How Money Affects Behavior: Irrational Financial Decisions

The ATM Experiment: Money Reduces Helpfulness

A fascinating study published in the Journal of Socio-Economics (2013) revealed how handling money changes behavior:

• 50 people withdrew cash from an ATM, while 50 others walked past without withdrawing
• Researchers then tested their willingness to help:
  • 34% of cash-withdrawers answered a survey vs. 62% of non-withdrawers
  • 60% of cash-handlers alerted someone to a dropped bus pass vs. 96% of others

This builds on prior research showing that money priming (even seeing Monopoly money) reduces helpfulness and increases solitary behavior.

Why Money Makes Us Less Rational

Traditional economics assumes people make logical, calculated decisions (homo economicus). But behavioral economics proves otherwise:

Key Findings in Neuroeconomics:

1. Decision Fatigue (Temple University study):

   • Too many choices (like ice cream flavors) overloads the prefrontal cortex
   • Brain activity drops sharply, triggering emotional responses
   • Result: People default to simple choices (like vanilla)

2. Loss Aversion (NYU research):

   • The brain treats losses as twice as painful as equivalent gains
   • The amygdala (fear center) activates during financial risk decisions
   • Explains why retirees avoid stocks despite long-term gains

3. Personality Drives Money Choices (Tel Aviv University):

   • Conscientious people prefer fixed-rate mortgages
   • Neurotic individuals make larger down payments
   • 30% of people in a dice game chose smaller prizes fearing "karma"

Practical Implications of Behavioral Finance

• Avoid money decisions when sad (increases risk aversion)
• Limit options to prevent decision paralysis
• Recognize emotional biases in investing/housing choices

Conclusion: Money Isn't Rational

From reducing helpfulness to triggering magical thinking, money decisions are deeply emotional. Understanding these psychological money traps can lead to better financial choices.