The New Psychology of Money

THE NEW PSYCHOLOGY OF MONEY
The New Psychology of Money is an accessible and engrossing analysis of our psychological
relationship to money in all its forms.
Comprehensive and insightful, Adrian Furnham explores the role that money plays in a
range of contexts, from the family to the high street, and asks whether the relationship is
always a healthy one. Discussing how money influences what we think, what we say and
how we behave in a range of situations, the book places the dynamics of high finance and
credit card culture in context with traditional attitudes towards wealth across a range of
cultures, as well as how the concept of money has developed historically.
The book has various themes:
• Understanding money: What are our attitudes to money, and how does nationality,
history and religion mediate those attitudes?
• Money in the home: How do we grow up with money, and what role does it play
within the family? What role does gender play, and can we lose control in dealing with
money?
• Money at work: Are we really motivated by money at work? And what methods do
retailers use to persuade us to part with our money?
• Money in everyday life: How do we balance the need to create more money for
ourselves through investments with the desire to make charitable contributions, or give
money to friends and family? How has the e-revolution changed our relationship to
money?
Radically updated from its original publication in 1998, The New Psychology of Money is a
timely and fascinating book on the psychological impact of an aspect of daily life we generally
take for granted. It will be of interest to all students of psychology, economics and business
and management, but also anyone who takes an interest in the world around them.
Adrian Furnham is Professor of Psychology at University College London. He has

lectured widely abroad and held scholarships and visiting professorships at, amongst others,
the University of New South Wales, the University of the West Indies, the University of
Hong Kong and the University of KwaZulu-Natal. He has also been a visiting professor of
Management at Henley Management College. He has recently been made Adjunct Professor
of Management at the Norwegian School of Management.
Thispageintentionallyleftblank
THE NEW PSYCHOLOGY
OF MONEY
Adrian Furnham
routledge
routledge
taylor&francis group
london and new york
First published 2014
by Routledge
27 Church Road, Hove, East Sussex BN3 2FA
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2014 Adrian Furnham
The right of Adrian Furnham to be identified as author of this work has been
asserted by him in accordance with sections 77 and 78 of the Copyright,
Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in writing from the
publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
Furnham, Adrian.
The new psychology of money / Adrian Furnham.
pages cm
ISBN 978-1-84872-178-4 (hbk) -- ISBN 978-1-84872-179-1 (pbk) 1.
Money--Psychological aspects. I. Title.
HG222.3.F867 2013
332.401’9--dc23
2013038605
ISBN: 978-1-84872-178-4 (hbk)

ISBN: 978-1-84872-179-1 (pbk)
ISBN: 978-0-20350-601-1 (ebk)
Typeset in Bembo
by Saxon Graphics Ltd, Derby.
For Michael Argyle
My co-author, DPhil (Oxon) supervisor, and guide
Godspeed
CONTENTS
List of illustrations ix
List of tables xi
Preface xiii
1 The psychology of money 1
2 Money today 15
3 Different approaches to the topic of money 33
4 Money and happiness 55
5 Money attitudes, beliefs and behaviours 81
6 Understanding the economic world 115
7 Economic socialisation and good parenting 139
8 Sex differences, money and the family 165
9 Money madness: money and mental health 183
10 Money and motivation in the workplace 211
11 Behavioural economics 237

viii Contents
12 Persuasion, pricing and money 259
Appendix 1 281
Appendix 2 285
References 289
Index 308
LIST OF ILLUSTRATIONS
4.1 The evidence for the Easterlin hypothesis 65

5.1 Materialism and work–family conflict 107
9.1 A strategy to understand typologies 198
9.2 Questions to determine type 199
10.1 Money and performance 215
10.2 Key variables in performance-related pay 225
11.1 The pain and pleasure of loss and gain 239
LIST OF TABLES
1.1 Unusual items which have been used as money 7

2.1 Today’s equivalent to £1m in the past 19
2.2 Reasons for millionaires’ wealth accumulation 20
4.1 Income as a predictor of happiness and well-being 71
4.2 Impacts on the money/happiness relationship 75
5.1 Factor loadings for the Money Ethic Scale 83
5.2 The money contented and the money troubled 87
5.3 Money associations and gender 88
5.4 Four-factor measure of attitudes to money 93
5.5 Four dimensions of money 96
5.6 Empirical studies: methodological characteristics and demographic
and personality factors that do and do not influence money attitudes 99
5.7 The items for the Money Attitudes scale 102
5.8 The Economic Beliefs Scale: instructions, items, format and scoring 104
6.1 Dates, samples and stages found in studies of the development
of economic understanding 117
6.2 Percentage of participants nominating the 11 ‘issues’ on which
government spends taxation money 129
6.3 Percentage of participants specifying taxes (other than income tax)
that (British) people have to pay 129
7.1 Children have a large disposable income: consider the British data
from the Walls’ annual survey, in the last century 144
7.2 The proportion of respondents who believe schools should teach
11 finance-related topics at secondary school, and levels of
significance for the logistic regression analyses with the seven
background variables 146
7.3 British parents’ beliefs 150
xii List of tables
8.1 Money grams 176

9.1 Money pathology of the British people 185
9.2 A test of the anal character 188
10.1 Reactions to inequity 218
10.2 Effectiveness of merit-pay and bonus incentive systems in
achieving various desired effects 228
10.3 Advice for managers 230
12.1 Increasing donations 266
12.2 Common pricing techniques 276
PREFACE
The Psychology of Money was published in 1998. It has been reprinted half a dozen
times and translated into various languages including Chinese and Portuguese. It
has been quoted over 350 times in the academic literature and was well reviewed.
It has been bought in bulk by banks as well as conference organisers, and I once
recall signing 300 copies in one session for those attending a conference.
It was written by myself and Michael Argyle, my PhD (DPhil) supervisor at
Oxford. The reason we collaborated on the book was really a chance remark made
15 years after I graduated. Michael used to tell people that he kept a “secret list” of
topics that, for some reason, psychology had neglected and about which he
intended to write books. One was happiness and he was among the first to write a
book on that topic, foreshadowing Positive Psychology. Another was money. We
had both noticed that even work/organisational psychology seemed to really
neglect the issue, and it was rare to find any psychology textbook that had money
in the index. It was as if psychology had left the topic completely to the economists,
who, as we shall see, treated the topic very differently. They believed it was the
measure of all things but that it cannot itself be measured. They believed we were
all rational beings bent on money accumulation.
I had been working on the topic for some time and had published various papers
on it. In 1984 I developed a measure to assess attitudes to money which is now one
of my most quoted papers. I had been particularly interested in children and money;
more particularly how they think about, and use, money. I had in fact started
writing the book, called The Psychology of Money, when Michael mentioned the
topic and his plan. I told him my story and we jointly agreed to write the book
together. It was not our first and we knew each other well. We had somewhat
different interests and rather different styles but that was relatively easily sorted out.
I wrote many of my chapters while working in New Zealand.
xiv Preface
Michael wrote four of the chapters: those on possessions, money and the family,
giving money away and the very rich. All have been radically changed. In this book
I have completely revised all the chapters on donating/giving money away and
enormously expand the chapter on the very rich to include biographies of those
with odd money habits. I have added new sections and the references have almost
doubled. There is a whole new chapter on perhaps the most important new
development in the area, namely behavioural economics. There is also a whole chapter
on pricing and persuasion, and the way commercial organisations exploit our
thinking about money. The chapter on children and money has been radically
revised. The chapter on attitudes towards, and beliefs about, money has been
greatly expanded. This is as much a new book as a second edition.
It is, of course, quite right that the book is dedicated to Michael. He was the
kindest and most generous of men and I miss him still. He gave me confidence in
my abilities at an early age and encouraged me to write and research topics I found
of interest. I was one of his 50 doctoral students and his legacy is immense. I am
not sure that he would have approved of all the contents of the second edition but
know he would be forgiving of my misjudgements and peculiar enthusiasms.
I have tried to make this book both academically sound and well referenced but
also approachable for those simply interested in the topic. I have found when
giving both academic and popular talks about money that almost everyone is
interested in some aspect of the topic. They recognise their (and others’) foibles
and fantasies, hopes and fears, rational and arational beliefs.
The topic of this book has attracted a lot of attention because money remains of
great interest to many people. The BBC and other networks, I am sure, must have
a file and next to the word money is my name. I am asked to appear on radio or
television at least half a dozen times a year very specifically to talk about money-
related issues. I did a dozen programmes on lottery winners as well as famous
misers, tax dodgers and spendthrifts. I am also asked to talk about children’s pocket
money and how to make them more economically responsible and literate.
The media are particularly beguiled by the Easterlin hypothesis and how little
money you need to achieve maximal/optimal happiness. The issue is the very
contentious relationship between money and happiness and how much of the
former you need to maximise the latter. The media, and I think people in general,
have an insatiable desire to know more about money and why people seem so
obsessed and irrational about it. All the recent work on “obscene banker bonuses”
and the feeding frenzy of people in the money world still attracts attention. There
are endless articles on the problems, particularly the unintended consequences, of
performance-related pay.
But I certainly know that writing this book will not make me rich! Indeed, it is
not intended to do so. My own money beliefs, behaviours and indeed pathology
are to be found in the appendices, should anyone be interested. Further, I should
confess that most of our family money affairs and issues are dealt with by my wife.
We academics are strangely incompetent at practical issues.
Preface xv
I have been helped and assisted by many people in the writing of this book. I
need to thank particularly various groups of individuals. First, there are my
colleagues at Mountainview Learning, especially Gorkan Ahmetoglu and Evengiya
Petrova. They have helped me enormously in some areas, such as the psychology
of pricing and behavioural economics as well as policies of donating: two chapters
that are as much their work as mine. Indeed much of Chapters 10 and 11 are reliant
on our joint work and reports that we presented to different organisations, such as
the Office of Fair Trading.
Next there have been my research assistants from Bath university over the years,
particularly Rebecca Milner, Kate Telford, Sharon Boo and Will Ritchie, who
have located and summarised articles and set me straight on various topics. Will, in
particular, has spent hours checking references as well as doing proofreading, which
I am famously bad at, as well as helping me to get the last revision into shape.
Third, there have been my academic colleagues, particularly Sophie von Stumm
and Tomas Chamorro-Premuzic, who have helped on numerous papers and
projects. To be surrounded by talented, positive, attractive people while working
on something that interests one is surely a very great privilege. Others, like Richard
Wolman, Thomas Bayne and John Taylor have always been a good sounding
board and source of new ideas for me to work on.
Of course, I have to take full responsibility for all errors and misjudgements in
the text.
Adrian Furnham
Bloomsbury 2013
1
THE PSYCHOLOGY OF MONEY
Money is like promises – easier made than kept.

