The way we think about spending and saving is frequently irrational. For example: The more something costs, the more careless we are about saving money on it compared with smaller purchases. But why? Psychology and neuroscience have some answers. While we may think we’re in control of our financial decisions, psychology lecturer Claudia Hammond says research shows we’re wired for certain behaviors toward money—some of which can hurt us. But she says learning about these tendencies can help us take back some control. Understanding the psychology of money and how science can teach us to make better financial choices.

Guests

  • Claudia Hammond BBC broadcaster, writer, and psychology lecturer for Boston University in London; her new book is titled "Mind Over Money: The Psychology of Money and How to Use It Better"

Read a Featured Excerpt

Excerpted from MIND OVER MONEY by Claudia Hammond Copyright © 2016 by Claudia Hammond. Reprinted courtesy of Harper Perennial, an imprint of HarperCollins Publishers.

Transcript

  • 11:06:53

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Research shows that money can have a profound impact on the way we think, feel and behave. Understanding why our brains approach money the way they do, we can learn to make better financial decisions. That's the idea behind Claudia Hammond's new book titled "Mind Over Money: The Psychology of Money and How To Use It Better." Claudia is a broadcaster for the BBC and lectures on psychology for Boston University in London. She joins me from a studio in London.

  • 11:07:33

    MS. DIANE REHMAnd throughout the hour, I'll be interested to hear how you regard money and its place in your life. Give us a call at 800-433-8850. Send an email to drshow@wamu.org. Follow us on Facebook or Twitter. Thanks for being with us, Claudia.

  • 11:07:55

    MS. CLAUDIA HAMMONDWell, thanks very much for having me. It's lovely to be on the show.

  • 11:07:58

    REHMThank you. You know, you started this book with an incident where a foundation burned a million pounds of money. I watched the video and watched these young men as they were interviewed after the deed was done. There was no rhyme or reason to why they did this or why they believed it had any significance at all. What did you make of it?

  • 11:08:31

    HAMMONDYeah, this was an extraordinary thing that the band who had been called KLF and who had big hits in the early '90s with songs like "3AM Eternal," they made a million pounds and they renamed themselves the K Foundation and they decided that what they would do with their million pounds, as a work of art, was how they explained it, was to burn it. And so they went to this tiny island off Scotland. They found a deserted hut and they burnt their million pounds in, you know, in 50 pound notes.

  • 11:09:03

    HAMMONDAnd it took them ages. And as you say, you can still watch the video of them burning it and it's painful to watch. And people got so angry with them, which is what I think is really interesting. People were furious with them for doing it and they were on all sorts of programs trying to explain themselves afterwards and trying to explain why they did it. And they were mystified as to why people were to upset with them because they said, well, there's not less bread in the world. There are not fewer apples in the world. It's just paper.

  • 11:09:32

    HAMMONDWhat are we worrying about? And yet people were really, really angry.

  • 11:09:36

    REHMAnd what were people so angry about?

  • 11:09:41

    HAMMONDI think what they were so upset about was that he'd taken away -- the two of them had taken away the potential for the money, that money, in a sense, is a tool for doing whatever we want and the amazing thing about money is that you can choose what you do with it. We don't all have to spend it on the same things. And so I think they had taken away that opportunity and so people would say, oh, well, they could've given it to charity and done something useful with it, which is true, but people don't get upset with rock stars who waste their money in other ways.

  • 11:10:14

    HAMMONDPeople don't mind if they, I don't know, spend it on sports cars and champagne and things like that. You know, we might say, oh, wouldn't it be nice if they gave it to charity, but we're not angry in the same way. We think that's normal, if you like. And yet, what they did was nothing with it and that was what people couldn't bear. It was that waste.

  • 11:10:32

    REHMSo for you, what that demonstrated is exactly what?

  • 11:10:40

    HAMMONDIt demonstrated that we do see money very strongly as a tool and that we have a very profound strong psychological relationship with money and so if we see it destroyed, we do get very upset about that. And there have been experiments done since, particularly in Denmark using brain scanners where they put people in a brain scanner and then show them a video of a woman tearing up big notes of money and people don't like it. They say they feel very distressed. But what's really interesting is when you look to see which part of the brain is affected, it's a part of the brain that deals with using tools, using, say, a pen knife to open something or some cutlery or something like that.

  • 11:11:23

    HAMMONDSo it's slightly surprising, the area that's involved, and I think this does suggest that we see money very much as a tool and also, at the same time, and I think this is what makes money so unique, we see it as a drug. And so it is the one thing which affects the brain in terms of a future reward, if you like. If you put people inside a brain scanner and give them some apple juice, you know, a squirt of apple juice or some wine or some chocolate, we see the reward centers of the brain light up, if you like.

  • 11:11:54

    HAMMONDThey're activated. If you promise them some chocolate later, the same thing doesn't happen, but if you give them some money while they're in the scanner, even though they can't spend it till later so it's still a promise of the future, they -- those same reward centers light up.

  • 11:12:09

    REHMInteresting.

