Toshl Finance Blog

How To Be Smarter Than Monkeys About Personal Finance

I know, the title sounds silly. You’re probably thinking: “Of course I’m smarter than monkeys, I have a savings account and abstract currencies and Apple Pay on my watch and….” That’s all true, these are all things that monkeys don’t use. At least the ones I know. But in some ways we still default to our basic and dreadfully wrong primate instincts when dealing with money. It’s vital that we acknowledge those predispositions and learn to overcome them.

Laurie Santos is a cognitive psychologist that set out to discover where our predispositions about finance come from. At the heart of the problem is the ever-present question of environment versus genetics. In other words, when we’re dealing with personal finances, which parts of our behaviour are defined by our mostly human-created environment and which behaviours are genetically hard-wired into our brains.
Here are the surprising results she discovered.

It turns out that the economic and behavioural principle of loss aversion which has been proven in humans also happens with monkeys. In practical terms, this means that we are much more prone to take big risks when there is a threat of losing money, than we are when there is an opportunity to gain additional money.
Understanding this principle and being aware of it can matter a great deal when making investments. People tend to be conservative with their decisions when a stock is doing well, but are usually much slower to sell if the stock is doing badly compared the when they first purchased it. We more often take the risker road of holding on to the stock, even-though there might not be a rational reason to think it will do better soon.
But it’s useful to keep this principle in mind in daily situations as well, since it’s commonly used in marketing as well. Getting a 10 € discount or avoiding a 10 € surcharge has a different ring to our ears, even though they are the same thing from a financial point of view.
So let’s all keep in mind that in some ways we’re no better than monkeys when it comes to money. If we’re aware of our irrational predispositions we can overcome them and become rational about personal finance. Otherwise we don’t really deserve to be called homo sapiens sapiens.
Posted in Personal finance, Tips & Tricks