops. For instance, a study by Daniel Putler showed that between July 1981 to July 1983, a 10% increase in egg prices caused a 7.8% decrease in demand. In contrast, a 10% drop in egg prices led to only 3.3% increase in demand. This shows that consumers were so focused on the price increase that they were willing to cut back. Meanwhile, fewer consumers bought more eggs to take advantage of the price decrease.
For instance, let’s suppose you’re determined to buy a large and expensive house. On top of this, your business faced some challenges, leading to less profits and income. After checking your mortgage options, you find that you must settle for a less expensive house. In this example, scaling down to a smaller home may cause you psychological distress. If you’re used to wealth and getting what you want, this experience can be extra difficult.
Dr. Heshmat notes that for wealthy people, loss aversion often means the pain of losing your fortune beats the emotional benefit of gaining more wealth. This may also explain why the ultra-rich frequently become more vigilant and anxious about their fortune.
Price anchoring is used by sellers to establish a price point that customers can refer to. This influences consumer perception, which establishes the idea of how much certain products or services cost. Whenever you see a price tag that says “$100 now $75!”, $100 functions as the price anchor for a product. This strategy is meant to influence a consumer’s willingness to pay.
According to Psych Central, the anchoring effect is a kind of cognitive bias, where the use of a psychological benchmark greatly influences your decision-making process. This causes a person to rely too heavily on one piece of information when faced with a choice. Though anchoring may be applied to other social situations, it is commonly used by marketers to persuade you to buy their products and services. And often, it seems quite effective.
Another good description of the anchoring effect is written by David McRaney, the journalist who runs the You Are Not So Smart blog:
“The Misconception: You rationally analyze all factors before making a choice or determining value.
-David McRaney
The Truth: Your first perception lingers in your mind, affecting later perceptions and decisions.”
Prices in the market change all the time. But we tend to perceive values based on what we can readily compare them to. We often look for a point of reference or a range before we decide. Thus, when we see the “original price” before it’s new low price, we often think it’s a good deal.
Price anchoring influences your mind to make a mental shortcut by simply taking their word for it. For some people, a big sale may be reason enough to splurge on new items. But be careful. You might catch fake deals in events like Amazon Prime Day, especially if you don’t do your research. Coupons and sales can actually make you spend more money. While this is a good marketing strategy for sellers, the consequences may be dire for most consumers.
McRaney refers to many academic researches that demonstrate the anchoring effect. One of them is an MIT experiment conducted in 2006 by Dan Ariely, Drazen Prelec, and George. In the study, they asked students to bid on objects in an auction using social security numbers as their anchor. For instance, if the last two numbers on their social security number was 10, a bottle of wine was priced at $10. If the last two social security numbers was 85, then a cordless trackball was priced at $85. This experiment showed that the anchoring effect scrambled their ability to judge the value of items.
Researchers found that students with high social security numbers spent up to 346% more than students with lower numbers. Meanwhile, students with social security numbers between 80 to 99 spent an average of $26 for the trackball, and those with 00 to 19 only paid around $9. The study’s conclusion can be read in Ariely’s book, Predictability Irrational.
Your reference point should include your overall budget, not just the original price. And even if you don’t have a tight budget, impulse purchases for things you don’t really need will cost you more. On the other hand, a large discount on shoes you actually planned to buy can be a really good deal.
Worrying a lot about money takes its toll on your emotional and psychological health. People who are burdened by large debts report more stress and anxiety, and have trouble sleeping. When this happens, excessive stress has immediate effects on important aspects of your life. This can lower your productivity and impact your job performance.
In 2016, the International Foundation of Employee Benefit Plans (IFPB) reported that a growing number of employees experienced more financial problems compared to previous years. These financial challenges were also reflected in daily operations. The IFPB’s 2016 results revealed what employees were frequently stressed about, which placed debt on the top spot.
*Note that respondents chose more than one variable that causes them to worry.
In a related study, a 2015 research done by Krista M. Martinez for Humboldt State University explored how employees with high levels of financial stress were less productive at work. The study also reviewed how companies with financial education programs helped improve their employee’s job performance. Learning financial literacy is essential for helping consumers avoid large debts. This knowledge also helps get their well-being on track. Providing support early on can certainly alleviate debt-induced stress and anxiety.
