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Poor Spending and our Genetics?

January 21, 2011

A Halifax advisor colleague of mine Stephanie Holmes-Winton (see her excellent blog at www.advisordefusingdebt.wordpress.com) discusses the research done by Dr. Santos of Yale University. Dr Santos was curious to determine if the poor spending habits of humans comes from a genetic predisposition.  The following is an exerpt from http://www.advisor.ca dated Jan 14, 2011:

Dr. Santos and her team gave their small community of capuchin lab monkeys some money – not real money of course, rather unmarked coins the primates could use like money. This was to be her monkey economy and the coins were the currency. The team of researchers introduced the monkeys to a monkey market which they had created for them. They taught the monkeys how to use their coins to gain food and treats. Our primate cousins quickly got the hang of it and began using their monkey money with ease.

As it turns out, the monkeys got up to a few bad behaviors humans sometimes exhibit, like stealing the coins when no one was looking or taking them from other monkeys.

Things were humming along at the monkey market and then came the twist: the monkeys were given situations where they had to take risks. Dr. Santos wanted to see if the primitive friends would make the same mistakes we humans do when presented with financial risk. What they found is that monkeys, just like humans dislike loss more than they like gains.

In the end, Santos and her team discovered that indeed those impulses that drive our financial behavior were no different than those of our very prehistoric relative “Ida”, the lemur. Our financial behavior is indeed to some extent is in our DNA and a 35-million-year-old habit can be hard to break.

I surmise that the very same carnal impulse that causes us to zig when we should zag in the market also drive our behaviors around spending and debt. The very instincts that once upon a time kept us alive don’t always serve our financial best interest. The best part of Santos’ discovery is that we are not destined to repeat the monkey’s behavior or even our own. Our ability to see what we have done and make a different choice is remarkable.

Make no mistake behavior is a huge part of finance from the panicked investor wanting to sell at the worst possible time to the borrower purchasing a house they can’t afford. It’s coming from the same place in our brains. Offering clients’ behavior change recommendations as part of their work with you may go a long way to helping them make meaningful financial change without allowing irrational instincts to sabotage their efforts.

To add somewhat to this I ask you if you really should be upset because our neighbor bought a new SUV and you have no kids. What the hell do you need such a ridiculous new vehicle for if yours is perfectly acceptable and paid for and running well. This need to compete is undoubtedly also part of our genetics as well and is often a major part of our financial undoing. It is a self-conscious “tell” of our weakened emotional state and only leads us into unnecessary debt. Your emotional health should be based on how much cash flow you retain, not how much you display.

So, what do we do with this new found knowledge?  Again, I turn to Stephanie for a creative resolution for 2011:

As the new car smell of 2011 wears off and the excitement of promises made during a champagne induced pledge to be better this year fades, I’ve got a challenge for you.  Let’s start a resolution revolution.  Every year millions of us make a resolution to do better with our money, but generally by the third week of January we’ve abandoned the thought and gone right back to what we were doing before.

If you change nothing, you change nothing.  One thing I know is that our clients will not listen to advice that we are not willing to follow ourselves.  So for the next four weeks I dare you to be the change!  From today until midnight 28 days from now change the way you spend.

Go On A Cash-Diet

Don’t worry; there are no pesky points or weigh-ins on this diet.  All you have to do is this:

  • Gather your family  (if your are single, get a few friends together to join you in your resolution);
  • Decide how much money you are willing to spend on a weekly basis on emotionally affected expenses such as food, clothing, entertainment, gifts, coffee, eating out, liquor, etc.;
  • Elect one person to retrieve your family’s weekly cash amount;
  • Divide the funds based on who normally does what, making sure everyone has at least a small amount to spend on themselves only;
  • And repeat for four weeks.

Rules

  • NO ADVANCES.  Take the cash on the same day every week.
  • TELL EVERYONE.  The more people you tell about your little resolution the more revolutionary it will become.  Tell clients too; they might just start to open up about their cash flow knowing you are working on yours.

You can do just about anything for four weeks.  I myself live like this most of the time, and I’ll be on it with you because I wouldn’t ask you to do anything I wouldn’t do.  The limit isn’t as important as the fact that there is a limit.  So, in the words of a very famous active wear company … just do it!

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