  • 11:12:09

    HAMMONDSo money sort of acts on the brain in that way as a kind of drug. We're kind of obsessed with it, what it can do for us.

  • 11:12:15

    REHMBut Claudia, don't our attitudes about money usually begin to develop in childhood from what our parents views of money were?

  • 11:12:28

    HAMMONDThey do. They definitely do. So in a way, they brain responds in one way and that's something we've learned. You know, we've learned when you're very little that you shouldn't waste money, but we also do learn a lot about our attitudes from it from watching what our parent do, what they say they do, how when they're in the shop, they might say, well, you can't have that one, that's too expensive, we can't afford it. But really little children, I mean, it's really sweet. I was talking to some 4 and 5-year-olds about money last week.

  • 11:12:53

    HAMMONDAnd if you ask them where it comes from, they don't really know. They say it comes from the bank. That's fair enough. Or they'll say it comes from shopkeepers. So they see their parents get change and they think that's them being given money when, of course, they gave over more money in the first place. And if you say, where do the banks get it, did your parents put it there in the first place, they don't see that connection. And they don't see the connection of money with work at that really young age.

  • 11:13:17

    HAMMONDIt's only later that that comes along. They just see it as this thing that just comes out of holes in the wall and is just there. And they even said to me, which I thought was really sweet -- I asked them if they had had chocolate money and they said yes, and I said which would be better, having lots of chocolate money or lots of real money and they all said chocolate money would be better. Not realizing they could buy lots and lots of that, of course, with some real money, which is quite sweet.

  • 11:13:38

    REHMExactly. I also wonder about the use of credit cards and the extent to which that has changed the whole dynamic of how we feel about what we spend. In other words, it seems as though with the use of that credit card and not handling that money that we sort of put aside how expensive it is or how much we may be wasting. Credit cards make a difference.

  • 11:14:12

    HAMMONDThat is definitely the case. There is something about having an actual note in your hand that makes it feel very real, just as we're upset about a note being torn up, and we don't feel the same way about things that are on cards, spending on cards. So there have been some fascinating experiments done about this. There was one in the U.S. actually where they followed people's spending for a year in supermarkets and half of the people always bought it on a card and half of the people always spent cash.

  • 11:14:39

    HAMMONDAnd the people who spend cash actually spent less. They also bought fewer unhealthy snacks and things. So it's almost as if the money doesn't count and kind of neither do the calories, that they somehow don't count either. And also, they've done experiments where they asked people when they've just used contactless payments, which are getting much bigger in many places now where you just tap your card on the payment thing, they asked people after that how much they've spent in a shop when it was just a very small amount, just a few dollars.

  • 11:15:08

    HAMMONDAnd people were much less likely to know the exact amount than they do if they've spent the cash because when you get the cash, you've got to work out, oh, I need a five and a one and a one and you've got a cognitively process that money. And the same doesn't happen with a card. So in a way, if we are buying things on cards and after all, it's really convenient, what we need to do is to imagine taking that money from a cash machine and imagine what we would think then if we'd taken it from an ATM and whether we would still spend it in the same way.

  • 11:15:37

    REHMI don't know about the UK, but here in the U.S., credit card debt is very, very high and one wonders if that isn't because of exactly what you're saying.

  • 11:15:52

    HAMMONDYes. I mean, it's very high in the UK, too, and going up all the time. And yeah, I think it doesn't feel quite real if you're not actually touching the money and so we have slightly different attitudes to it. We haven't really got used to, yet, to the idea of figures on a screen representing the same thing as actual money. And, of course, you can't see the amount. I mean, I do wonder whether, in the long term, technology will come to the rescue 'cause I think often with these things, technology, you know, we worry about the problems it causes and then something else is invented and we get used to it and we become accustomed.

  • 11:16:25

    HAMMONDSo I think rather than us all being bankrupt in the end, what might happen is you get cards which, I don't know, they could cleverly tell you what your balance is each time you do it. Maybe something will appear on the card. It could be that in the future, it becomes more obvious how much money you have in your bank account rather than less and there could be, you know, they'll be apps on your phone or already are apps which can tell you exactly what you're spending. So I think technology might rescue us in the end, but I think at the moment, we're in a kind of midway where we're trying to deal with that and yet, it's still real money, but it doesn't quite feel real to us.

  • 11:16:56

    REHMDo we have any idea what percentage of purchases are made with cash these days and what percentage with credit cards?

  • 11:17:10

    HAMMONDI mean, that's an interesting question. Certainly in the UK, it is -- they've predicted that in January, next year, January coming up will be the moment where cashless payments, so any form of card, overtakes cash for the very first time. So it's been -- and I think that is similar in other countries so it's been almost equal and it's just about to overtake it. So, you know, cash is dwindling and it is certainly being used for -- cards are being used for smaller and smaller things now.

  • 11:17:37

    REHMClaudia Hammond, her new book is titled "Mind Over Money: The Psychology of Money and How To Use It Better." We're going to get to how to use it better after we take a short break.