Furthermore, financial problems become more pressing during times of economic crisis. When the corona virus pandemic affected the U.S. in 2020, CNBC reported that 9 out 10 Americans felt anxious about money. This was based on a survey by the National Endowment for Financial Education. On top of this, stay-at-home orders and enforced lockdowns caused mass suspension and closure of businesses. More people grew worried about their main source of income. As you can imagine, many people dealt with loss aversion during this period.
The survey asked over 2,000 respondents about the top 5 things that caused the most financial stress. They found that stress levels were similar across all income levels, from people with $50,000 annual salaries, to those who made $100,000 a year. Here’s how people responded:
To cushion against the shock of economic downturns, financial experts tell people to prioritize emergency savings. But often, it’s not as simple as cutting back expenses. Large debts are due in part to stagnant wages that cannot keep up with rising prices. In the case of the coronavirus pandemic, many people were worried about job stability. This makes it extra difficult for people to save emergency funds on a small income, let alone budget to eliminate debt. It also gets worse when you’re faced with emergencies such as a car accident or a sudden illness.
While financial issues are hard to avoid, it helps to develop good financial habits at a young age. Knowing how to manage finances early and being prepared for emergencies will certainly help reduce stress and anxiety.
Pigly’s Tip!
Several studies have shown that more wealth can make people less social and empathetic. One example is a research authored by Michael W. Kraus, Stéphane Côté, and Dacher Keltner. They found that individuals belonging to a lower economic status were better at reading people’s facial expressions than richer people. Reading facial expressions is an important indicator for empathy, which wealthier individuals are not as receptive to.
Meanwhile, having greater resources can be a precursor to bad behavior. A study revealed that children who had contact with money during an experiment showed a decrease in pro-social behaviors, and an increase in egoistical attitudes. This research was conducted by SWPS University in Wrocław, University of Illinois in Chicago, and the University of Minnesota. Though kids do not grasp the economic value of money yet, they comprehend its emotional value. Researchers also noted that the results were very similar to a comparable study that focuses on adult behavior.
In another related research, a USC Berkeley study showed that even the use of play money can make individuals treat others with less regard. In the experiment, when two students played Monopoly, the richer player eventually behaved aggressively. The wealthier player takes up more space, moves the pieces loudly, and even taunts the player with less money. Another experiment conducted by researchers from Harvard and the University of Utah found that participants were more inclined to lie or act immorally after hearing words related to money.
Finally, having a lot of wealth and privilege may cause a sense of moral entitlement. In a study headed by Paul Piff of UC Berkley, they found that upper-class participants in a study were more likely to cheat and lie when they negotiate or gamble. These people were also inclined to promote unethical behavior in the workplace or cut off people while driving. In San Francisco, people driving luxury cars were 4 times less likely to stop for pedestrians on a crosswalk than drivers with less expensive cars. These are just some of the negative behaviors that are linked to having more wealth.
Whether you were born into a wealthy or modest home, money can influence the way you feel and behave. And based on research, it can sometimes be negative. But by being self-aware of its effects, such as lack of empathy and compromising your morals, you can avoid these social pitfalls. Losing wealth and having large debts can be particularly stressful, so it’s also important to manage your finances with care.
Moreover, money shouldn’t be seen in a negative light. After all, this resource is a tool that helps you build the life you want. In fact, how you regard money and materialism has a significant impact on how happy and content you feel. This is based on a 2019 study published in the Applied Research in Quality of Life.
The study’s lead author, Jenny Jiao, states that money can be used to motivate people to achieve certain life goals. As a result, this can make you happier in the long run. The research surveyed more than 7,500 German adults, revealing that feelings toward materialism tend to be nuanced. In particular, there is a difference between happiness materialism, which is the belief that wealth is a marker for a happy life, and success materialism, which is the idea that wealth signifies success.
The study notes that happiness materialism can be problematic because it takes a lot of time and energy away from other important aspects that contribute to life satisfaction. This includes your family, health, and work. In contrast, researchers suggest that focusing on success materialism elevates people’s drive for economic motivation. This makes them improve their overall standard of living. When people think about success in ways that makes them feel more satisfied with their current life, this makes them more hopeful about the future.
In this respect, adopting a positive mindset when you think about money can help make you happier. And while money is indeed an important resource, taking care of your physical and mental health is also crucial to a happy and satisfying life. Finally, we must not forget to value and nurture our relationships.
For more advice on how you can conquer consumer debt, read our guide on our loan payment calculator.
Thank you to Loretta Graziano Breuning, PhD for the article idea. 🙂