Josh Billings
If you wonder why something is the way it is, find out who’s
making money from it being that way.
Anon
I do everything for a reason, most of the time the reason is money.

Suzy Parker
Always remember, money isn’t everything – but also remember to

make a lot of it before talking such fool nonsense.
Earl Wilson
Introduction
The New Oxford (Colour) Thesaurus defines money thus:
Money n: affluence, arrears, assets, bank-notes, inf bread, capital, cash,

change, cheque, coin, copper, credit card, credit transfer, currency,
damages, debt, dividend, inf dough, dowry, earnings, endowment, estate,
expenditure, finance, fortune, fund, grant, income, interest, investment,
legal tender, loan, inf lolly, old use lucre, mortgage, inf nest-egg, notes,
outgoings, patrimony, pay, penny, pension, pocket-money, proceeds,
profit, inf the ready, remittance, resources, revenue, riches, salary, savings,
silver, sterling, takings, tax, traveller’s cheque, wage, wealth, inf the
wherewithal, winnings.
2 The New Psychology of Money
The above definition gives some idea of all the money-related issues that will be
discussed later in the book. Money not only has many different definitions – it has
multiple meanings and many uses. The sheer number of terms attests to the
importance of money in society.
Money is, in and of itself, inert. But everywhere it becomes empowered with
special meanings, imbued with unusual powers. Psychologists are interested in
attitudes toward money, why and how people behave as they do toward and with
money, as well as what effect money has on human relations.
The dream to become rich is widespread. Many cultures have fairy tales, folklore
and well-known stories about wealth. This dream of money has several themes.
One theme is that money brings security, another is that it brings freedom. Money
can be used to show off one’s success as well as repay those who in the past slighted,
rejected or humiliated one. One of the many themes in literature is that wealth
renders the powerless powerful and the unloved lovable. Wealth is a great transforming
agent that has the power to cure all. Hence the common desire for wealth and the
extreme behaviours sometimes seen in pursuit of extreme wealth.
However, it is true to say that there are probably two rather different fairy tales
associated with money. The one is that money and riches are just desserts for a good life.
Further, this money should be enjoyed and spent wisely for the betterment of all.
The other story is of the ruthless destroyer of others who sacrifices love and happiness
for money, and eventually gets it but finds it is of no use to him/her. Hence all they
can do is give it away with the same fanaticism that they first amassed it. Note the
moralism in the story, which is often associated with money.
The supposedly fantastic power of money means that the quest for it is a very
powerful driving force. Gold-diggers, fortune hunters, financial wizards, robber
barons, pools winners, and movie stars are often held up as examples of what money
can do. Like the alchemists of old, or the forgers of today, money can actually be
made (printed, struck, or indeed electronically moved). Money through natural
resources (oil, gold) can be discovered and exploited. Money through patents and
products can be multiplied. It can also grow in successful investments.
The acceptability of openly and proudly seeking money and ruthlessly pursuing
it at all costs seems to vary at particular historical times. From the 1980s to around
2005 it seemed quite socially acceptable, even desirable, in some circles to talk
about wanting money. It was acceptable to talk about greed, power and the
“money game”. But this bullish talk appears only to occur and be socially sanctioned
when the stock market is doing well and the economy is thriving. After the various
crashes this century, brash pro-money talk is considered vulgar, inappropriate and
the manifestation of a lack of social conscience. The particular state of the national
economy, however, does not stop individuals seeking out their personal formula
for economic success, though it inevitably influences it. Things have changed since
the great crash of 2008.
Money effectiveness in society now depends on people’s expectations of it rather
than upon its intrinsic or material characteristics. Money is a social convention and
hence people’s attitudes to it are partly determined by what they collectively think
The psychology of money 3
everyone else’s response will be. Thus, when money becomes “problematic” because
of changing or highly uncertain value, exchange becomes more difficult and people
may even revert to barter. In these “revolutionary” times long-established, taken-for-
granted beliefs are challenged and many people find themselves articulating and
making explicit ideas and assumptions previously only implicitly held.
One of the most neglected topics in the whole discipline of psychology, which
prides itself in the definition of the science of human behaviour, is the psychology
of money. Open any psychology textbook and it is very unlikely that the word
money will appear in the index.
An overlooked topic
It is true that not all psychologists have ignored the topic of money. Freud (1908)
directed our attention to the many unconscious symbols money has that may
explain unusually irrational monetary behaviours. Behaviourists have attempted
to show how monetary behaviours arise and are maintained. Cognitive
psychologists showed how attention, memory and information processing leads
to systematic errors in dealing with money. Some clinical psychologists have been
interested in some of the more pathological behaviours associated with money,
such as compulsive saving, spending and gambling. Developmental psychologists
have been interested in when and how children become integrated into the
economic world and how they acquire an understanding of money. More recently
economic psychologists have taken a serious interest in various aspects of the way
people use money, from the reason why they save, to their strategies of tax
evasion and avoidance.
Yet it still remains true that the psychology of money has been neglected. There
may be various reasons for this. Money remains a taboo topic. Whereas sex and death
have been removed from both the social and research taboo lists in many Western
countries, money is still a topic that appears to be impolite to discuss and debate.
To some extent psychologists have seen monetary behaviour as either relatively
rational (as do economists) or beyond their “province of concern”.
Lindgren (1991) has pointed out that psychologists have not studied money-
related behaviours as such because they assume that anything involving money lies
within the domain of economics. Yet economists have also avoided the subject,
and are in fact not interested in money as such, but rather in the way it affects
prices, the demand for credit, interest rates, and the like. Economists, like
sociologists, also study large aggregates of data at the macro level in their attempts
to determine how nations, communities, and designated categories of people use,
spend, and save their money.
It may even be that the topic was thought of as trivial compared to other more
pressing concerns, like understanding brain anatomy, or the causes of schizophrenia.
Economics has had a great deal to say about money but very little about the
behaviour of individuals. Both economists and psychologists have noticed but
shied away from the obvious irrationality of everyday monetary behaviour.
Lea and Webley (1981) wrote:
We do not need to look far to understand this negligence. Psychologists do

