The document provides an introduction to the weird and wonderful world of behavioural finance and economics. It discusses how human decision making is influenced by factors like mood, peers, and default options. Some key points made include that seasonal affective disorder can influence financial decisions by making people more pessimistic; unexpectedly good weather can increase lottery ticket sales by putting people in a better mood; and employees' pension choices are often influenced by the choices of their coworkers, such as following the investment choices of the store butcher. The document aims to help readers better understand human behavior and communicate with customers in a more natural way.
1. brought to you by…
The weird and wonderful
world of behavioural
finance and economics
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2. ow customers make decisions is what we all strive to know
And Daniel Kahneman provided some of the answers in ‘Thinking Fast and Slow’.
Sadly our brains are not as rational as we’d all like to think
In fact we often make choices a lot quicker than we can blink.
So when we are faced with a complex decision
We use instinct much more than we’denvision,
NEWSFLASH: We’re more like Homer Simpson than Mr Spock
Which for some of us can come as quite a shock!
But once we realise that survival and status are what drives us most
And that our reptilian brain is the real host,
We can help you communicate in a more natural way
Which will make customers happier and more likely to stay.
So here’s our ode to all things funny
About people’s behaviour, particularly when it comes to money,
We hope you enjoy our first edition
And make sure you take part in our competition!
An Ode to Funny Money
The weird and wonderful world of
behavioural finance and economics
3. “How could economics not
be behavioral? If it isn’t
behavioral, what the hell is
it?”
Charlie Munger,
Warren Buffett's right handman.
1 Sunny Money
What does the sun have to do with
how we spend our money?
17 Nudge of
The Month
contents
We
Love
2 MIN
READ
3 Healthy Money
Can spending money onothers make
you healthier?
5 Earnest Money
Why are self-made billionairesmore
generous than billionaireswho inherit
their wealth?
7 Bloody Money
Need pensionadvice?
Ask the butcher
9 Foreign Money
Does foreignmoney make us
spend more or less abroad?
16 An Interview with
Dan Goldstein
11 The Financial Bias
of the Month
15 Businesses BEhaving
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READ
2 MIN
READ
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READ
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5 MIN
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4. What does the sun have
to do with how we spend
our money?
Surely something as abstract as the weatherwouldn’t get inthe
way of the important life decisions we make, including what to
invest in? Think again.
Recent research has found a significant relationshipbetween
seasonal affective disorder (SAD) and the financial market in the
UK, specifically in relation to the investment patterns within the
stock market. SAD has been identified as one of the biggest
influencers of people’s mood globally (Denissen et al., 2008;
Rosenthal, 1998). SAD sufferers tendto lack energy and feel
depressed and as a result have a more pessimisticoutlook on life
which leads to a tendency to avoid risky investments.
Findings show that SAD leads to lower investment in stocks which
are traditionally higher risk investments anda higher investment in
much safer government bonds. When people recover from SAD in
the summer months, we see higher investments in stocks and
lower government bondreturns (Cheng, 2015).
Cheng, X. (2015) Are UKFinancial Markets SAD? A Behavioural Finance Analysis. PhD thesis,
University of Sheffield.
Sat Sun Mon Tue Wed
16ºC 17ºC 20ºC 11ºC21ºC
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Otto, R., Fleming, S.M., & Glimcher, P.W.(2016) Unexpected but Incidental
Positive Outcomes Predict Real-World Gambling, Psychological Science 1–13.
A body of research gained fromlaboratory experiments has
shown that people are more likely to gamble when they are in a
good mood. At the same time, people are in a better mood
when they experience unexpected positive outcomes, such as a
beautifully sunny day following days of cloudand
rain. Together, these separate findings led researchers to
investigate whether these unexpected positive outcomes, such
as better weather, caused a change in risky behaviour. To test
this effect in the real world, they studiedthe number of lottery
tickets bought across 174 zip codes in New York to see whether
more lottery tickets were bought on days when the weather
surpassed expectations.
