Money and Psychology
Many, well actually most, economists use theories that suggest that all people are 100% “rational” or “logical” when making decisions about money.
The truth is that all people are 100% logical with money when it comes to relatively simple choices.
If you ask someone, “would you prefer I gave you $25 or $100″? everyone would simply take the $100. Even a total fool would know that a hundred bucks is better than less than that. But that’s too obvious. It’s too easy.
There are many times when people make “stupid” decisions involving money too. They act ‘emotionally’ instead of ‘logically’.
For example, people buy different foods if they go shopping at the grocery story when they are hungry. They are more likely to buy high calorie junk food, even if they don’t plan on eating it right away. That’s an emotional decision.
There are also many scientific studies showing that people spend more money when they are sad. If you show a group of people a sad scene from a movie and then ask them how much they would spend on some item, they will say MORE money than if they didn’t watch the sad movie clip first.
Marketers and advertisers take advantage of all of this human psychology when they do marketing. They will make people feel emotional about their product, which makes them spend more money on their product than they otherwise would.
I love to believe that advertising tricks don’t work on me because I study them. The annoying fact is that they totally do! I’m just as much of a sucker for good advertising as anyone else.
Last night I watched a really really interesting 1 hour documentary about how psychology affects people’s decisions about spending money. It also spoke a lot of the economic housing crash that happened in 2008.
An “economic crash” is when the economy suddenly gets very bad, very quickly. An example is the “housing bubble”. People believed that house prices would keep getting higher and higher, and that they would never come down. People were buying houses like crazy and pushing the home prices up super high. Then one day in 2008, thousands of people couldn’t sell their homes and there were suddenly no more buyers. Home prices fell very quickly and many many people who owned homes could no longer afford to pay the banks back. Many people, including me, believe that we are in another bubble right now and that one day within the next couple of years we’ll see another HUGE crash. I’m not sure exactly when, but I think it’s coming.
The USA has a debt of over 17 trillion dollars! That is over: $17 000 000 000 000 USD. That is INSANE. They are borrowing the money from countries all over the world (China is the biggest lender). The US government will never be able to pay this money back, and when countries start demanding that they get their money back, we are going to see economic problems like we’ve never seen.
Some people will make a lot of money from the crash. And people who don’t work on their skills and make sure they are in a good position to get a good job, will likely lose their jobs and be lucky if they can find a job at MacDonald’s. So…… Another great reason to be focussing on your English (I always like to give you guys extra motivation) but I really do think this will happen.
What do you think about all of this? Do you think marketing affects people’s financial decisions? Do you think the world is borrowing FAR too much money and this will cause huge problems in the near future? Do you believe that now is more important than ever to do what you can to make yourself more competitive in today’s job market? Please share your ideas and opinions below.
I decided to put the full documentary video here in the VIP community for you guys. I think you’ll really enjoy it. I loved it 
August 23rd, 2013 at 2:20 pm
There are a bunch of books that talk about this topic. Right now I just remember “Freakonomics”, “Nudge”, “Thinking, Fast and Slow” and “Predictably Irrational”, and all of them refer to themselves as Behavioral economics’ books. Moreover, Freakonomics’ author has an homonymous podcast on iTunes. It’s a fascinating subject!
August 23rd, 2013 at 2:21 pm
I agree with you again, Andy.
Do you know what is funny with all of that? That there is some group of people who always have money to lend. Money is created easily as debt.
Single people, small businesses or big ones, even COUNTRIES all over the world are indebted. Debt is like some virus who spread everywhere. But there is no end of this debt. All this debt is a fraud. If money were real we would have no debt.
Imagine that gold is a real money as IT SHOULD BE. How bankers could make up gold from nothing? That would be not possible. Gold is gold. But notes or digits on bank’s accounts can be created from nothing, from the air. The question is who are these people who stand behind it? Who has all the power over money today?
August 23rd, 2013 at 6:11 pm
To say that people are 100% rational when it comes to Money is a complete non-sense.Women – unfortunately, mine included – go shopping to relieve stress and ended up buying things completely unecessary.
August 23rd, 2013 at 9:05 pm
There is nothing unusual in this topic. History shows us that all are you talking about already been happened many times in many countries. It calls inflation =)
Or hyperinflation, when its already doesn’t matter how much money do you got.