  • 11:20:02

    REHMWelcome back. My guest is Claudia Hammond. She joins us from a studio in London. Her new book is titled "Mind Over Money: The Psychology of Money and How to Use It Better." We have an email from Emma, who asked, "Did you come across studies that say anything about how we make choices as consumers, especially when it comes to major purchases. How can we do better at choosing a bargain?"

  • 11:20:44

    HAMMONDWell, that's a really good question, Emma. And there has been actually lots of research about this. And actually, we're not very good at picking bargains. We tend to think we are. You know, most of us think we're above average at spotting a bargain, just as most of us think we're above average at driving, and you know, we can't all be above average, because somebody's got to be average or below average. And the same happens with bargains. So there are various mistakes that we tend to make when we're looking at prices and trying to judge what's good value.

  • 11:21:15

    HAMMONDThere's one thing that's very easy for people to put into practice themselves, and to be very aware of, and that is when items are laid out in shops or online in threes. And this very often happens, and often happens with more expensive things. So if you imagine that you are going to buy a laptop, and all you want is a cheap laptop, nothing fancy. And you go online, or you go into the shop and you see something very cheap, just a few hundred dollars, and you think, yeah, that would probably do fine.

  • 11:21:43

    HAMMONDAnd next to it, there's something slightly more expensive, only slightly more expensive, and those are fine. Now, when you give people those two choices, in experiments, half the people will choose the cheap one, and half will choose the more expensive one. But then, if you put a third item beside it that's really expensive, say, you know, $1200, something really fancy and sleek and shiny, then suddenly, twice as many people will go for what is now the mid-priced item, IE, the one that was a bit more expensive.

  • 11:22:10

    REHMHow do you explain that?

  • 11:22:10

    HAMMONDAnd they weren't going to, until that big one was there.

  • 11:22:14

    REHMHow do you explain that?

  • 11:22:14

    HAMMONDWell, it's extraordinary, because in a way, you know, you were never intending to buy the $1200 one.

  • 11:22:20

    REHMRight, right.

  • 11:22:20

    HAMMONDSo why would you even take that into account? You need to ignore it, and that's what you need to do. But the shops, you know, the stores know what they're doing, and they know it influences us. And the reason is, it's called the compromise effect, and it's been well established within psychology by various researchers. And it's all part of the fact that we don't like disadvantages of things. We hate losses, and we hate losses more than we hate the chance to actually gain something. We really, really hate losses.

  • 11:22:45

    HAMMONDAnd so do monkeys, incidentally. We all hate losses. And so we look for the disadvantages, and the cheapest one has the disadvantage, well, it's very cheap, maybe it's not very good. Look, there's all these others. The really expensive one, obviously, has the disadvantage of being really pricey. The middle one doesn't appear to have so many disadvantages, and so when it's laid out that way, in the three, you suddenly go for the middle one, when you weren't actually planning to do that.

  • 11:23:09

    REHMAnd do the owners of the stores recognize precisely what you're talking about?

  • 11:23:16

    HAMMONDI think they do, because you'll often find -- and particularly, you know, you've only got to have a look online for some laptops and you'll see it's not that three similar things are put together. So if they were three of relatively similar prices of the same kind of thing, you might expect that, but it's so often the case that one is way out, far more expensive, and you're not -- the same consumer isn't really going to choose realistically between those three things.

  • 11:23:41

    HAMMONDSo I think they do know what they're doing, and I think it's successful. So what we need to do is ignore that expensive item, is the way to get around this. Even kind of don't look at it, almost block it off on the side of your screen, or don't look in the shop.

  • 11:23:53

    REHMAll right, so if you're talking about a very pricey item, such as a car, we seem to be willing to bargain on that kind of item, but not a smaller one. How come?

  • 11:24:12

    HAMMONDYeah, we make some strange mistakes with these things. And so we always look at a discount, we love a discount. We all love a discount. And we look at the discount in relation to the whole prices. So if, say, something costs $60, and we get $25 off, we're very, very pleased with that. That's an excellent saving, and it's nearly half, and we think of it as that in our mind. We think, oh, that's nearly half. But then, somebody, you're buying something much bigger.

  • 11:24:36

    HAMMONDYou're buying a second hand car that's a few thousand dollars. And maybe you could save 25 pounds on that, $25 on that, but $25, you know, what's that on something that costs thousands? It seems like nothing. So we constantly look at things in proportion to the whole price. And that's a mistake in a way, because -- and this is called relative thinking, it's been very well established by, you know, Nobel Prize winner Daniel Kahneman and others. And it's a mistake because, you know, $25 is $25. It's all the same money in the end. So if you can save it anywhere, that's a really good thing.

  • 11:25:08

    REHMDo you have a technique of bargaining?

  • 11:25:14

    HAMMONDWell, if you look at all the different research that's being done on bargaining, one thing that comes out strongly is that you should name your price first. And you want to be the first one to get your price in, unless you really have no idea what something is worth at all. If you've got no idea, then you need to ask the person you're negotiating with. But if you have any idea at all, you should put your offer in first, and this is often the opposite of what people learn about negotiations.