The results showed a relationship between unexpectedly good
weather and an increase in sales of lottery tickets (Otto et al.,
2016). They suggestedthat the large-scale data set offered the
statistical power and precision to suggest a causation between
these factors and not merely a correlation. They explained these
findings by stating that when we’re in a good mood for some
unrelated reason, we experience a greater sense of optimism
and this leads to a decision to gamble.
This researchcomes with the hazard warning that more sun
doesn’t lead to an increase in the chance of winning the
lottery!
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5. Can spending money on others
make you healthier?
The political philosopher andeconomist, John Stuart
Mill, said it best when he describedhow to find true
happiness:
“Those only are happy who have their minds
fixed on some object other than their own
happiness; on the happiness of others, on the
improvement of mankind, even on some art or
pursuit, followed not as a means, but as itself an
ideal end. Aiming thus at something else, they
find happiness by the way.”
For meFor you
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Recent research has studied the positive effects that spending
money on others, or ‘prosocial spending’, has on our mental health.
However, less research has investigated the link to physical
wellbeing. Previous research has shown that spending money on
others increases happiness in both some of the wealthiest and
poorest countries in the world (Aknin, Barrington-Leigh et al., 2013).
Given the high instance of cardiovascular conditions, with high
blood pressure currently affecting 1 billion people globally (WHO,
2014), researchers were keen to understand whether spending
money on others couldactually increase cardiovascular health.
A recent study split a group of adults who were diagnosed with
high blood pressure into two groups (Whillans et al, 2016). The first
was assigned to spending money on others for a period of 3 weeks
and the other was assignedto spendingmoney on themselves for
the same period of time. At the end of the 3 weeks, the group that
had spent money on others had significantly lower blood systolic
and diastolic blood pressure. Interestingly, the effect of spending
money on others was found to be comparable to other commonly
used interventions such as antihypertensive medications and
exercise.
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Whillans, A. V., Dunn, E. W., Sandstrom, G.M., Dickerson, S.S.,& Madden, K.M. (2016).Is
Spending Moneyon Others Good for Your Heart? Health Psychology.
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6. Why are self-made billionaires
more generous than billionaires
who inherit their wealth?
The recent sobering report from Oxfam showed that 62 people
own as much as the poorest half of the world's population.
However, the good news is that some of these 62 people are also
the most generous.
For example, Bill Gates has pledged to donate 95% of his wealth to
charity and has already donated $28 billion of his fortune. Similarly,
Warren Buffet has promisedto donate 99% of his wealth and so far
has donated $11 billion. Even Mark Zuckerbergrecently pledged to
donate over half of his fortune to charity.
Recent research has shown that self-made billionaires are three to four
times more generous than billionaires that have inherited their wealth, as
measured by their propensity to sign the GivingPledge or enter the
Philanthropy Top 50 list of biggest donations (Coupe & Monteiro, 2013).
Bill Gates originally made this observation a few years ago, statingthat
“our experience worldwide is that first-generation wealth is actually more
generous than dynastic wealth… Both here in India and U.S. and other
countries, the biggest givers are those whoare receivers of first-
generation wealth.”
So why is this the case? From a psychological perspective, here are a
few reasons that this effect might exist:
1. Parents have a desire for their children to grow upto be like them
and so by donating the majority of their wealth, their children will
have to make their own success too.
2. Peer networks are stronger amongst self-made billionaires, for
example Warren Buffett and Bill Gates are close friends, and
therefore they are more likely to measure their behaviour in relation
to their peers and jump on the charitable bandwagon.
3. Due to the fact that self-made billionaires have made their money,
they have a stronger connection with their wealth than they wouldif
it had been gifted to them. This increases the endowment effect
which leads to a stronger sense of empowerment to make bold
decisions about how to spend it.
Coupe, T. & Monteiro, C. (2013). The Charity of the Extremely
Wealthy. Discussion Papers 51, Kyiv School of Economics.
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7. Need pension advice?
Ask the butcher!
We tend to believe that people
in authoritative positions, such
as CEOs, doctors andsporting
heroes make better decisions
and therefore we place more
importance on their opinions
and contributions.
