Rational economic theory would say that a quid is a quid – it can just about cover you for a chocolate bar and a bag of crisps. But how we perceive the value of that pound changes depending on how we got it in the first place. A pound found down the back of the sofa is a windfall, whereas the coin in our savings account is more likely to go towards a holiday abroad or a car.
Having a basic handle on behavioural science not only helps explain why we make certain decisions when it comes to money, it can encourage us to change our mindset and habits for the better. Behavioural science is also being used increasingly by regulators and companies alike to understand everything from how consumers handle debt to why they give to charity.
You may be richer than you think
David Bach, American author of The Latte Factor, espouses behavioural science as a way for ordinary people to realise they are richer than they think. He says that saving $2,000 a year from 19 to 26 ($5.41 a day) means they will have $1 million by 65. Most of us are not millionaires, but according to people like Bach, most of us have a serious spending problem.
How to counter that? Author of You’re Not Broke You’re Pre-Rich, Emilie Bellet, encourages readers try to adopt a “growth” money mindset, where you encourage yourself to keep up with those small, positive changes, instead of convincing yourself you might as well give up at the first hurdle. Yes, you can get out of debt. Yes, you can stick to a budget. You can save for your retirement. It also means being kind to yourself, just as you would if your best friend came to you with a money problem.
“It’s not our net worth, but our self-worth, that is the number one goal,” she writes.