  • 11:25:42

    HAMMONDBut the reason is, in the research, there's been lots of research on a thing called anchoring, which is where any number that's already been mentioned, we become very interested in and fixated on. And so if you name it first, everyone starts negotiating around your numbers. And it can even be something relevant that makes a difference. There's an extraordinary experiment where they gave people a menu and they told them it was from a restaurant called Studio 19, and asked them what they'd be prepared to pay for it.

  • 11:26:12

    HAMMONDThen they gave people exactly the same menu for a restaurant called Studio 97, and asked them what they'd be prepared to pay for it, and amazingly, people are prepared to pay more for the restaurant called Studio 97, just because 97 is a bigger number. So numbers can be influencing us in all sorts of ways, and so you really in negotiating want to get your number in first, because it really matters.

  • 11:26:35

    REHMAll right, we've got callers waiting. Let's go to Mauricio in Orlando, Fla. You're on the air.

  • 11:26:45

    MAURICIOHi. My question was, if your guest could comment on how it is with married couples, when they have different attitude towards money and maybe one partner will see more scarcity, where another partner sees more opportunity and more plenty.

  • 11:27:05

    REHMAre you suggesting that one partner spends more than the other partner?

  • 11:27:11

    MAURICIONo, not necessarily more, that there's just a general view as to the -- how much there is. You know, how much there is, you know, one partner may operate with a framework that there's less, and another partner just feels in general like a more optimistic view about what there is.

  • 11:27:31

    REHMInteresting. What do you think, Claudia?

  • 11:27:33

    HAMMONDYeah, that's a really interesting question, Mauricio, and a really good one, because many couples argue about money, and you know, relationship therapists will tell you that money is one of the big things people argue about.

  • 11:27:45

    REHMSure.

  • 11:27:45

    HAMMONDAnd in fact, I think couples are really lucky if they happen to have the same attitudes towards money, Because everyone has such varying attitudes about what's an extravagance and what isn't, and what's a necessity, and we'd all label it slightly differently. And if you look at your friends, you might think, oh, don't they spend a lot on that? And they probably think, oh, don't you spend a lot on something different as well. So the chances of two people kind of agreeing on that are quite slim.

  • 11:28:09

    HAMMONDAnd I think it all comes down to how it is that people view money and what they view it as for, and so some will view it as much more as about security, and will think you need to keep a bigger amount if you like as a backstop for a rainy day than others. And some people, as you say, will be much more optimistic about whether more money will come along. And in fact, in general, all of us have a slight over optimism about money. We tend to think that in the future, we'll earn more, and that we'll spend less, and that we'll save more.

  • 11:28:41

    HAMMONDPeople may be lucky and they may earn -- have incomes that go up as they go through their working lives, but they may not. And also it's probably not going to change how much you spend and save. You're probably not going to spend less and save more. But, so it really varies depending on how people view money and why they view it as important. And I think it is a really hard thing to try to get around for people.

  • 11:29:04

    REHMSo short of marriage therapy, what do you suggest?

  • 11:29:12

    HAMMONDI think in a way, what people need to do is to, one, to try to talk about it openly.

  • 11:29:16

    REHMExactly.

  • 11:29:16

    HAMMONDAnd people, we know, don't like talking about money. It's a very difficult thing for people to talk about, and you know, many researchers have commented, it's easier to get people to talk about sex in studies, than it is to get people to talk about money and their own attitudes to it. So I think one is to try to get some open lines of communication, and to have an agreement, you know, we're gonna have a discussion now about money and what money we need, and no one's gonna be judgmental about what someone else spent it on and what they did and didn't spend it on, so that you can try to find some way together to say, okay, well, you think we need a bit more for this.

  • 11:29:47

    HAMMONDI think we need to save a bit more. Let's try and find some compromise, let's try and find some common ground there, and it has to be talking it through that's gonna get you there.

  • 11:29:55

    REHMYou know, I would recommend that couples really talk about money before they get married. Their attitudes about money can be very destructive to a marriage. Let's go to Mary in Ann Arbor, Michigan. You're on the air.

  • 11:30:17

    MARYHi, Diane. I love your show.

  • 11:30:19

    REHMThank you.

  • 11:30:21

    MARYSo, here's the situation. We have three children, all in their 30s, and when my husband, the kids were in lower elementary school, my husband went back to school, and I was an at home mom, and so I had to go back to work to support the family. So things were pretty tight. And the kids knew that, we didn't really talk about budgets and stuff, we were just trying to get by day by day. So now here we are 25 years later, and our three children spend in different ways.

  • 11:31:03

    MARYThe oldest is very careful with her money, and invests and saves and things like that, and holds off purchases, and doesn't spend frivolously. Our second one is the exact opposite of that. He spends all of his money and then some, his kids walk around with holy shoes, but, you know, he's got every fishing lure on the market. And then our youngest is kind of tight with his money, very careful with it, and just doesn't, you know, it's like he pays his bills, makes sure everything is paid on time, but maybe he's just not in a position yet to save (unintelligible)

  • 11:31:54

    REHMSo now, Mary, tell me your question for Claudia.

  • 11:31:58

    MARYWell, I just wondered if she had done any research on the variances in a family?

