According to this article in the Los Angeles Times, evolution accounts for a lot of our strange ideas about finances. Most people would rather earn $50,000 a year while people around them made $25,000, than earn $100,000 a year while people around them earned $250,000. Irrational, but in this case, relative social ranking trumps absolute financial status.
Thousands of experiments in behavioral economics, neuroeconomics and evolutionary economics conclusively demonstrate that we are every bit as irrational when it comes to money as we are in most other aspects of our lives.
Regret falls under a psychological effect known as loss aversion. Research shows that before we risk an investment, we need to feel assured that the potential gain is twice what the possible loss might be because a loss feels twice as bad as a gain feels good. That’s weird and irrational, but it’s the way it is.
Human as it sounds, loss aversion appears to be a trait we’ve inherited genetically because it is found in other primates, such as capuchin monkeys.
Experiments show that these monkeys show the same sensitivity to changes in supply and demand and prices as people do. They also demonstrate the same trait of economic loss aversion. In an experiment where the monkeys had a choice of a 50% chance of a bonus food or a 50% chance of a loss of food, the monkeys were twice as averse to the loss as they were motivated by the gain.
According to the article:
If there are behavioral analogies between humans and other primates, the underlying brain mechanism driving the choice preferences most certainly dates back to a common ancestor more than 10 million years ago. Think about that: Millions of years ago, the psychology of relative social ranking, supply and demand and economic loss aversion evolved in the earliest primate traders.
What do you think? Is evolution the cause of your bad financial decisions, or is it something else?
I think that lack of self control is the problem. A lot of people simply can’t resist the temptation to spend an available hundreds or thousands of extra dollars at their fingertips. At the same time, we all need credit cards for everyday online purchases, booking plane tickets, etc. An option that has worked for me is obtaining a pre-paid card. Using this card I can make all the necessary online purchases, but because I have limitations, I don’t have the temptation to spend beyond my means.