BRAINS DON’T DO MONEY
Obvious, perhaps, but often overlooked
© Alan Newman
https://uk.linkedin.com/in/alangnewman
Evidence from our DNA, and from the fossil record, suggests that modern
humans were roaming the savannahs of East Africa about 70,000 years ago.
That’s about 3,000 generations: so it wouldn’t be a very large crowd of your
direct ancestors that took you back to that time. (The portrait in the picture
is based on a reconstruction from a fossil: the oldest modern human found so
far. It comes from southern Ethiopia and dates back about 125,000 years.)
Successful brains not only helped their owners get food but also stopped
them becoming food for something else. That meant survival. And brains
were also good enough at connecting with other brains so their owners could
have sex. Without that you would not be here.
That world was complicated. Whether it was food or sex, our ancestors had to
make good enough decisions, quickly, in a world characterised by uncertainty
and incomplete information.
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Business Psychologist
The Human Brain (1)
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The answer to the question, “How old is money?” depends on what you mean by money.
In modern day Anatolia, Obsidian was used as a medium of exchange about 12,000 years
ago. Heads of cattle (an example of synecdoche: we don’t literally mean heads) were
also counted as a store of value – which is where we get capital from: capita meaning
head.
Some types of grains were used as money and, around 2000 BC, it is possible that the
Shekel may have referred to a weight of barley. Cowry shells also have a history of being
used as a means of exchange.
Greek arrowhead money dates to about the 7th Century BC and it is also about this time
that we see the earliest example of COINAGE, as we understand it today. The gold
coloured coins are from Lydia (in modern day Turkey) and are made from electrum.
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Business Psychologist
Money
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Although a human brain, when removed from the skull, may look like an
amorphous mixture of blancmange and porridge it does in fact have structure.
Different parts of the brain specialise in different things. This is referred to as
functional localisation.
For example, there is a part of the brain that is focused on nouns, another on
short term memory and another on long term memory. The back of the brain is
called the visual cortex because that is where most of the processing takes
place to make sense of what we see. Another part of the brain specialises in
muscular co-ordination and movement; another on processing emotions;
another on hearing. You get the picture.
But there is no specialised part of the brain that processes money. Money
has not been around long enough for such an area to have evolved.
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The Human Brain (2)
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The situation is complicated further by the fact that the notion of
money itself is still changing. To a certain extent the points on loyalty
cards (e.g. Nectar, Boots Advantage Card) are money and the same
applies to Air Miles.
There are also local currencies such as the Brixton pound and the
Lewes pound. And crypto currencies such as the Aurora and Bitcoin.
And how might PayPal or Apple Pay evolve?
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Modern versions of money
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So let us remind ourselves of what brains like.
What is it that brains do naturally that has a
bearing on how they process money-related
information well and not so well?
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What Brains Like
Brains prefer this . . . .
to this.
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Easy
Guaranteed
Now
Pretty
Short term
Simple
Stories
Sweet
• SYSTEM 1
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Difficult
Provisional
Later
Ugly
Long term
Complicated
PPT Presentations
Sour
• SYSTEM 2
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Psychologist and winner of the Nobel Prize for Economics, Daniel
Kahneman, has pointed out that we have two Thinking Systems
called, imaginatively, System 1 and System 2.
We use System 1 most of the time. About 95% of the time in fact.
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THINKING, Fast and Slow
System 1
System 2
• Effortless
• Effortful
• Fast
• Slow
• Intuitive
• Calculating
• Non-rational
• Rational
• Sub-conscious
• Conscious
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First, brain subconsciously focus on the benefits of the outcome. This food tastes nice or
This food might taste nice. Or, This piece of affection or sex will be enjoyable.
Second, brain looks at what the downside might be – cost and/or risk. Last time I had
this food it was good. (No risk). Last time I tried a new food it didn’t taste great. (Risk.
Unpleasant consequence.) My social status is based partly on my willingness to try new
foods. This person may already have a mate. (Courting might be risky and weapons for
hunting can be used to fight other humans.)