  • 11:32:07

    REHMYeah, I think that's a good question, Claudia.

  • 11:32:11

    HAMMONDYeah, it is absolutely fascinating when you can see, as you say, you know, they've had the same parents and sort of the same upbringing, and yet there are these huge differences you can see, and it's really not uncommon at all for siblings to say this, and for parents to notice this, and they often notice it younger. You know, that one of them is very good at piling up their coins and constantly counting them, and has a full money box, and the other one seems to have spent all theirs and is borrowing it from them.

  • 11:32:36

    HAMMONDAnd there has been quite a bit of research done by the researchers here at University College London, actually, on personality and money. And it seems that -- so even if people are in the same family, that their personalities have such an influence on their attitudes towards money, that that's what's going on here. And so not surprisingly, the research will find that people who score very high on conscientiousness on a scale, for example, are better at saving money. People who score high on risk taking scales that tend, not surprisingly, to be not as good at spending money and are more likely to risk it.

  • 11:33:12

    HAMMONDAnd so I think what it is, is that the -- they learn some of it from you, and your attitudes to money, but then their own individual personalities, which we know can vary so much within the same families come in to that as well.

  • 11:33:24

    REHMClaudia Hammond. Her new book is titled "Mind Over Money" and you're listening to "The Diane Rehm Show." Claudia, our caller said she had three children, and it sounded to me as though the middle child was the one who spent every dime and had holes in his shoes. Is there any research on child placement in the family, and the use of money?

  • 11:34:00

    HAMMONDThere is research on child placement in the family, and personality, but I've not come across research specifically on money and child placement in the family.

  • 11:34:09

    REHMRight.

  • 11:34:10

    HAMMONDSo, but it could be that -- but certainly with personalities, often, you know, the oldest child we know will often but not always, you know, be more confident.

  • 11:34:19

    REHMOf course.

  • 11:34:19

    HAMMONDAnd that may make them keener to spend here. The older one, of course, was the careful one, which was interesting.

  • 11:34:23

    REHMExactly. And it's important, I think, to bring out in this discussion, how critical parents must be to teach their children about money. She said, you know, while I was at home, and how to go out to work because my husband went back to school, we didn't really talk about money that much. Isn't that crucial in the upbringing of a child, thinking about what things cost, and how much the family has to spend.

  • 11:35:10

    HAMMONDI think it is. I think it definitely is and it makes a difference if, you know, children are saying oh, why can't I have what so and so's got, but they need to understand, well, you can't, because we've got to work for the money, and this is what we have. Well, maybe we don't have work. So I think it's really crucial that parents talk out loud about some of the decisions they're making, so that when they're in the shops, even just buying food, you know, how are they choosing which milk to get? How are they choosing what's good value and what isn't, which will last longer, or which is bigger for the money or whatever.

  • 11:35:38

    HAMMONDAnd so that they start to talk out loud about some of those things. I also think that pocket money is really crucial, and it's interesting that lots of families, you know, don't give pocket money at all, and the research seems to show it doesn't matter how small it is, but if you can start giving them pocket money, rather than just giving them money 'cause they say, oh, can I have a so and so, and I want to buy this, and just handing it out.

  • 11:35:59

    HAMMONDActually giving them any amount of money, if it's regular, allows them to start budgeting, and to start thinking, oh, I've got to make these choices, I can have this now, or I can have something small now, or I can have something bigger in two weeks' time, or even bigger in three weeks' time, and to start practicing that for themselves. And to learn that when you spent it, it has gone, until the next bit comes, it has gone, which is what life's gonna be like.

  • 11:36:19

    REHMOf course, parents may not always be the best teachers, so one wonders whether, as part of a school curriculum, there ought to be a course helping young people understand the value of money.

  • 11:36:37

    HAMMONDI think that would be quite a good idea. I mean, in one way, I always feel sorry for schools, 'cause we can't suddenly sort of say, oh, and they should have lessons in this, and that and that.

  • 11:36:44

    REHMRight.

  • 11:36:45

    HAMMONDAnd we want them to do the whole lot, and how are they gonna fit it in. But yeah, but I do think that, you know, we're not taught about money. It's -- our relationship with money is very complex, and I think we easily could be taught more about it, so that we, you know, understand more at a younger age, and work out how to make the best decisions for ourselves and to spend it in a way we want to spend it. You know, to use it how we want to use it and save it how we want to save it.

  • 11:37:07

    REHMClaudia Hammond, her book "Mind Over Money: The Psychology of Money and How to Use It Better." Short break here. Your calls, your comments when we come back. Stay with us.

  • 11:40:01

    REHMWelcome back. Let's go right to the phones to Dana in Pittsburgh, Pa. You're on the air.

  • 11:40:11

    DANAHi, Diane.

  • 11:40:12

    REHMHi.

  • 11:40:12

    DANAThank you for taking my call.

  • 11:40:14

    REHMSurely.