This is why celebrities are often
used in advertising campaigns
and why we trust doctors more
when they are wearinga white
coat instead of normal clothes
(Rehman et al., 2005).
Interestingly, we trust
authoritative figures more even
when the person is not in fact
an expert but is perceivedas
one.
Rehman, S. U., Nietert, P. J., Cope, D.W., & Kilpatrick,A. O. (2005). What to wear today? Effect of doctor’s attire on the
trust and confidence of patients. The American Journal of Medicine,118(11), 1279-1286.
A Texan supermarket chain foundthat the 401(k) pension plan choices of
their employees were remarkably similar within the same stores but the
investment choices between the supermarket stores variedhugely.
When they dug deeper, they realisedthat the common thread across
stores was the butcher!
They realised that this was because supermarket employees considered
the store butcher to be the investment maven or ‘expert’ and so
employees would follow the same investment philosophy as their
respective store butcher (Bernatizi & Thaler, 2007).
A similar effect was found by Duflo & Saez (2002) who investigated the
difference in pension plan participation across 11 different libraries within
a large university.
They found that librarians working in the same library invested similar
proportions of their salary into their pensions but that this proportion
varied significantly between the 11 libraries, showing the powerful effect
that peers have on our decisions.
Benartzi, S. & R. Thaler (2007). Heuristics and biases in retirement savings behavior.Journal of Economic Perspectives, 21, 81-104.
Duflo, E. & Saez, E.(2002).Participation and Investment Decisions in a Retirement Plan: The Influence of Colleagues’ Choices.
Journal of Public Economic, 85(1): 121–487 8
8. Does foreign money make us
spend more or less abroad?
With the Easter holiday approaching, we wondered whether people’s
spending patterns change when they travel abroad.
People often say that foreign money feels like play money and therefore
we predicted that people would spend more when they’re abroad.
However, an interesting study has shown that it’s not quite as simple as
that.
Wertenbroch et al. (2007) showed that differences in our spending
patterns when we go abroad arise from a mistake in the way that we
perceive the value of currency. Across a series of laboratory
experiments, they gave participants in the US, Hong Kong and Germany
a budget to spend in either a foreign or local currency and askedwhat
they would spend on a variety of transactions.
The results showed that people spent less in real terms when the
denomination of the currency was less that that of their local currency
(e.g. for a US citizen spendingEuros where $1 = € 0.8). On the other
hand, participants spent more in real terms when the face value of the
currency was higher than their local currency. This is due to a
phenomenon known as the money illusion and occurs because people
evaluate transactions by estimatingthe nominal difference between their
budget and the price of a given good.
Wertenbroch, K., Soman, D., & Chattopadhyay, A. (2007). On the perceived value of money: The
reference dependence of currency numerosity effects. Journal of Consumer Research, 34(1), 1-10.
¥ $
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10. Present Bias
We are impatient and tend to be biased towards making
decisions that provide instant gratification and often put off
decisions that are associated with future outcomes.
We saw this bias earlier this year with a couple who won the
lottery and opted to take £200 million as a lump sum instead of
taking the full £500 million over 30 years in the form of an
annuity. A famous video showing this bias features on the next
page (but you haveto finish reading this page beforeyou can
see it!)
Furthermore, present bias means that we have difficulty
understanding our future requirements and thereforepeople
rarely save enough to liveon in retirement. Currently, only 7% of
the UK are ready for retirement.
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The Marshmallow experiment was published in 1972 and
took place at Stanford University.
Children aged 4-5 were sat in a room and left to face a lone
marshmallow on a plate.
The children were told that they could eat the marshmallow
now, or if they waited until the researcher returned, they
could have two!
The choice was simple: one treat now, or two treats later!
The researcher then left the room and left the childalone
with the tempting treat.
They found that the children that were willingto delay
gratification (or in other words, overcometheir present
bias), were more successful in life. This included higher
SAT scores, lower substance abuse andbetter social skills.
Mischel, W., Ebbesen, E.B., Raskoff Zeiss, A. (1975). Cognitive and attentional mechanisms in delay of
gratification. Journal of Personality and Social Psychology, 21(2): 204-218.
