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The weird and wonderful world of behavioural

finance and economics

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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’d envision,

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 ofbehavioural finance and economics

“How could economics not

be behavioral? If it isn’t

behavioral, what the hell is

it?”

Charlie Munger,

Warren Buffett's right hand man.

1 Sunny MoneyWhat does the sun have to do with how we spend our money?

17 Nudge of

The Monthcont

ents

We Love

2 MINREAD

3 Healthy MoneyCan spending money on others make you healthier?

5 Earnest MoneyWhy are self-made billionaires more generous than billionaires who inherit their wealth?

7 Bloody MoneyNeed pension advice? Ask the butcher

9 Foreign MoneyDoes foreign money make us spend more or less abroad?

16 An Interview with

Dan Goldstein

11 The Financial Bias

of the Month

15 Businesses BEhaving

4 MINREAD

2 MINREAD

2 MINREAD

2 MINREAD

5 MINREAD

2 MINREAD

5 MINREAD

1 MINREAD

What does the sun have to do with how we spend

our money?

Surely something as abstract as the weather wouldn’t get in the way of the important life decisions we make, including what to invest in? Think again.

Recent research has found a significant relationship between 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 tend to lack energy and feel depressed and as a result have a more pessimistic outlook 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 and a 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 bond returns (Cheng, 2015).

Cheng, X. (2015) Are UK Financial Markets SAD? A Behavioural Finance Analysis. PhD thesis, University of Sheffield.

Sat Sun Mon Tue Wed16ºC 17ºC 20ºC 11ºC21ºC

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1Otto, 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 from laboratory 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 cloud and 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 studied the 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 suggested that 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 research comes with the hazard warning that more sun doesn’t lead to an increase in the chance of winning the lottery!

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Can spending money on others make you healthier?

The political philosopher and economist, John Stuart Mill, said it best when he described how 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 could actually 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 assigned to spending money 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 Money on Others Good for Your Heart? Health Psychology. 3 4

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 promised to donate 99% of his wealth and so far has donated $11 billion. Even Mark Zuckerberg recently 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 Giving Pledge or enter the Philanthropy Top 50 list of biggest donations (Coupe & Monteiro, 2013). Bill Gates originally made this observation a few years ago, stating that “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 who are 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 up to 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 would if 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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Need pension advice? Ask the butcher!

We tend to believe that people in authoritative positions, such as CEOs, doctors and sporting 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 wearing a 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 perceived as 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 found that the 401(k) pension plan choices of their employees were remarkably similar within the same stores but the investment choices between the supermarket stores varied hugely. When they dug deeper, they realised that 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

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 asked what 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 spending Euros 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 estimating the 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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The

A -ZOf

financial biases

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And the financial bias of the month is…

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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 have to finish reading this page before you can see it!)

Furthermore, present bias means that we have difficulty understanding our future requirements and therefore people rarely save enough to live on 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 child alone with the tempting treat.

They found that the children that were willing to delay gratification (or in other words, overcome their present bias), were more successful in life. This included higher SAT scores, lower substance abuse and better 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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businesses BEhaving

Have you ever tried to get out of a gym membership that you don’t use?

You’re not alone. The Office for Fair Trading was concerned that gym contracts were exploiting people’s optimistic view of their future selves and tendency to overestimate their gym use. Some gyms were tying customers into contracts for three years, and if they wanted to terminate their contract any sooner, they would have to pay all remaining fees. Following an investigation, the High Court ruled that the minimum length contract across a range of gyms were both unfair and unenforceable.

Since then, we’ve seen an emergence of gyms operating a ‘pay as you go’ system. These gyms are using their understanding of behavioural economics to restore customers’ trust in the industry and to treat customers fairly.

Ian Nicole

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We love the new pay-as-you-go hipster gym in Liverpool Street, 1Rebel, who use one of the most powerful insights from behavioural economics, commitment bias, to get customers returning. Their brick wall acts as a

tangible driver to get fitness bunnies to commit to sessions.

Operating a pay-as-you-go system can be a risky strategy but giving customers chalk to write their fitness goal on the wall and completing a

tally underneath every time they workout, increases the likelihood of them going back.

This is due to the fact that customers can easily see their progress and research has shown that if we have already made some progress towards a goal, we are more likely to complete that goal, a phenomenon referred

to as the goal-gradient effect.

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What's your favourite'Nudge' of all time & why ?

That would have to be the default effect: people tend to choose the default option, even when it takes the same amount of effort not to do so.

Eric Johnson and I published our paper on organ donor pool defaults in European countries in 2003[www.dangoldstein.com/papers/DefaultsScience.pdf } and it went on to become a leading example in books like “Nudge” by Thaler and Sunstein and “Predictably Irrational” by Dan Ariely.

We hear it’s used in the first lecture of behavioural economics classes. It’s nice to see one’s work as a canonical example. That one will always be close to my heart.

Who would join you, if you wrote a book entitled 'Three Behavioural Economists in a Boat' ?

I understand that Herbert Simon said "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 that is probably not such a good idea. I did get to meet him when I was a baby, though.

As the other two economists I'd choose Charlie Plott and Vernon Smith because they were doing behavioral economics long before people were saying behavioral economics, and their ideas influenced me.

Richard Thaler recently dida cameo in 'The Big Short', looking at your secret pastlife, will you be in a movieanytime soon ?

I'm going to play the voiceof Prospect Theory in ananimated feature based on the works of Kahneman and Tversky. Watchout for it.

“An interview with ...

Dan Goldstein”

This month we were lucky enough to get a couple of minutes with Dan Goldstein, to ask him some questions about the weird and

wonderful world of behavioural finance and economics.

Click here to try and beat Dan’s evil dictator game

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Nudges on the fly

Our favourite nudge this 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-space card.

COMPETITION

Think you’ve seen a notable nudge?

Tweet us a picture with the hashtag #NudgesOnTheFly for a chance to win a

spot in next month’s Funny Money!@CowryConsulting

Brought to you by…

Ziba GoddardChoice Architect

zibagoddard@cowryconsulting.com

Raphy MarchBehavioural Designer

raphymarch@cowryconsulting.com

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see you next month!