  • 11:40:15

    DANAAnd hello, Ms. Hammond. And thank you for this very pertinent and interesting topic today. I just wanted to first make a comment and say we feel -- my husband and I feel like we are in the minority. We've been married for 28 years and basically have been living within our means for our entire marriage. We use credit cards, but we pay them off monthly. We put away off the top for taxes and long-term expenses, without even looking at the money, before it's in the account. We follow a budget. But the question that I have is has there been any research on the approximate of percentage of people who really live within their means?

  • 11:41:03

    REHMThat's a fascinating question, Dana. I have one question for you.

  • 11:41:10

    DANAYes?

  • 11:41:10

    REHMDid you and your husband of 28 years talk about money before you were married?

  • 11:41:19

    DANAWe absolutely did. We talked about it before we were married and said that we would purchase a house on his income only because we wanted me to stay home, if and when we had children. And then when we did have a child, I was able to stay home with her because we had the lower mortgage. We had a specific amount in mind and didn't go over it.

  • 11:41:47

    REHMThat's sure…

  • 11:41:47

    DANASo we could live within his paycheck.

  • 11:41:51

    REHMAnd, you know, it sounds as though that was awfully good planning, Claudia.

  • 11:41:57

    HAMMONDYes, it sounds as though they've been, you know, you've been very wise in planning things. And fortunate perhaps, too, to agree with each other over these plans as well, which is, you know, as we were saying is not a thing that always happens. But I think it's interesting the question of how many people do stay within their means. In one way, it's kind of hard to measure, 'cause what are their means and so how would you measure that?

  • 11:42:18

    HAMMONDI mean, but you can measure how many people get into debt, but of course then some of those people can pay off that debt. So in a sense, really, you know, if you're borrowing for a mortgage does that count as debt, in a way? That's, you know, that's how we buy houses now. It's the way to do it 'cause it's, you know, hard, almost impossible to save up enough in advance to be able to do that unless you earn an enormous amount of money.

  • 11:42:39

    HAMMONDSo I think what is interesting is these decisions that people make. Of course, people vary on their attitudes towards risk. And some people will just be optimistic and think something will come up in the future. I think sometimes people really don't mean to, you know, what research does show is that people don't like being in debt. It's not as if there's a load of people who think I don't care about being in debt. In fact, people don't like it.

  • 11:43:04

    HAMMONDWhat people do tend to think is that they will be able to pay it off quickly. And I'm guessing in the States you probably have the same issue with -- we call them payday loans, where people get loans…

  • 11:43:13

    REHMSure.

  • 11:43:15

    HAMMOND…waiting 'til payday at very, very, very high…

  • 11:43:17

    REHMHigh interest.

  • 11:43:18

    HAMMOND…high interest rates. And I think people will sometimes say, oh, you know, how could they be so foolish as to do that. But I think in fact if you look at it, if you look at the reasons people do just often want something to tide them over 'til payday, I don't know, their car breaks down and they need to mend that car in order to carry on doing their job that gets them the money. So they think next week they'll be able to pay it back.

  • 11:43:40

    HAMMONDAnd this is the way of getting money really fast. And so they do it. Then something else happens, which means next week they can't pay it back and suddenly they're in this cycle and suddenly the debt mounts up really fast in a way they never really expected. So I think when people make decisions about loans and debts they are not expecting it go wrong in the way that it sometimes does.

  • 11:43:59

    REHMIndeed. Thanks for calling, Dana. And we have an email talking about Black Friday, which, as you may know, is usually the day after Thanksgiving here in the States, where people go out and shop, shop, shop. And this email says, "I've never understood why people are willing to wait for hours in line during these annual Black Friday sales to save a few dollars, while apparently not considering the monetary value of their time."

  • 11:44:45

    HAMMONDOh, well, that is so true. And, you know, Black Friday is something that's now spread from the U.S. to the U.K. And it's getting bigger and bigger here as well. And you do see, you know, people queuing for hours and then sort of scrum while they go into the shops. And it's fascinating, because as you say, people -- they're -- we love a bargain. We love a bargain so much. And so people don't take into accounts the time they spend. And I think it's something that's, you know, a lot of us (unintelligible) in different ways and we may not realize we're doing it.

  • 11:45:09

    HAMMONDLike you may spend ages online trying to find a good budget flight and you, you know, you save yourself $20 and you're really pleased with that $30 dollars and you're delighted by that. And actually you spent so long doing that, that perhaps if you'd be working instead, you could have earned more money than the money you've saved. I think it's definitely true that we don't value our time enough. And interestingly, the one -- the group of people who do value their time more or pay more attention to it, are people if they're paid by the hour.

  • 11:45:41

    HAMMONDBut it -- that can even be to an extent that's negative in a sense, that if someone asked them if they'd like to do something nice, they will think, oh, well that will take two hours, in which time I would earn X dollars. Is it worth it? And so it starts to sort of, you know, stop them enjoying themselves so much. But I think when it comes to Black Friday, maybe people should think a bit more about the time it takes and how much they're really saving. Unless they're thinking of it as a day out that's a fun thing. In which case, we know spending money on experiences is a good thing. It makes people happy buying things.

