Sunday, April 7, 2013

When money is tight, do we spend or save?


If you lost your job today, what would you be more likely to do?

            A)    Use the excess money from your last paycheck to splurge on dinner at your favorite restaurant
                                                         or
            B)    Increase the contribution you make to your savings this month

According to the ‘life-history theory’, A represents more of a fast life strategy, while B represents a slow life strategy. Fast and slow life strategies explain how different groups of people behave as a function of their evolutionary environment. Individuals who live in a dangerous or stressful environment have to spend their resources on surviving in the present moment, or have to have fast strategies for survival. For example, females who live in an environment with a high rate of disease or multiple threats to survival start having children at younger ages to increase the likelihood of having at least one child reach adulthood. In contrast, individuals who live in a safe and enriched environment spend their resources on flourishing in the future, or have slow strategies for survival. For example, females who live in an environment with an abundance of resources and protection start having children at later ages to increase the amount of resources that offspring has available to them, and thus have more advantages throughout development. In the example above, both solutions serve a positive purpose. Option A serves the purpose of mitigating stress and worry while option B will result in more available resources for the challenging days to come.

A group of psychologists recently published a paper examining how fast and slow life strategies relate to socioeconomic status. Previous research has shown that when people are worried about money, some people increase their spending and risk-taking while others conserve. In a study published this year, Dr. Griskevicius and his colleagues at the University of Minnesota reported their findings from three experiments which address the question:

Does how much money we had when we were children determine our financial decisions as adults? 

To answer this question they recruited three samples of adults and asked them a number of questions about their financial stability as children. Then they proceeded to conduct three experiments. In each of these studies, half of the participants were primed with information about financial insecurity, the recession condition, and half weren’t primed, the control condition.  In the first study, they showed half the participants images of recession related photos (e.g., photos of unemployment lines and soup kitchens). The other half of the participants viewed images that were neutral like trees and hills. After viewing the photos, all of the participants completed computer tasks where they made decisions about financial risk-taking and delay of gratification. For example, in the risk-taking computer task, they were given the choice between having a 50% chance of getting $10 or a 10% chance of getting $50. In the delay of gratification task, the participants were given the choice of receiving $10 today or $20 in 2 weeks. What they found was that adults who had financial worries as children were more likely to take financial risks and choose not to delay financial rewards if they were in the recession condition.

To further test this finding, they conducted a 2nd study. They gave a new set of participants one of 2 fake newspaper articles to read. In the recession condition, the participants read a “doom & gloom” newspaper article about the current state of our economy and the negative implications it will have for young adults today. In the control condition, individuals read a neutral article of similar length. After reading the articles, the participants played a game where they saw images of common luxury brands (e.g., Rolex, Porsche) and used a joystick to “pull” the brands they like towards themselves and “push away” the brands they didn’t. Consistent with the first experiment, they found that the participants in the recession condition who grew up with concerns about financial security pulled luxury brands faster and with more force. In contrast, participants who reported financial security during childhood and read the article about the recession were more likely to push the luxury brands away.

Finally, they conducted a 3rd experiment to see if stress had anything to do with these findings. In this study, they had half the participants read the recession article and the other half read the neutral article. Then they played a balloon game, where they get 10 cents for every pump of air that goes into the balloon, but they lose all of their money if the balloon pops. In this study they also measured how much stress hormone each participant produced during the balloon game. They found that participants in the recession condition with financial insecurity during childhood produced more stress hormones and also took more risks during the balloon game. Thus, they not only found that childhood financial security determines your financial behavior as an adult, but also that a biological stress system was motivating this behavior.

Together, these three studies mean that if you were concerned about money and resources during childhood, you are more likely to spend and make risky financial decisions than when you are stressed about money. What’s most interesting about the findings of these three experiments is that under the control conditions, when people are not primed with financial concerns, the participants all perform similarly. Many psychologists have written about the phenomena that, despite many programs aimed at income inequality, people who were raised with few resources seldom escape their financial problems. These findings are evidence that this phenomenon may not be driven by daily habits, but rather differences in how individuals behave in times of stress.

What remains to be understood in psychology is how these “financial concerns” really relate to survival in this modern age. The participants in this study may have come from a wide range of economic backgrounds, but I would venture to say that few of them ever lived without shelter or food. Generally in psychology, but specifically in this study, it’s still unclear whether rational behavior in an economic context is consistent with rational behavior in a biological context. The question is whether the conditions in this experiment parallel our “real life” stress related to financial well-being and further, whether financial well-being extends from whether we can afford to eat to whether we can afford to buy an iPad. If so, the New York Times may be forcing us to engage in “retail therapy” merely by reporting daily news.

The take home message that can clearly be gleaned from the findings of these studies is simple. Regardless of your perceptions of financial security during childhood, we all could benefit from a bit more self-monitoring when it comes to financial decisions. The next time you decide to buy something or abstain from buying something, think about whether your motivation to choose one over the other is related to a recent financial stressor. If so, perhaps the timing is wrong.

Griskevicius, V., Ackerman, J. M., CantĂș, S. M., Delton, A. W., Robertson, T. E., Simpson, J. A., ... & Tybur, J. M. (2013). When the Economy Falters, Do People Spend or Save? Responses to Resource Scarcity Depend on Childhood Environments. Psychological science, 24(2), 197-205.

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