Present Bias
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11. businesses BEhaving
Have you evertried to get out of a gymmembership that you don’t use?
You’re not alone. TheOffice for Fair Trading was concernedthat gymcontracts
were exploiting people’s optimistic viewoftheir future selves and tendency to
overestimate their gymuse.Somegymswere tyingcustomersinto contracts for
three years, and ifthey wantedto terminatetheir contractany sooner,theywould
have to pay all remaining fees.Followingan investigation, the High Court ruled that
the minimumlengthcontract across arange ofgyms were both unfair and
unenforceable.
Since then,we’veseen an emergenceofgyms operating a‘pay as you go’ system.
These gymsare usingtheir understandingofbehavioural economics to restore
customers’trust in the industryand to treat customersfairly.
Ian Nicole
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We love the new pay-as-you-go hipster gymin LiverpoolStreet,1Rebel,
who use one ofthe mostpowerful insightsfrom behavioural economics,
commitment bias,to get customersreturning. Their brick wall actsas a
tangible driver to get fitnessbunnies to commit to sessions.
Operating apay-as-you-gosystemcan be arisky strategy butgiving
customers chalk to writetheir fitnessgoal on thewall and completing a
tally underneathevery time they workout, increasesthe likelihood ofthem
going back.
This is due to the fact that customerscan easilysee theirprogressand
research has shown that ifwe have already madesomeprogresstowards
a goal, we are more likely to completethatgoal, aphenomenon referred
to as the goal-gradienteffect.
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What's yourfavourite
'Nudge' of all time & why ?
That would have to be the
defaulteffect: people tend
to choose the default
option, evenwhenit takes
the same amount of effort
not to do so.
Eric Johnsonand I
published our paper on
organdonor pool
defaults inEuropean
countries in2003
[www.dangoldstein.com/pa
pers/DefaultsScience.pdf}
and it wenton to become a
leading example inbooks
like “Nudge”by Thaler and
Sunstein and “Predictably
Irrational”by Dan Ariely.
We hear it’s used inthe first
lecture of behavioural
economics classes.It’s nice
to see one’s work as a
canonical example. That
one will alwaysbe closeto
my heart.
Who would join you, if you
wrote a bookentitled
'Three Behavioural
Economists in a Boat' ?
I understand that Herbert
Simonsaid "I thought all
economics was behavioral"
many years ago, so I'd like
to have him along in the
boat. However, he's
deceased, so thatis
probably notsucha good
idea. I did getto meethim
when I was a baby, though.
As the other two
economists I'd choose
Charlie Plottand Vernon
Smith because they were
doing behavioral
economics long before
people were saying
behavioral economics, and
their ideas influenced me.
Richard Thalerrecently did
a cameo in 'The Big Short',
looking at yoursecret past
life, will you be in a movie
anytime soon ?
I'm going to play the voice
of ProspectTheoryinan
animated feature based on
the works of Kahneman and
Tversky. Watchoutfor it.
“An interview
with ...
Dan Goldstein”
This month we were lucky enoughto geta couple of minutes with
Dan Goldstein, to ask himsome questions about the weird and
wonderful world ofbehaviouralfinanceand economics.
Click here to try and beat
Dan’s evil dictator game
15 16
12. Nudges on the fly
Our favourite nudgethis month
was spotted in Starbucks!
Why do we love it?
As humans and other animals
approach a goal, their efforts
toward that goal increase, this is
known as the goal-gradient
effect.
We purchase faster if the task is
started for us. Therefore a 10-
space coffee card with 2
stamps will be completed faster
than an empty 8-spacecard.
COMPETITION
Think you’ve seen a notable nudge?
Tweet us a picture with the hashtag
#NudgesOnTheFlyfor a chance to win a
spot in next month’s Funny Money!
@CowryConsulting
Brought to you by…
ZibaGoddard
Choice Architect
zibagoddard@cowryconsulting.com
Raphy March
Behavioural Designer
raphymarch@cowryconsulting.com
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