not think about money because it is the property of another social science,
namely economics. Economists can tell us all there is to know about money;
they tell us so themselves. It is possible, they admit, that there are certain
small irregularities of behaviour, certain deficiencies in rationality perhaps.
Thus, psychologists can try to understand, if this amuses them. But they are
of no importance. As economic psychologists, we disapprove of both the
confidence of economist and the pusillanimity of psychologist. (p. 1)
It is, of course, impossible to do justice to the range and complexity of economic

theories of money in this book. Economists differ from psychologists on two major
grounds, though they share the similar goal of trying to understand and predict the
ways in which money is used.
First, economists are interested in aggregated data at the macro level – how
classes, groups and countries use, spend and save their money under certain
conditions. They are interested in modelling the behaviour of prices, wages, etc.
– not often people, though they may be interested in certain groups like “old
people” or migrants. Thus, whereas economists might have the goal of modelling
or understanding the money supply, demand and movement for a country or
continent, psychologists would be more interested in understanding how and why
different groups of individuals with different beliefs or different backgrounds use
money differently. Whereas individual differences are “error variance” for the
economists, they are the “stuff of differential psychology”.
Second, whereas economists attempt to understand monetary usage in terms of
rational decisions of people with considerable economic knowledge and
understanding, psychologists have not taken for granted the fact that people are
logical or rational in any formal or objective sense, though they may be self-
consistent. Indeed it has been the psychological, rather than the logical, factors
that induce people to use money the way they do that has, not unnaturally,
fascinated psychologists.
A number of books have appeared entitled The Psychology of Money (Hartley,
1995; Lindgren, 1991; Ware, 2001). Most reveal “the secrets” of making money,
though what was left unsaid was the motive for the writing of that particular kind
of book itself! Often those readers most obsessed with finding the secret formulae,
the magic bullet, or the “seven steps” that lead to a fortune are the ones least likely
to acquire it.
Many famous writers have thought and written about monetary-related matters.
Marx (1977) talked about the fetishism of commodities in capitalistic societies
because people produced things that they did not need and endowed them with
particular meanings. Veblen (1899) believed that certain goods are sought after as
status symbols because they are expensive. Yet this demand for the exclusive leads
to increase in supply, lowered prices and lessened demand by conspicuous
consumers who turn their attention elsewhere. Galbraith (1984), the celebrated
economist, agreed that powerful forces in society have the power to shape the
creation of wants, and thus how people spend their money.
This book is an attempt to draw together and make sense of a very diverse,
scattered, and patchy literature covering many disciplines. A theme running
through the book is not how cool, logical and rational people are about acquiring,
storing and spending money, but the precise opposite.
The history of money

Historians have long been interested in the financial history of the world. Ferguson
(2009), like others, was fascinated by manic stock market rises and falls. He noted
that all seemed to go through a highly predictable cycle: displacement where
economic circumstances offer new and very profitable opportunities for some;
euphoria or overtrading; mania or bubble where first-time investors and swindlers
get involved; distress when insiders see that expected profits cannot justify the
trades and start to sell; and finally revulsion or discredit – when the bubble bursts
due to a stampede for the exit.
In many ways the history of money is the story of boom and bust, and how all
aspects of the financial system are the result of human behaviour with all its fruitless
foibles. In his book The Ascent of Money: A Financial History of the World, Ferguson
(2009) notes that he had three particular insights.
First, that poverty is not the result of wicked, rapacious financiers exploiting
poor people but rather an area or country not having effective financial institutions
like well-regulated banks.
Second, money amplifies our tendency to over-read, causing swings from
boom to bust. The way we use our skill and money causes dramatic inequality
between people.
Third, few things are harder to predict accurately than the timing and the
magnitude of financial crises. History shows that big crises often happen, but few
economists can say when.
The history of money is about the establishment of great financial institutions as
well as great and dramatic events like the South Sea Bubble, the Great Depression,
etc. Every generation seems to experience national and global crises that affect the
whole monetary system. Further, technological changes, such as the invention of
automated telling machines or credit cards and electronic money, alter the
behaviour of individuals and whole societies. Individuals are products of their time
and circumstance, but are not governed by it.
There is a fascinating literature on the history of money as opposed to
financial institutions. Most countries have coins and notes. Each has a history of
when they were introduced; who designed them and the name of the issuing
authority. Each has a function, which is in effect its nominal value as well as
the name of the guaranteeing institution. It also has identity, including a serial
number and information about the conditions under which the value is payable
and to whom.
As Gilbert (2005) notes, there is an iconography of national currencies that may
self-consciously reflect or attempt to strengthen a sense of national identity. In
some countries it is banks that issue notes while in others it is the government.
Money, like stamps, can be used to underlie political agendas. Just as countries that
move out of one political system to another – colony to dominion to republic –
change their flag and state symbols, so they change their money. Note the problem
for the design of the Euro!
Earliest human records show evidence of what Adam Smith called “truck,
barter and exchange”. Bartering, which still goes on today for those who have no
cash or wish to avoid taxation, has obvious drawbacks. These include: the necessity
of the double coincidence of wants: both parties in the exchange must want
exactly what the other has. Barter does not help in establishing the measurement
of worth; the relative value of the changed products: whilst it may be possible to
exchange multiple items of less worth for a single item of greater worth, it may be
that only one item of less worth is required, i.e. it does not work well if things
cannot be divided; barter cannot easily be deferred: some items perish and need
to be consumed relatively rapidly.
Hence as barter transactions grew more sophisticated, people formed the habit
of assessing “prices” in terms of a standard article, which in turn came to enjoy
preferential treatment as a medium of exchange (Morgan, 1969). Thus cattle,
slaves, wives, cloth, cereals, shells, oil and wine, as well as gold, silver, lead and
bronze have served as a medium of exchange (see Table 1.1).
Often religious objects, ornaments or model/miniature tools served as the
medium of exchange. During the post-war period in Germany, coffee and cigarettes
became the medium of exchange, and in the 1980s bottled beer served that function
in war-torn Angola. The cowrie shell (as well as pigs) until the middle of this
century (in New Guinea) was a very popular Asian medium of exchange.
Using cattle or oxen in exchange for other goods was a cumbrous system.
Traders took time to make a settlement (if they reached an agreement at all). The
quality of the animals varied, as did the quality of the goods for which they were
exchanged. Cattle and oxen, when used as money, were portable and recognisable,
but not durable, divisible, or homogeneous.
The next step in the development of money came about when the trading
countries around the Mediterranean began to use metal for exchange purposes.
The metals were gold, silver, and copper: precious enough to be wanted, useful
and decorative enough to be generally acceptable, and their quality did not vary
with time. Some believe the earliest people to use metal money were the Assyrians
of Cappadocia, whose embossed silver ingots date back to 2100 bc. The Assyrians
may even have had a primitive banking system including what we now call
“interest”: payment for loans and debts.
TABLE 1.1 Unusual items which have been used as money
Items Country/region
Beads Parts of Africa and Canada

