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You may recall the past issues where I reported on some of the strange findings from the fields of behavioral economics, neuroeconomics and evolutionary economics. For example, I wrote about how most people would prefer to make $50,000 a year while the other people around them make $25,000, rather than make $100,000 a year while others make $250,000. You read that right, and if you are one of the majority on this issue, you too would prefer to make half as much if you could be twice as wealthy as your peers. The relative social ranking of the first scenario (being wealthier than most) is apparently more appealing than the better financial status.
I also told you about the ultimatum game, where two one-time participants have to split $100. The first suggests any split he wants, and the second says yes or no. If he says yes, they get the money, if he says no they get nothing and never get to play again. Amazingly, if the split offered is worse than $30 to the second player (meaning $70 to first player), most people refuse. They are willing to give up $10, $20 or even $30, just to be sure the "unfair" player gets nothing.
Evolutionary Economics - More
Strange Findings
For one more example of our irrationality when it comes to money issues, imagine yourself standing in line at a movie theater. You get to the ticket window and lights go on, music starts, and they yell, "congratulations!" You are customer number 100,000, so you win $100. Of course, you would be very happy that you got in line at just the right moment.
Now imagine an slightly different scenario, at another theater. The man in front of you is the hundred thousandth customer. He is showered with applause and congratulations, and he wins $2,000. As a consolation prize you win $150 for being next in line after him.
Which situation would you prefer? When presented with both scenarios, most people choose the first. They would prefer being the big winner of $100 to winning $150 and missing out on the $2,000 by one place in line. Effectively, they are willing to give up $50 to avoid the regret of not getting in line at the right moment (a moment they could never have guessed).
The thousands of studies that have been done in all the newest branches of economics show that we are commonly irrational. There are reasons for our faulty decisions. For example, at one time there was probably an evolutionary advantage to seeking status, a tendency which still guides us today even though wealth is clearly more advantageous now. There are reasons we feel we should throw away money (the $30 in the ultimatum game) in an attempt to preserve "fairness" (interestingly, even monkeys do this in experiments).
We can start by recognizing the forces at work in ourselves, the urges and ideas that lead to irrationality in financial matters. It is funny to read about other's silly decisions, but too easy to miss our own. We need to see our own habitual and irrational choices and patterns. Then perhaps we can correct them, one-by-one. The page; Ten Financial Mistakes covers some of the more common ones.