August 24th, 2013 at 3:23 am
I don’t know what you guys have learned at school, may be capitalist Economy? In China, as part of education in ideology, we all know The evils effects of capitalism, all of us are used to credit Marx’s thought “The theory of capitalism” as truth. According to that theory, too much of pursuing profit could lead to monopoly and finally ruin the world economy. All of phenomenon you mentioned could conclude the capitalism and could find in that theory. All of those will speed up capitalism to death. It’s only a matter of time that USA will end up with huge debt. It may not last until the end of the century.
August 24th, 2013 at 4:10 am
Hi Andy,
I would like to point out two very small notes regarding what you said when some body goes shopping to buy some thing to eat…,
Every body should notice that the cost of eating and drinking is nothing in compare with other expenses that we have in life and it is may be less than 20 percent of the money which is spent in a month , so , I say this to whom which some times let them self to suffer and do not buy some thing to eat just to save money while they loose some money in way that do not see much more that eating costs , so help your self ,the life time will not last much but consider your healthy !
The other note that I want to state is that what is money ? why do you earn money? why do you spend your time to earn it? why do you consume your energy to catch money? why do you suffer and do not take rest to get more money ?
Before to get down on detail,let to clear something about this world, this world has totally made of energy it is full of different kinds of energy that we know , energy is converted from each type to other type but it does not die,that is the NEWOTON rule,for example ,when you say hello to some body with smile, in fact you send to whom one sort of energy, when who replies, send some energy back depending on how who reflect and replies.so people exchanging the energy with each other in any type even with one look always.so you confirm that every thing is energy.
Let back to our question, almost all the people are in condition that they are not satisfied with and they have to do some jobs and functions that they have to ,due to the laws and rules of this life and this world (which if you think deeply and get back to your inherent dignity you will figure out that the life should not be like this and human should have much better life and enjoy of every seconds of their life and in other world they should live their life ).
Anyway so, the people have pushed on the corner and their freedom has been limited, so they have to work they have to do some activity which they do not like, they sell their life time, their healthy ,their energy to get money ,WHY???
Because the money is the raw energy and it is convertible easily to what we want, to what we enjoy of it.
Yes, you are right when we are sad , we change some parts of our money to positive energy ,we may get some goods or go to dance club or to give it to poor people it will be changed to any sort of energy that we need and we like and we want.
Of course people know the mentioned issue but some times we needs to LEARN what we KNOW.
August 24th, 2013 at 2:19 pm
I though about national debts of world countries .. Then checked statistics on wiki. The uncovered truths is its easy to threaten yourself and others with a huge number of 17 trillions while nobody knows what it mean and how it relates to the world and to history etc.
So Wiki told me : all developed countries ( usa, Europe …) have huge debts .
The biggest economy and the second export-country USA has probably the biggest debt …. You take into account how the debt relate to economy size , and the ability to print dollars . Given that , may be the debt is all right ?
What had Wiki told me about developing countries of the world ?
They lend money . They don’t have much debt at all.
Please think about it , try rationalize it?
May be like big organisms – developed counties – are Smarter with money ?
As form of energy Money are important Today, why not borrowing it ? Anyways inflation , unknown future, Third World War are coming… Some economists think the real important thing is economic Balance .. I you can handle you debt – okay . Do it.
Say a guy borrowed 25k usd on the credit card. For some countries it’s huge, huge number . Then say in fact the guy has a monthly income of 25k usd … Now looks better ? Then say – may be he is going to die from cancer … Now it’s a different story..
Check a chaos theory, love it. The ugly truth is nobody really knows the future and its uncontrollable to big degree. USA can thrive for centuries and can go down in 21 , so better get a multipassport and multi-English knowledge
August 24th, 2013 at 4:11 pm
Optimists – learn English, pessimists – learn chinese, realists – study with AK-47…
August 27th, 2013 at 9:20 am
The marketing have a huge influence on people’s decision. We buy things which we don’t really need and spent a lot of money for stupid, unnecessary things. Sometimes I’m trying to be reasonable and I think to myself that I don’t really need this, but another time I buying something under the impulse. Similar situation is in financial area. People buy houses because all media talking about price increase in next year . All of these is nothing else as manipulation techniques and it’s unfortunately have impact on everybody.
August 31st, 2013 at 1:44 am
Aw i love it