Boars New Hebrides
Butter Norway
Cigarettes Prisoner-of-war camps and in post-war Europe
Cocoa beans Mexico
Cowries (shells) World-wide (South Sea Islands, Africa, America and
Ancient Britain)
Fish hooks Gilbert Islands
Fur of flying fox New Caledonia
Fur of black marmot Russia
Grain India
Hoes and throwing knives Congo
Iron bars France
Knives China
Rats (edible) Easter Island
Salt Nigeria
Shells Solomon Islands, Thailand, New Britain, Paraguay
Skins Alaska, Canada, Mongolia, Russia, Scandinavia
Stones South Sea Islands
Tobacco USA
Whale teeth Fiji
Source: Furnham and Argyle (1998)
Precious metal
By the eleventh century bc, bars of gold and electrum were traded between
merchants. Electrum is a naturally occurring mixture of gold and silver. The bars
or lumps of electrum were not coins, for they were of differing weights, but they
had great advantages over the exchange of goods by barter and the use of animals
as a form of money. Metals do not rot or perish, so deferred payments could be
arranged. Yet these metal bars were bulky. They did not easily pass from hand to
hand. They were difficult to divide. The quality and quantity of the metal in
different bars was not the same. The ratio of gold and silver in electrum varied.
Traders in different parts of the world often used different weights, so all metal bars
had to be weighed before goods could be exchanged.
Because of the need to weigh metals to ensure that they were of the
correct value, traders tried to identify their own metal bars by marking them. Smaller
pieces of metal, easily handled, were later produced, and marked in the same way as
the larger pieces had been, so that they, too, would be recognisable by traders.
At first it was not clear how much metal should be exchanged for cattle.
Eventually the amount of gold, silver, or copper was made equal to the local value
of an ox. The Greeks called this measure a talanton or “talent”: a copper talent
weighed 60 lb. The Babylonians used shekels for their weights: 60 shekels equalled
one manah, and 60 manahs equalled one biltu, which was the average weight of a
Greek copper talent.
The process of marking small pieces of metal was probably how the first coins
were produced in 700 bc, when the Lydians of Asia Minor gave their electrum
pieces the head of a lion on one side and nail marks on the other. From Lydia the
use of coins like these spread to other areas such as Aegina, and the states of Athens
and Corinth; to Cyrenaica, Persia, and Macedon. China, Japan, and India were also
using coinage by about this time.
Some media of exchange were weighed; others counted. Coins eventually
compromised between two principles because their characteristics (face, stamp)
supposedly guaranteed their weight and fineness and hence they did not have to
be weighed.
Metal discs have been found in both the Middle East and China that date back
more than ten centuries bc. In the seventh century bc it became possible to stamp
coins on both obverse and reverse sides so as to distinguish between different
denominations and guarantee quality. As today the coinage of one country could
be, indeed had to be, used by others.
Because money could serve as a payment for wages it could bring benefits to a
wide section of the community. Even slaves could be paid a ration allowance,
rather than being fed by their masters. Precious metal coins have been dated to the
Peloponnesian Wars of 407 bc: gold for large transactions, bronze for very small
ones. Alexander the Great, who spread the use of money in his empire, was the
first to have his face on coins. The Romans varied the appearance of their coinage
for political ends but also manipulated its value to suit the financial needs of the
state. Nero, amongst others, reduced the weight in coins and caused a crisis of
confidence in the currency.
Until this century the means of payment in commercial societies were, with rare
exceptions, either coins made from precious metals or notes or bank deposits
convertible into coin. The inconvertible paper note and the deposit repayable in
such notes is a very recent development, which has now displaced the precious
metals for internal transactions in all the highly developed economies of the world.
So long as they retain public confidence, they have great advantages in convenience,
but they are liable to abuse and, on many occasions in their short history, they have
broken down.
Banks have gone bankrupt in many Western countries through bad debt,
incompetence or financial crises they could not foresee. Sometimes investors are
partly recompensed by government; often they are not! The government that
adopts an inconvertible currency, therefore, takes on a heavy responsibility for
maintaining its value. Indeed paper money – that is documents rather than actual
notes – is now being transferred electronically such that a person might fly 1,000
miles, go into a bank in a foreign country never before visited, and emerge with
the notes and coinage of that country.
There are various ways to approach the history of money. Usually one starts with
primitive money, followed by the first use of coinage, then onto banking, credit, and
gold/silver standards, and, finally, on to inconvertible paper and plastic money.
Chown (1994) has explained some of the concepts associated with money. It costs
money to manufacture coins from silver or gold, and the mint authority charges a
turn (usually including a profit) known as “seignorage”. Issuers can cheat, and make
an extra profit by debasing the coinage. If this is detected, as it usually is, the public
may value coins “in specie” (i.e. by their bullion content) rather than “in tale”
(their official legal value). The purchasing value of coins may change without any
debasement; the value in trade of coinage metal itself may change. The monetary
system may be threatened by clipping and counterfeiting and, even if rulers and
citizens are scrupulously honest, the coinage has to contend with fair wear and tear.
In medieval and early modern time coins were expected (although in some
places and times only by the naïve and credulous) to contain the appropriate weight
of metal. The use of more than one metal raised problems. This is sometimes
referred to collectively as “tri-metallism”, but is more conveniently divided into
the two separate problems of “bi-metallism” (the relationship between silver and
gold) and “small change” (the role of the “black coins”). The new and more
complicated coinages also caused problems by definition – “ghost money” and
“money of account”. For much of the late medieval period, there would be more
than one coinage type in circulation in a country. This creates a serious problem
for the modern historian, as it presumably did for the contemporary accountant.
“Ghost money” units consist of accounts which have names based on actual coins
that have disappeared from circulation. They arose, of course, from depreciation
and the phenomena of bi-metallism and petty coins.
Money is used as a “unit of account” as well as a medium of exchange and store
of value. Some system was needed by which debts could be recorded and settled,
and in which merchants could keep their accounts. It was convenient to have a
money of account for this purpose. This could be based on a silver and gold
standard or, very occasionally, on black money. Two systems often existed side by
side. The value of actual real coins could fluctuate in terms of the appropriate
money of accounts and this was often based on a ghost from the past. Money could
be used as cash or stored in a bank.
Cash
Derived from the French word caisse, meaning money-box or chest, cash is often
known as “ready or liquid” money. Traditionally it comes in two forms: coins and
bank-notes.
(A) Coins: Standard coins, where the value of the metal is equal to the face
stamped on the coin, are comparatively rare but used in the collecting world.
Token coins are more common: here the metal (or indeed plastic) content is
worth (far) less than the face value. The Jewish shekel was first a weight of metal,
then a specific coin. Monasteries were the first mints because it was thought they
would be free of theft.
Wars or political crises often lead to the debasing of a country’s coinage. Precious
metal coins are filed down (shaved), made more impure, or give way to token
(non-metallic) coins. But even coins that began as standard could come to a bad
end. Unscrupulous kings rubbed off metal from the edge of gold coins, or put
quantities of lead into silver coins to gain money to finance wars. In Henry VIII’s
time the coins issued in 1544 contained one-seventh less silver than those issued in
1543; Henry continued in this way until, by the time coins were issued in 1551,
they contained only one-seventh of the original amount of silver.
The idea of a standard coin was that it should be a coin of guaranteed weight
and purity of metal. That remained true until coins became tokens in the sense that
their intrinsic metal value was not the same as their face value.
(B) Paper: Paper money was primarily introduced because it made it much
easier to handle large sums. Second, coins could not be produced in sufficient
amounts for the vastly increased world trade that developed from the seventeenth
century onwards. Third, trade inevitably demonstrated that there were more
profitable uses for metal than as exchange pieces. Finally, it was argued that paper
money (cheques, credit cards) reduced the amount of cash in transit and therefore
reduced the possibility of theft.
Cash money probably developed from the practice of giving a receipt by a gold
or silversmith who held one’s precious metal for “safe-keeping”. In time this receipt,
although it had no real value of its own, became acceptable in payment of debt
among the literate. Banknotes, printed by banks, first appeared in the twentieth
century. Up till the beginning of the First World War in Britain notes were called
convertible paper because they could be exchanged for gold. Alas now all notes are
inconvertible paper. Clearly one of the disadvantages of convertible paper money is
that the supply and issue of notes is related to the amount of gold held by the issuing
authorities (government, banks) and not to the supply of goods. Another disadvantage
of the old convertible money is that prices depend on the world market not simply
gold supply. A government cannot control its country’s prices without taking account
of what is going on in other parts of the world. Equally, imprudent governments can
literally print (issue) as much money as they wish, with too much money chasing too
few goods leading to a concomitant fall in the value of the money.
China printed money in the Ming Dynasty (1368–1644), while the Swedes
were the first Europeans to issue paper money, in 1656. Notes can have any face
value and the variation within and between countries is very wide. They have also
varied considerably in shape, size, colour and ornamentation. Provided paper
money is immediately acceptable in payment of debt, it fulfils the criteria of being
money. Cheques, postal orders, credit cards, electronic transfers, etc., are “claims
to money”, sometimes referred to as near money.
(C) Plastic, virtual and local money: For a discussion of this topic see
Chapter 2.
Banks
Goldsmiths were the first bankers. They soon learnt to become fractional reserve
banks in that they kept only a proportion of the gold deposits with them and
invested the rest. Many failed, as did banks this century, because they could not
immediately pay back deposits on demand because they did not have enough
reserves or “liquid money”. The cash ratios or the amount of actual cash kept by
banks is about 6–10% of all the money deposited with them. Another 20–25% of
deposits are kept as “near money”, which are investments that can be turned back
into cash almost immediately.
The Christian church objected to usury and moneylenders, which opened up
the profession particularly to Jews (see Shylock in Shakespeare’s Merchant of Venice).
Islam, too, disapproves of interest and has been more zealous than Christianity in
trying to discourage it. Some Christians later lent money free for a short period, but
if the debt was not paid back at the time promised Church laws appeared to allow
the delay to be charged for. The Crusades and the industrial revolution were a
great impetus to banking because people needed capital. Goldsmiths, rich
landowners, and prosperous merchants pioneered modern banking by lending to
investors and industrialists.
By manipulating the liquidity rate and their preferred patterns of lending, banks
are inevitably very powerful institutions. However, they are not the only institutions
that lend money. Building societies make loans to house buyers; finance houses
lend money for hire-purchase transactions; and insurance companies have various
funds available for borrowers. The relationship of money to income and capital
may be summarised as follows. First money circulates, or passes from hand to hand
in payment for:
a. goods and services which form part of the national income;

