A New Look At Attitudes About Money

Hammond is bound to step on toes with her amusingly pointed “Bad Money’’ chapter. She concludes from various studies that “There’s also some evidence that the more money you have, the meaner you become’’; that when wealthy respondents were asked by psychologist Paul Piff if they deserved to be on the first lifeboat of a sinking Titanic, “more rich people than poor people thought exactly that,’’ and that “Richer people were also more likely to agree that they were good at everything and never wrong.’’
 
Hewing to her hunch that money attitudes are innate, Hammond ponders whether the Piff study indicates that the rich “were loathsome in the first place and that’s how they got so stinking rich,’’ surely a sentiment that advisors had best not idle over.  Piff’s 2014 study is entitled “Wealth and the Inflated Self: Class, Entitlement and Narcissism.’’

Clients who balk at what they perceive as risky investments can be understood better by taking a look at Kahneman and Tversky’s Nobel Prize-winning research in risk and loss behavior, enthusiastically embraced by Hammond.

In “To Have And to Hold,’’ Hammond says, “Loss aversion is one of the most robust findings in behavioral economics, and it influences many of the decisions we make about money. We all like the chance to win, but we’ll put more effort into not losing. The thought of even a small loss holds more power over us than the prospect of a larger gain, as Tversky and Kahneman found.

“They found our aversion to loss is just over twice as strong as our attraction to a gain of the same size.’’
  
Loss aversion test results help explain irrational behavior toward money: In one test, respondents were asked if they preferred to trade in their car for $6,500 for a new $8,500 car, rather than trade at $5,500 for the same new car at $7,500. The former option was chosen more often.

“People would rather overpay for a new car provided they felt they were well compensated for their old car,’’ she says.

Other studies Hammond cites show that people think of money as an “existential drug’’; that accumulated money is seen as a buffer against fear of death, and “What we really hate is losing a financial benefit we’ve become accustomed to.’’

Mind Over Money. The Psychology of Money and How to Use it Better, by Claudia Hammond. $15.99. 373 pages. Harper Perennial.

Eleanor O’Sullivan is an award-winning freelance journalist who writes for Financial Advisor magazine.