  • 11:46:08

    REHMYou know, and there's a flip side to that. Someone the other day complained to me about having to wait in a doctor's office for two hours. Now, this person might have been a professional, like a lawyer or a doctor or an architect, who indeed was losing money waiting in that doctor's office. Seems to me doctors ought to take that more into account, as they schedule their patients.

  • 11:46:47

    REHMWe've got, let's see, a tweet from Calliope, who says, "How do we talk about the limits of the family's money with the children, without stressing them out and making sure they feel secure?" Great question.

  • 11:47:12

    HAMMONDIt's a really good question. And I think, again, openness is the thing to do here and to perhaps, you know, be frank with them about, well, you know, this a -- we can earn so much money, you know, doing this. And that takes a long time to make that much money and there's not, perhaps, opportunities to make more than that at the moment and that the things you're buying, you know, cost a lot. And I think you can do that whilst, you know, explaining some of those details. And sometimes people are nervous about talking about actual amounts.

  • 11:47:40

    HAMMONDYou know, many people get to 18 and have no idea what their parents earn. And no idea whether their parents have any savings or if so how many -- how much savings they have. Which, in a way, when you're 18 is a kind of a strange thing not to know about your parents. Now, true, maybe you don't want your small kids kind of shouting about it in the playground because people seem to like a lot of privacy where money is concerned.

  • 11:48:01

    HAMMONDBut I think if people can talk openly and to say, well, you know, this is how much things cost, you know, this is how much the gas bills cost, you know, this is water costs. So that all those things they might not have thought of, but I think you're absolutely right, that what you don't want to do is make them anxious at the same time. And so I think you should present it in a very calm way and not as if you're panicking or anxious.

  • 11:48:23

    HAMMONDAnd if you are anxious about it, if parents are anxious themselves, then I think that is something to keep to themselves and not spread to the children and not worry them. But you can be frank about, well, there are things we can't afford. We'll be fine in the future. It will be fine, but there are things we can't afford.

  • 11:48:37

    REHMIndeed. All right. To Joyce in Houston, Texas, with a very different perspective on money. You're on the air.

  • 11:48:48

    JOYCEGood morning. I do coaching and I also spend a lot of time with young people. And I find across age groups women are much more attractive these days if they have more money to men. That's a phenomena that I think women aren't aware of. They're still waiting for the prince to come along. And the guy is looking at your 401 (K), your earning power, how well you're doing at balancing that budget.

  • 11:49:20

    HAMMONDI think that's really interesting if things are starting to, you know, equal out a bit in that sense then I think that is a fascinating thing if that starts to happen more. And I think that there's -- it's not something I know if there being research on it at the moment, whether men are looking more for money as well, but I think as women become more powerful, then maybe that is something that will happen and that people will start -- as we know already, people will often get together with somebody with a similar earning power to them, partly they meet those people in those jobs.

  • 11:49:50

    HAMMONDBut I think that's really interesting, if they start to look for it that way around as well. Whether money is the right thing to look for in a partner, you know, whether that's the thing that's really gonna make you happy, as whether they're rich or not, is a whole other question of course.

  • 11:50:00

    REHMIndeed. Let's go to Wendy in Leesburg, Va. You're on the air.

  • 11:50:07

    WENDYHi. Thanks for taking my call.

  • 11:50:08

    REHMSure.

  • 11:50:09

    WENDYMy question is actually kind of the flip side as well. I've worked in the non-profit world for a long time and I came across this philosophy that actually giving money away and being philanthropic can result in you being more financially successful. And I was just wondering if you've come across any research to that effect or any actual studies that support that claim.

  • 11:50:32

    HAMMONDI mean, certainly there are lots of studies about philanthropy making people happier. And you might have seen online there's even been ideas that people should, you know, perhaps pay the toll for the person who bought the car behind them and buy the coffee for the person behind them in the queue 'cause it will make them feel good. And there are definitely experiments where they give people some money at the beginning of the day and they get into, they assess their mood at the beginning of the day.

  • 11:50:56

    HAMMONDHalf the people are told to spend the money on themselves -- it's $5 or $20 -- to spend it on themselves that day. The other half are told to spend it on someone else or give it to charity. At 5:00 o'clock they have to have spent the money and then they assess their mood again. And they found people were happier if they gave the money away. So it is definitely the case that spending money on others, rather than yourself, is -- seems to be a way to happiness.

  • 11:51:23

    HAMMONDI think it's interesting this question of whether it brings you -- actually brings you more money or not to yourself. I mean, in one way you could, you know, people like the idea of sort of karma and, you know, it comes around, goes around. I think it's definitely the case that people who are generous are liked by other people, because they're nice and generous and they're thinking of other people and that perhaps thinking of other people might mean you do something that has real meaning for you.

  • 11:51:46

    HAMMONDAnd people are better at doing the jobs that bring them real meaning and that have real meaning for them. And so they do -- they then might do better in those careers because they've chosen something that has meaning. And that might then bring them money the long way around, if you like.