b. transfers and intermediate payments, which are income from the point of view
of the recipients but which are not part of the national income;
c. transactions in existing real assets, which are part of the national capital; and
d. transactions in financial claims, which are capital from the point of view of
their owners but which are not part of the national capital.
Money is also held in stock. Stocks are, however, very different in the time for
which they are held, and the intention behind the holding. Money in stock is part
of the capital of its owners, but it is not part of the national capital unless it is in a
form that is acceptable to foreigners. New money can be created by a net addition
to bank lending, and money can be destroyed by a net payment of bank loans. For
a closed community, income and expenditure are identical, but for an individual
they are not. An individual can spend less than his income and so add to his stock
of money or some other asset, and he can spend more than his income by reducing
his stock of money or other assets or by borrowing.
For most people the “high street bank” is the primary source of money. They
borrow from, and lend to, banks, which are also seen as major sources of advice.
Estimates are that over three-quarters of all UK adults have a current bank account
or chequing account and in the past five years there has been a considerable increase
in such accounts as well as building society accounts.
The cheque (or “check” in the USA) arose about 300 years ago directly out of
the use of exchanged receipts or promissory notes and was illegal to begin with and
certainly regarded as highly immoral, but the convenience quickly outweighed any
moral considerations and the legalities soon followed. Until 1931 there was a
national responsibility not to issue more hard currency than could be backed up by
gold deposits. So, in effect, until that date if everyone handed in their notes for
value, there would have been enough gold to go around. Today, if we all demanded
our face-value gold, the banks and the nation would go bankrupt overnight. There
is currently enough gold on deposit in the Bank of England’s vaults to cover around
one-third of the issued currency. It is no longer possible, in fact, to receive face
value gold.
The biggest difference between a bank in the UK and a bank in the USA is that
in the UK, in order to open a bank account, it used to be necessary not only to
have money but also to have friends. A reference provided by a bank-account
holder had to be furnished before a new account could be opened. The process
took about two weeks. In the USA, and now in most developed countries, anyone
can walk into almost any bank and open an account on the spot, receive a cheque
book and use it, provided they deposit enough money in the account to cover the
cheques. One of the reasons why this is so is that in New York State it is a crime
to write a cheque without having funds to back it. In the UK, however, a bouncing
cheque will not send you to prison.
In addition, in the USA, with some of the competing banks, opening an account
and depositing a fixed amount of cash will bring you free gifts. British banks have
copied this trend, especially in attempting to lure young people (i.e. students) to
open accounts with them.
Banks all over the world lend money to each other. This is called the Interbank
lending system and it occurs because the larger banks have more money on deposit
than the smaller ones, and all banks must balance their accounts each day – so they
borrow and lend among themselves. Thus, if you leave a lot of money in your
current account each day, even though the banks are not paying you any interest
on that money they are making interest on it through the overnight Interbank
lending market – about 11% per annum in the UK. In the USA almost all money
in all accounts earns interest, if only at a low rate, and this system is slowly happening
in the UK too, with various different names. No bank is giving anything away with
these accounts; they are simply reducing their profits slightly to attract more
custom.
Themes in this book

There are six themes in this book.
First, people are far from rational in the way they think about, accumulate,
spend and save money. They are essentially psychological rather than irrational.
Money is imbued with such power and meaning that people have difficulty
thinking rationally about it.
Second, we all apply a range of (sometimes unhelpful) heuristics when thinking
about money. These short cuts or rules of thumb explain why we make so
many “mistakes”.
Third, many of these money beliefs come from childhood and early education.
We learn about money and its power and allure early on in life and carry these ideas
and associations into adulthood.
Fourth, money and happiness/well-being are only tangentially related. Many
factors contribute to our unhappiness and money is only one factor.
Fifth, money is a more powerful demotivator than a motivator at work. If
people are paid equitably, given their comparative inputs, money has surprisingly
little motivational power.
Sixth, a knowledge of how people think about and use their money in typical
(and arational) ways has meant businesses often try to “exploit” them. These
processes and procedures can be understood in order to help people guard against
any form of attempted manipulation.
2
MONEY TODAY
Human capital has replaced dollar capital.

Michael Milken
Business ethics is to ethics as Monopoly money is to money.

Harold Hendersen
Beauty is potent, but money is omnipotent.

Anon
Nothing is more admirable than the fortitude with which millionaires

tolerate the disadvantages of their wealth.
Rex Stout
Introduction
It is true, as well as a truism, that the world is changing fast. This is as true of
money as of everything else. Technological changes have deeply affected how
people use, store and spend their money. The world of cash is fast disappearing.
People now pay for their car parking from their mobile phone; and transfer
high sums of money (legally and illegally) around the world electronically.
Currencies change and both appear and disappear. There are now local currencies
and virtual currencies.
The distribution of wealth has also changed dramatically. Many countries have
many thousands of millionaires and it seems the gap between the rich and the poor
is changing dramatically. However, some things are constant, like the bizarre
behaviour of (often very rich) people with respect to their money.
This chapter will look at some of the changes in the world of money today.
The story of the credit card

