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The Psychology of Love and Money

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A little while ago, I got an email from a Dr. Daniel Crosby who works at IncBlot Organizational Psychology (seems like he runs the company, I couldn't tell for sure). How long was a little while ago? I remember when I got it, because it was the day my son was born. Little Man is over 9 months old now. I am a heel and should have covered this before now.

The email caught my attention. I get a little bit of a kick when a doctor sends me an email that starts with "Hey Lazy..." (I know I brought that on myself.) I get a lot of requests from people to highlight whatever it is they are working on with my readers. I'd say that over 99% of it is junk or nothing very special. However, Dr. Crosby's work was different. It was a TEDx talk. If you aren't familiar with TED, I don't know how you found my website. However, Wikipedia gives a good introduction. I'd describe as a bunch of brilliant people imparting their best wisdom on the world... and you get to watch it free!

I hesitated to embed the video here just because it's over 18 minutes long. I understand your time is valuable. I found this more entertaining and informative than almost everything on television today. In case you didn't get it from the title of the article, the video is about the psychology of money. As you might guess, people don't always act rationally to money. (If they did, this video would be very boring.) The video covers some of the irrational ways we act. I don't know if there are official terms for psychological phenomena that Dr. Crosby talks about, but I'll cover a few after the video:

The talk focuses on four specific psychological pheneomena, but I'll outline the whole thing here to make it easy for you. One of the great things about the talk that I overlooked the first time (I was focused on the money) is that he compares the irrational behavior that people have with love with money.

  • I Can Change Them
    • We Feel We Can Change Lotto Odds - In love, people often have a bias towards fixing someone (for lack of a better term). We feel we can change them. When it comes to money, we are the same way. In a $100 lottery with 50 tickets people are willing to pay nearly $2.00 for a ticket that is choosen for them (as you might expect). However, if they are given the chance to choose the ticket, they'll pay almost $9. We think we can change the odds. (I asked Crosby for a citation of this and he said believed it was from Langer 1974 in the Journal of Personality and Social Psychology.)
    • We Over-Invest in What We Know - We think our experience with the company or product is going to lift the stock price. He cites the Facebook IPO and how Facebook warned us about the financial problems with the company.
    • We Invest in companies we work for... even when we don't significantly matter to that company's success. The example cited is the person who works for Coke and invests in the company. You aren't likely to change Coke unless you are meeting with the C-level executives on a fairly regular basis.
  • This Time It's Different - The example here is that Liz Taylor believed this each of the numerous times she got married. In terms of money, the phenomena is called New Era Thinking. He cites the tulip bubble in the Netherlands in the 1630s where people would pay 10x the yearly pay of a skilled guilder for a single tulip bulb. Dr. Crosby says that it's easy to dismiss this kind of thing as antiquated thinking, but it comes up recently with the tech bubble and he cites eToys when it was valued more than Toys R Us when it very little sales and no profit.
  • Prince Charming Bias - A high-impact, low-probability event will come sweep us off our feet and make all our romantic or financial problems disappear. He points out the stories of Cinderella, Snow White, and Sleeping Beauty. Only Sleeping Beauty's Prince has a real name. It's not important to the story for the other princes to have names, we know what they stand for which is what matters. Dr. Crosby compares this to the lottery. The people who play the lottery are the ones who typically can least afford to. Those with masters and Ph. D. are the least likely to play. He cites that you are 9 times more likely to be crushed by your television than to win the lottery, but you'd never bet on such a thing. If you do win the lottery, be careful what you wish for, because there is a good chance that you'll gain weight, not be happier, and broke in five years.
  • Just Can't Quit You Bias - Breaking up with a partner is terrible (this isn't exactly news). We have same problem with money. The gambler can't quit the table, because he can't stand being a loser. A person buying a stock that loses money tends to ride on it to the bottom, because they can't stand a sure loss.

I had a few thoughts while listening to this presentation. When Dr. Crosby was talking about Facebook, I recall that I bought some at $26 and some more at $19 because I realize that a number of people have a "Can't Quite You Bias" with the company. (At those prices, I found the valuation fair. I sold off most of my ownership at $33 at locked in some gains.) His response was that at some price Facebook makes sense, just not $38. (I agree.)

I also thought that the eToys vs. Toys R Us was an interesting comparison. What if it was Amazon vs. Barnes and Noble? Ebay vs. Sotheby's? His response was that eToys had a lot more vapor surrounding it. I remember Amazon being referred to for years as Amazon.org, because they never made a profit. He agreed that breakthrough companies do indeed change the game. The problem is figuring out what these are. Seems like Netflix has been up and down that roller coaster a number of times.

In the end, these biases are certainly worth acknowledging. It reminds me a lot of the article I wrote about why people buy into MLM health products that appear to be nothing more than snake oil.

Posted on July 9, 2013.

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2 Responses to “The Psychology of Love and Money”

  1. […] Man @ Lazy Man and Money writes The Psychology of Love and Money – One of the great things about Dr. Daniel Crosby’s talk that I overlooked the first […]

  2. […] a year ago, I wrote about The Psychology of Love and Money. That is to say that I covered a YouTube clip that economic behavior psychology guy (certainly not […]

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