  • 11:51:59

    REHMThanks for calling, Wendy. And an email from Dale in Thurmond, N.C., who says, "I'm wondering if services like PayPal, Google Wallet, Apple Pay, Amazon or other online payment platforms make it more or less likely to spend, versus if you have to pay or have to physically enter a credit card number."

  • 11:52:33

    HAMMONDNow, that's interesting. Because when you enter the credit card number, you're not kind of -- you're not entering the amount, 'cause the amount is always there. So you're concentrating on the number on your card, which means you have to think for a little bit longer. But you're not processing the amount in the same way that you're processing cash, by counting out cash in the shop. And so apart from it being quicker, I don't think it would make that much difference, apart from the fact that you can just, you know, you can click on it fast and buying things fast is good. But I don't think it would make a difference.

  • 11:53:03

    REHMAnd you're listening to "The Diane Rehm Show." And on that particular point we have a tweet from John who says, "Will cash always be around?"

  • 11:53:21

    HAMMONDIt's a really interesting question. And I think possibly it won't always be around, but I think it will take quite a long time before it goes. I think gradually, you know, we're getting to this tipping point now where more people paying with cards and it will gradually go away. I think what will always stay is currency and counting things in this way. It's really interesting that whenever any society has started using currency it never goes back again to not using it.

  • 11:53:47

    HAMMONDBecause money, you know, brings its problems, has its evils, but is an amazing way of commodifying trust with someone else and allows strangers to cooperate. You know, you can go to a movie theater and you can see a film and you've all paid your money and you know it will come on at that moment, the actors will get paid, the producers will get paid. It's an amazing cooperation that's gone there through having money. And strangers can come together and do all sorts of amazing things. So I think that in the end the currencies will stay and in the end cash might go, but we'll still talk about it in the same way.

  • 11:54:18

    REHMSo tell me about your own spending habits. What is your own attitude about money?

  • 11:54:26

    HAMMONDWell, it's interesting actually. I mean, I've always been quite good at saving. And I was one of those, you know, kids who used to, you know, pile up the money.

  • 11:54:33

    REHMPile up money, yeah.

  • 11:54:33

    HAMMONDPile up the coins and count up. You know, tiny penny coins and so on and save those up.

  • 11:54:37

    REHMSure.

  • 11:54:39

    HAMMONDBut I can also remember when I was very little going to the -- putting some birthday money in the building society and then the next time, going to the building society and asking where was the money, 'cause I wanted to see my money. And then them saying to me, oh, it's in the safe at the back. And there was -- you could see a great big safe there in those days. But and then I was sort of horrified that it was in with everyone else's and that it was mixed up because I imagined that there was my little pot of money and not that it was, you know, all mixed up with everyone else's.

  • 11:55:04

    HAMMONDAnd interestingly, writing the book has changed my attitudes towards money, particularly the wealth of research on how spending money on experiences makes you happier than spending money on things. And there is a lot of that. And so going away for a weekend or going on a daytrip, there is good evidence that that will make you happier than spending money on a new TV, say. And the reason is that we anticipate those experiences, we think about them in advance.

  • 11:55:29

    HAMMONDWe don't think what it will actually be like having a big TV. We might think, oh, that will be fun in the future, but we don't really think about it. Whereas, we do really think about having this, you know, an experience like going away for a weekend. And afterwards we can look back on it and enjoy it. And especially, if you can divorce the pain of paying from the pleasure that you get by paying in advance, that makes you even happier. And so 'cause of the research I've tried really hard to do that now.

  • 11:55:54

    REHMSo do you have any spending vulnerabilities?

  • 11:55:59

    HAMMONDI do quite like shoes, I must admit. And my husband will say, surely you don't need any more.

  • 11:56:06

    REHMAnother…

  • 11:56:07

    HAMMONDAnd I say, yeah, but these don't, these don't go with anything. You know, I need some shoes to go with this. I've not got a stitch to wear. And so I do like shoes and get pleasure from those.

  • 11:56:17

    REHMAnd how about clothing in…

  • 11:56:18

    HAMMONDBut as long as you get pleasure from it it's allowed.

  • 11:56:20

    REHMHow about clothing in general?

  • 11:56:23

    HAMMONDYes. I do like clothes, as well. And so I do sort of look in the cupboard and think, oh, I've got nothing, I've got nothing, I need something, I need something more, I need something new. But you see, the research will say that a new pair of shoes is only new for a couple of weeks. And then it's like an -- it's an older thing again.

  • 11:56:40

    HAMMONDAnd so now I try to be really careful about how -- will this -- will I really enjoy this thing for its own sake. Because the research shows that if you want to buy material things, then if you'll enjoy them for its own sake, then it's -- that's okay. If you buy them 'cause you want to show off to others, that won't make you any happier. If you just want to make other people envious that's no good.

  • 11:56:57

    REHMInteresting. Well, I must say, you and I share the same vulnerabilities. Claudia Hammond, thank you so much for joining us. Her new book is titled, "Mind Over Money: The Psychology of Money and How to Use It Better." Thanks, again.

  • 11:57:22

    HAMMONDThank you for having me.

  • 11:57:23

    REHMAnd thanks all for listening. I'm Diane Rehm.

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