The use of credit cards originated in the United States during the 1920s, when
individual firms, such as oil companies and hotel chains, began issuing them to
customers. Early credit cards involved sales directly between the merchant offering
the credit and credit card, and that merchant’s customer.
Around 1938, companies started to accept each other’s cards. Today, credit
cards allow you to make purchases with countless third parties. The inventor of the
first bank-issued credit card was John Biggins of the Flatbush National Bank of
Brooklyn in New York. In 1946, Biggins invented the “Charge-It” program
between bank customers and local merchants. Merchants could deposit sales slips
into the bank and the bank billed the customer who used the card.
By the early 1960s, more companies offered credit cards, advertising them as a
time-saving device rather than a form of credit. American Express and MasterCard
became huge successes overnight, allowing the consumers a continuing balance of
debt, subject to interest being charged.
These are a few handy facts about credit cards:
• There are 609.8 million credit cards held by US consumers (Source: “The
Survey of Consumer Payment Choice”, Federal Reserve Bank of Boston,
January 2010).
• Average number of credit cards held by cardholders: 3.5, as of year-end 2008
(Source: “The Survey of Consumer Payment Choice”, Federal Reserve Bank
of Boston, January 2010).
• Average APR on new credit card offer: 14.91% (Source: CreditCards.com
Weekly Rate Report, 6 July 2011).
• Average APR on credit card with a balance on it: 13.10%, as of May 2011
(Source: Federal Reserve’s G.19 report on consumer credit, released July 2011).
• US credit card 30-day delinquency rate: 3.3% (Source: Moody’s, May 2011).
• Forty-one per cent of college students have a credit card. Of the students with
cards, about 65% pay their bills in full every month, which is higher than the
general adult population (Source: Student Monitor annual financial services
study, 2008).
• Eighty per cent of Americans who are 65 or older indicated they used a credit
card in the month preceding the September 2008 survey. That’s 13 points
higher than any other age group. They also used debit cards far less than other
age groups. Only 47% of those over 65 said they had used a debit card in the
month before the survey, 19 points lower than any other age group (Source:
Javelin, “Credit Card Spending Declines” study, March 2009).
• Just 51% of Americans aged 18 to 24 indicated they had used a credit card in
the month preceding the September 2008 survey. Seventy-one per cent of that
age group said that they had used a debit card in the same period (Source:
Javelin, “Credit Card Spending Declines” study, March 2009).
Money today 17
• One in 12 households in London (or 8%) has used credit cards to pay their
mortgage or rent in the last 12 months. Across Great Britain, 6% of households
did the same, equivalent to more than one million people (Source: Shelter
Media Centre, January 2010).
• There were 60.7 million credit cards in circulation in the UK at the end of
November 2009, 69% of which had a balance outstanding (Source: British
Bankers Association, January 2010).
• Outstanding credit card balances stood at £63.5 billion in November 2009,
nearly £3 billion lower than a year earlier (Source: British Bankers Association,
January 2010).
Children as young as 14 carry credit and debit cards. Most adults have many cards
and they are often a source of considerable problems.
The story of online banking and shopping

The concept of online banking as we know it today dates back to the early 1980s,
when it was first envisioned and experimented with. However, it was only in 1995
that Presidential Savings Bank first announced the facility for regular client use.
Inventors had predicted that it would be only a matter of time before online
banking completely replaced the conventional kind. Facts now prove that this was
an over-optimistic assessment – many customers still harbour an inherent distrust
of the process. Despite this, the number of online banking customers has been
increasing at an exponential rate. The speed with which this process happens
online, as well as the other services possible by these means, has translated into a
boom in the banking industry over the last five years.
Seventy-one per cent of survey respondents said they had logged into their
credit card account via the Internet (ComScore, 2009).
One of the first known Web purchases took place in 1994. It was a pepperoni
pizza with mushrooms and extra cheese from Pizza Hut. When Amazon came on
the scene not long after, selling books online was a curious idea, but eventually a
revolutionary change in culture and groupthink took place. Buying things online
was all about price and selection.
Now 83% of consumers say they are more confident in making a purchase
when they have conducted research online as opposed to speaking to a salesperson
in a store. And, despite the economic recession, online retail in the USA grew 11%
in 2009, according to a March 2010 report from Forrester Research. More than
150 million people – about two-thirds of all Internet users in the USA – bought
something online last year. It’s a staggering leap for an industry used by only 27%
of the nation’s online population a decade ago.
Local currencies
One of the more interesting features of “the new money” is the rise of what are
called “local currencies”. In London the Brixton Pound (B£) exists in paper and
electronic format (also known as Pay by Text). The paper version was launched in
September 2009 and the electronic currency was launched in September 2011.
Around 200 businesses accept the B£ paper notes and about 100 are signed up to
Pay by Text.
The notes are printed on watermarked paper by specialist secure printers. Each
B£ is worth £1 sterling, so B£1 = £1, B£5 = £5, B£10 = £10, and B£20 =
£20. The sterling backing for all B£ in circulation is held at a local bank. B£ notes
are not exchangeable back to sterling, however businesses may redeem them at
face value.
Some traders offer B£ customers special offers for using the money (like a
loyalty card for Brixton). The 1st Edition of the notes expired on 30 September
2011, with the 2nd Edition being in use since. Pay by Text customers receive a
10% bonus automatically added onto their account every time they credit it. The
notes have already become highly collectable items and, together with the Pay by
Text service, they are attracting a lot of media attention and encouraging new
visitors to go to Brixton.
This currency has the potential ability to raise awareness of prosocial issues (e.g.
the importance of shopping locally) rather than its claimed economic effect of
keeping more value local by facilitating local spending. The idea is to “keep money
in Brixton”. By swapping real money for Brixton currency, you are obliged to
spend it with local retailers (since no one else will accept it). Arguably it raises
awareness of the importance of buying locally as it inevitably gets people talking
about the issue (because they have the currency in their pocket and it’s newsworthy).
Bristol in England recently introduced the “Bristol Pound” in a bid to increase
local commerce. By making the currency only available to spend within the
city, each spend using the money will in turn force an equivalent spend on local
goods and services, unless the money is converted back to British sterling at the
3% fee rate.
Unlike previous attempts at a local currency the Bristol Pound is available to be
spent online. More than 350 local companies have signed up, making the Bristol
Pound the UK’s largest alternative to sterling. In fact, Bristol’s mayor is taking his
entire salary in Bristol Pounds.
Not far from Bristol, in Stroud, Gloucestershire, a “Stroud Pound” experiment
that started in 2009 has failed to take the town by storm, with only half the amount
of Stroud Pounds issued last year as in the first year. Local businesses do say,
however, that customers have committed to buying locally because of it.
Local currency systems encourage not only local business growth, but local
responsibility. The creation of new jobs and new projects in any region will
stimulate not only economic but also social growth.
Money today 19
Millionaires
Traditionally, to be a “millionaire” meant having over £1million in the bank. Yet
it seems this definition may be changing. Goldstein (2011) describes how in recent
years the term “millionaire” has come to relate instead to someone who earns over
£1million a year. There is a considerable difference between the two definitions.
Someone earning over £1million a year is much more elite. Barclays Wealth
(2011) said there were 619,000 millionaires – including property assets – currently
living in the UK at the end of 2010, up from 528,000 in 2008. However, only
11,000 people in the UK earn over £1million each year (Office for National
Statistics, 2009). Therefore, changing the definition from assets toward annual
income redefines “millionaires”, pushing them up the economic ladder. This is
highly rational, as having a million pounds does not make you as rich as it used to,
with the cost of living having increased dramatically. Today, you would need
£17.5million to enjoy the equivalent lifestyle of a person with £1million in 1958
(Table 2.1; Bank of Scotland, 2008).
So who becomes a millionaire? Spectrem Group (2011) found that those with
over $1million in assets were more likely to have a degree than those in the lower
$100,000–$1million segment. Interestingly, those in the middle affluent segment
($1m–$5m) either currently or have previously worked for more than 60 hours
each week, while 47% of those in the well-off segment ($5m–$25m+) worked less
than 40 hours per week.
How do millionaires become so wealthy? (Table 2.2).
Spectrem Group (2011) investigated the method through which affluent
households believed they had obtained their wealth, with the predominant reason
offered being through hard work. Those in households with $1–5million and
$5–25million of net worth believed that education and smart investing were the most
significant contributing factors. Yet those in households with $100,000–$1million
net worth placed more emphasis on frugality than education. Though many
mayspeculate that the majority of such wealthy people inherit their money, the four
main sources those in wealthy homes believe they gain their riches through are hard
work, education, smart investing and frugality. Inheritance was specified as a source
of wealth by just a quarter of individuals in each wealth segment.
TABLE 2.1 Today’s equivalent to £1m in the past
1958 £17.500m
1968 £12.991m
1978 £4.297m
1988 £2.009m
1998 £1.318m
2008 £1.000m
Note: According to estimates by the economic consultancy, cebr (The cebr Forecasting Eye, 14 August
2006). Figure relates to 2006.
Source: The Cebr Forecasting Eye (2006)
TABLE 2.2 Reasons for millionaires’ wealth accumulation
Reason $100000– $1000000– $5000000–

$1000,000* $5000,000* $25000000*
Hard work 93% 95% 95%

Education 71% 89% 92%
Smart investing 67% 83% 85%
Frugality 66% 81% 77%
Taking risks 42% 67% 72%
Being in the right place at 33% 45% 62%
the right time
Inheritance 23% 28% 26%
Note: *Not including principle residence.