Third, brain subconsciously factors in time. If the benefits and/or costs and risks occur
now or soon a good deal of weight is attached to them. If they occur in the future they
are discounted in an exaggerated fashion. For example, although seasons in one part of
the world may be different to those in another (e.g. Hot and cold vs wet and dry) our
ancestors would have know that ‘the good times’ did not last. The fruit got eaten or
rotted; migrating herds moved on.
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Give brain a money task (1)
1 The benefits
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2 Risks and Costs
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3 Time. NOW is good
Business Psychologist
Fast forward to today and consider how our Stone Age brain deals with a 21C
money task. How does a brain perceive a credit card and a pension plan?
A credit card dovetails well with brain wiring: the benefits are easy to
understand. They also relate to real life and immediate gratification. And if
we’ve been ‘pre-approved’ that social recognition is an added feel-good factor.
The cost and risks seem low – we’re in control and the minimum monthly
payments are easy to understand and seem manageable; and the timescale is
good too – monthly (i.e. short term).
A pension plan does not dovetail well with brain wiring. In the most common
pension plan (defined contributions) the benefits are uncertain. It is risky too
because Governments always seem to be fiddling with the terms and conditions
that are attached to pension schemes; and payoff is a long way off. Who knows
what our lives will be like 10, 15, or 25 years from now?
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Give brain a money task (2)
BENEFITS?
COSTS & RISKS?
TIMESCALE ?
ANGELIS MERKOULOS
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
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BENEFITS?
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COSTS & RISKS?
X X
TIMESCALE ?
X X XX
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Business Psychologist
Classical economics assumes that people treat a pound the same way as
any other pound, irrespective of how we came by the money, and
irrespective of how we intend to use it.
Behavioural economics, on the other hand, says that brains exhibit ‘mental
accounting’, the tendency for us to separate our money into
separate accounts based on a variety of subjective criteria, like the source
of the money and the intent for each account.
Once we have put money, literally or figuratively, into separate ‘jars’
(accounts) we are loathe to use it for another purpose.
What mental accounts do you use?
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Mental Accounting
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Mental accounting is just one example of how brains ‘do money’. Psychologists
who specialise in behavioural economics note that we exhibit ‘bounded
rationality’: in decision-making, our rationality is limited by the information we
have, the cognitive limitations of our minds, and the finite amount of time we
have to make a decision.
As a consequence certain strategies have evolved that have helped our brains
make accurate-enough decisions, quickly, based on limited information.
These strategies include heuristics (mental short cuts); and cognitive biases (an
asymmetric, non rational way of perceiving risks and pay-offs). Some of the
more widespread examples and their consequences are included in this list.
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Heuristics & Biases
Affective reasoning, Anchoring, Availability heuristic, Base rate
neglect, Belief perseverance, Black swans, Bounded rationality, Choice
architecture, Cognitive bias, Cognitive dissonance, Confirmation bias,
Decoy effect, Defaults, Endowment effect, Focusing illusion, Framing,
Gambler’s fallacy, Group think, Habits, Halo effect, Herd instinct,
Hindsight bias, Hyperbolic discounting, Illusions, Loss aversion, Mental
accounting, MINDSPACE, Money (or Big Number) Illusion, the MPG
Illusion, Multiple selves, Narrative fallacy, Nudging, Optimism bias, Over
confidence, Planning fallacy, Salience, Status Quo Bias, Sunk cost
fallacy, Ultimatum game, Wilful blindness, Zero risk bias.
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Business Psychologist
Research for The BBC Big Money Test was carried out by The Open
University and University College London. Finance guru Martin Lewis was
also involved and presented the findings and insights on the TV programme
based on the research results.
One of the findings is that each of us, to a greater or lesser extent, exhibits
a number of ‘money personas’: bargain hunter, gambler, miser, shopperspender, and tycoon. A different persona steps forward under different
circumstances.
As consumers we are complicated and sometimes contradictory.
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Business Psychologist
Multiple selves
Each of us is a personal
combination of :
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Bargain hunter
Gambler
Miser
Shopper-spender
Tycoon
Under what circumstances does
each one step forward?
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Bottom line?
We are complicated and non-rational when it comes to money matters.
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BRAINS DON’T DO MONEY
© Alan Newman
https://uk.linkedin.com/in/alangnewman