Source: Spectrem Group, 2011, Affluent Market Insights.
These findings are supported by Skandia (2012) “millionaire monitor” research.

Seventy-four per cent of UK millionaires were found to have made their wealth
through employment, with 57% acknowledging that investments contributed to
their fortune. Fifteen per cent of the surveyed millionaires made their money from
their own business. This all indicates that hard work and smart investing are key.
However, 41% had inherited money, contributing to their fortunes. The research
showed that the top jobs through which wealth was earned were manufacturing
(21%), IT/Telecoms (21%), finance (18%) and the service industry (17%). The
project found that 29% of UK millionaires made their wealth through setting up
their own business.
Interestingly, research shows that the majority of UK millionaires (79%) are
wealthier than their parents (Skandia, 2012). The research also found that the
majority of millionaires make their fortune when they are young, with 31% of
entrepreneurs in the survey making their fortune before they were 30, and over
half (53%) of those making their money before they were 25. Hong Kong was the
country in which millionaires earned their fortune most rapidly, with two-thirds of
entrepreneurs making their money within five years. Whereas in the UK, 60%
made their earnings from their business in a decade or less.
What do they do with their money? Data from Skandia (2012) research
shows that Britain’s millionaires tend to invest their wealth in residential property,
with just under a third of money being held here. The next most popular areas
that wealth is invested in are cash (18%), shares (16%) and managed investment
funds (13%).
Some spend money on moving to a different country. Skandia (2012) research
found that almost one in ten millionaires in Italy, France and Dubai say they intend
to leave their country (they are considered a millionaire if conversion of their net
disposable assets relates to GB£+1million). In the UK almost 45% would consider
relocating. A widely stated reason for moving was the weather (22%), with
improved living standards also being hoped for (20%).
Money today 21
There are a few famous examples of eccentric millionaire behaviours:
1. Salvatore Cerreto: the 71-year-old property magnate was found to

have been defecating in front of shops and restaurants in the dead of
night in his local town of North Ryde.
2. Robert Clark Graham: the late millionaire optometrist opened a sperm
bank in 1980 to be mostly stocked with donations from Nobel laureates,
in a bid to create a master generation. When the bank closed in 1999
after his death, none of the children fathered from the stocks had a
Nobel laureate father.
3. Ailin Graef: this Chinese woman became the first person to make a
million from the online avatar community Second Life by developing
property online and selling it on, converting the online currency to real
money as per the game’s rates.
4. Karl Rabeder: grew up poor, and upon realising his £3 million fortune
was making him unhappy, gave it all away, with all proceeds going to
charitable foundations he set up in Central and Latin America, from
which he will not take a salary.
5. Gunther IV: received his inheritance from his father Gunther III, who
received it in turn from the German countess Karlotta Liebenstein.
Gunther is worth around $372 million now thanks to his growing trust
fund. None of which is remarkable, until you find out that Gunther and
his father are German shepherd dogs.
6. Graham Pendrill: the Bristol millionaire visited Kenya for a month last
year, and was awarded the title of elder after helping resolve a conflict.
He has since decided to sell his house and move to Kenya to live in a
mud hut with the Masai tribe.
7. Scott Alexander: the 31-year-old lifestyle millionaire decided to buy his
own town in Bulgaria for £3 million and is turning it into a holiday
hotspot. He has named the town after himself – Alexander.
8. Karen Shand: became the first person to win £1 million live on TV when
she won ITV’s “The Vault”. Despite this, she has not quit her £25,000 job
as a nurse in Kirkcaldy, Fife.
9. Nicholas Berggruen: known as the “homeless billionaire”, Berggruen
lost all interest in acquiring material goods, so decided to sell his
properties and live in hotels. He plans to leave his fortune to charity and
his art collection to a museum in Berlin.
10. Thaksin Shinawatra: the Thai Premier’s youngest daughter works in
McDonald’s in Thailand. He got her the job through the president of
McThai, but insisted that she be treated like any other employee in order
to teach her the value of money.
Famous (modern) people with odd money habits

One way to understand people’s difficult, often bizarre, relationships with their
money is to examine case studies of famous people. Their story is readily available
on Wikipedia and other public sources.
Misers
1. Benny Hill
Benny Hill was a famous British TV comedian, starring in the popular Benny
Hill Show.
Hill lived in a small apartment, keeping the many awards he had won throughout
his career in a large box, with none being openly displayed. Despite Hill having
earned millions of pounds over the course of his career, he did his own grocery
shopping, and never used the second floor of his modest rented flat. Friends
described Hill’s home as being characterised by an unmade bed, dirty dishes, and
heaps of paper everywhere.
The Daily Star, a popular British newspaper, referred to him as “Mr Mean”,
after regular sightings in his local area of a distinctly un-showbizzy-looking Benny
poring over tins of food in a supermarket, and trudging home with plastic bags.
Benny Hill died in 1992, aged 68, leaving an estate worth over £7 million.
Despite his fortune, Benny Hill died alone watching TV and his death was not
discovered for several days. In many ways his is a classic story of someone for
whom money represented security more than anything else.
2. Lester Piggott
Piggott remains the most famous jockey in British racing history. Known affect-
ionately as “the Long Fellow”, he won the world famous Epsom Derby nine times,
including his first victory in the famous race in 1954 aged only 18. He also rode
more than 5,300 winners worldwide during 47 years in the saddle. He was also
famously mean.
Piggott tarnished his good name, and sacrificed his OBE, when he was jailed in
1987 for tax fraud for failing to declare income of £3.25m to the Inland Revenue
in the biggest tax-evasion case of its time. The jockey, whose fortune was estimated
at £20 million, spent a year in prison.
3. Howard Hughes
Howard Hughes was the son of the founder of the Hughes Tool Company, which
revolutionised oil well drilling. Hughes inherited 75% of the company in 1924,
following the death of his father. He then proceeded to buy out his relatives’ shares
in the business, becoming the owner of the Hughes Tool Company.
Money today 23
Hughes moved to Hollywood aged 23 and began producing films, winning

Academy awards, as well as being successful at the Box Office. He became famous
and even richer.
Hughes went onto develop a passion for aviation, forming the Hughes Aircraft
Company in 1932. In 1934, Hughes built and test-piloted the H1, the world’s
most advanced plane, as well as setting a new speed record in 1935.
Hughes then went on to move to Las Vegas, where he purchased four hotels and
six casinos. Hughes is also remembered for his eccentric behaviour and reclusive
lifestyle in later life, caused in part by an obsessive-compulsive disorder. He spent the
last 20 years out of the public eye living in hotel penthouses around the world.
Hughes was described as never being the same after suffering a fiery plane crash
in 1946. He avoided socialising, stopped playing his beloved golf, and his germ
obsession began to spiral out of control. This included a fear of flies. Hughes hired
three guards to work in eight-hour shifts at the bungalow where he lived to
intercept the insects.
Also in 1946, he threw out his golf clubs and clothes, convinced they were
contaminated with syphilis. Over the next 20 years, Hughes became an increasingly
reclusive shell of a man. He wore tissue boxes for shoes, began storing his bodily
waste in glass jars and drafted lengthy memos on the proper way to open tin cans
without touching them.
X-rays taken at autopsy revealed broken hypodermic needles lodged in his arms,
and his six-foot-four frame weighed less than 90 lb (41 kg). He had been seen by so
few people for so long that the Treasury Department had to use fingerprints to
identify his body. On his death in 1976, Hughes left an estate estimated at $2 billion.
This was a classic and very sad psychiatric case where high sums of money
seemed to make him worse rather than better off.
Spendthrifts
1. Michael Jackson
Michael Jackson went from being the richest musician in the world, having sold 61
million albums in the USA alone, to having mounting debts as a result of a lavish
and bizarre lifestyle.
Jackson’s highly successful music career included his 1982 hit “Thriller”, which
still holds the record for the second best-selling US album of all time. During his
success, Jackson purchased the famous Neverland ranch for $14.6 million, a fantasy-
like 2500-acre property. His life changed in 1993 when child molesting allegations
were revealed, and financial troubles became apparent.
In 2003 Michael Jackson was said to be more than $230 million in debt. At the
time, he was stated to be spending $20 to $30 million more than he was earning
per year by accountancy experts, with Neverland costing as much as $120,000 a
month to look after. Upon Jackson’s death in 2009, his debts were estimated at
$500 million.
2. Viv Nicholson
Nicholson became famous in 1961 when she won £152,319 (equivalent to more
than £3 million today), and announced that she was going to “spend, spend,
spend”. This she did. Born into a modest working-class home, she set about
spending this massive windfall immediately.
Viv went on to purchase a large bungalow priced at £11,000 for herself and
her family, as well as a pink Chevrolet, which she changed for a different luxury
car every six months. Her husband bought a racehorse, the children were sent to
boarding school, and the family enjoyed luxurious holidays around America
and Europe.
Around half of her winnings had been spent by the time her husband was killed
in a car accident in 1965. She then ran into financial trouble, with banks and tax
creditors deeming her bankrupt, declaring that all her money, and everything she
had acquired with it, belonged not to her but to her partners’ estate.
Following a three-year legal battle, Viv gained £34,000 from her husband’s
estate, yet went on to lose the money she had been awarded on the stock market
and through unsuccessful investments. She ended up penniless, and by 1976 was
unable to afford to bury her fourth husband, having failed to regain her position in
the public eye through promoting a singing career. In 2007 Nicholson described
how she was now living on £87 a week, and finding it difficult to find a job, yet
talked about her financial situation with ease – “It may have served me right –
maybe I was wild and crazy. But it is my life and I won’t be told how to live it.”
Investors
1. Warren Buffett
Buffet, perhaps the most famous investor of all time, began investing his money in his
early life. At 14 years old, he invested $1,200 of his savings from delivering newspapers
in 40 acres of farmland, and in high school he then purchased a used pinball machine
for $25, which he placed in a nearby Barber Shop. Within months, he owned three
machines in three different locations, and went on to sell his pinball business for
$1,200. Buffett continued to invest his savings in a series of similar entrepreneurial
ventures. By the time he went to study at the University of Nebraska in 1946, he had
saved $6,000, which was a considerable amount of money at the time.
Having graduated and spent a period of time working in New York, he started
his own investment company when he was 25 years old with $100. Seven limited
partners contributed a total of $105,000 towards the stock market trading
partnership. The partners were rewarded with 6% on their investment and 75% of
the profits above this target amount annually. Buffett received the remaining 25%
of profits. Over 13 years, he compounded money at an annual rate of 29.5%
through stock market trading activities, whilst the Dow Jones Industrial Average
declined in value during five of these years.
Money today 25
By 1969, Buffett believed that the stock market had become speculative and
ended the stock market trading investment partnership, with his share of the
investment partnership having grown to be worth over $25 million.
He also invested in a number of companies, including a leading textile
manufacturer called Berkshire Hathaway. In 1969, he was having difficulty finding
reasonable investments in the stock market, so he liquidated his partnership. His
initial investors received $30 for every dollar they invested in 1956 – a compounded
annual return of almost 30%. Buffett invested his share of the partnership profits
into Berkshire Hathaway.
In 1967, Buffett began diversifying Berkshire’s business interests by purchasing
two insurance companies. Over the next decade, he added several more insurance
companies to his arsenal. He became, in effect, the investment manager for the
insurance companies’ premium-based capital (or “float”). But instead of returning
the profits from his investments to his partners, he reinvested them in his company.
His company, Berkshire Hathaway, owns many companies. In 2007, Buffett
was named The World’s Second Richest Man, after Bill Gates. Despite this, he still
lives in the same small three-bedroom house that he bought after he got married
50 years ago. Buffett drives his own car everywhere and does not have a driver or
security people around him. He never travels by private jet, although he owns the
world’s largest private jet company. He is now mainly concerned with giving away
his great wealth.
2. The “Google Guys”

Sergey Brin and Larry Page are the co-founders of Google, having studied computer
science together at Stanford University. Google began in 1996 as a project by the
pair. In their research project they came up with a plan to make a search engine
that ranked websites according to the number of other websites that linked to that
site, and ultimately came up with the Google we have today.
The domain google.com was registered on 14 September 1997 and Google
Corporation was formed a year later in September 1998. Google started selling
advertisements with its keyword searches in 2000. These advertisements used a
system based on the idea that you only paid for your advertising if someone clicked
on your ad link – hence the term Pay Per Click (PPC) was born.
In 2004, Google launched its own free web-based email service, known as
Gmail. This service was made to rival the free online mail services supplied by
Yahoo! and Microsoft (hotmail). This new free email service shook up the very
foundation of free email with its enormous 1 GB of storage, which dwarfed its
rivals tenfold.
In 2004 Google also launched Google Earth. Google Earth is an amazing
creation: a map of the earth based on satellite imagery. This interactive map of the
world allows you to type in a search for any place in the world and you will
automatically be taken there.
Google has a dominant controlling share of the search market. It is the most
widely used search engine on the Internet, with an 85.72% market share in August
2011, with Google receiving about a billion search requests per day – and with
estimates that Google makes 12 cents for every search you perform.
As of 2011, Larry Page and Sergey Brin are estimated to each be worth $19.8
billion.
Tycoons
1. Mohamed Al-Fayed
Mohamed was born in Egypt, with his first real business opportunity coming when
he and his brothers set up the shipping company Genavco, which turned out to be
highly successful. However, the President of Egypt decided to “nationalise” all
substantial private companies, removing control of Genavco from the Fayeds. The
family then decided to relocate to London. Despite this setback, in 1966 the Fayeds
re-established Genavco’s headquarters in Genoa, Italy, and opened additional
offices in London. Mohamed’s fleet of Genavco ships frequently traded between
Alexandria and Dubai, and in the mid-1960s he travelled there to meet with its
ruler, Sheikh Rashid al Makhtoum.
Mohamed discussed with the Sheikh why, with so many boats trading in the
Gulf and sailing right past Dubai, he did not build a harbour which would allow
Dubai to offer bunkering and other such services to the ships and their crews.
Sheikh Rashid invited Mohamed to gather the resources needed to build Dubai’s
first significant piece of modern infrastructure.
When the harbour was complete, the Sheikh asked Mohamed to help him find
a company to search for oil, something most large companies did not want to do.
Mohammed flew experts from a leading technology firm out to Dubai to set to
work. Some 300,000 barrels of oil were found. The Sheikh was delighted, and
charged Mohamed with revolutionising Dubai. Mohamed was committed to
fulfilling the Sheikh’s vision for Dubai and chose to purchase a 30% stake in
Richard Costain (the British construction company he had entrusted with the
majority of the work) to ensure it fulfilled its promises to the Emirate. The
architectural overhaul of Dubai was vast; construction took almost a decade to
complete and laid the foundations for the phenomenal growth Dubai enjoys today.
Mohamed insisted on using British companies and workers for the projects, and
consequently introduced British financiers and construction companies to Dubai.
As a direct result of Mohamed’s industry and enterprise, Britain earned £8 billion
at a time when the UK economy was struggling.
The year 1968 was when Mohamed established International Marine Services
(IMS), which carried out salvage, towing and servicing work for the fleets of oil
tankers trading in Dubai’s waters. IMS became one of the world’s leading companies
in this specialised field.
Money today 27
In 1979, Mohamed learnt that L’Hotel Ritz in Paris was for sale, and made an
offer on it, which was accepted. He went on to renovate the hotel, spending the
equivalent of US$1 million per suite in the process.
In November 1984, Mohamed and his brothers acquired a 30% stake in House
of Fraser (which included Harrods). In March 1985, the Fayeds made an offer for
the remaining 70%, which was subsequently accepted. House of Fraser employed
30,000 people and was badly in need of capital investment, which Mohamed
provided. He also hired leading retailers to take charge and ensured that everyone
kept their jobs. Without Mohamed’s efforts, House of Fraser would not enjoy the
success it does today. Mohamed had also begun to restore Harrods, investing more
than £400 million in the renovation.
Mohamed and his brothers decided to float House of Fraser Group on the
London Stock Exchange in 1994, retaining Harrods and its subsidiary companies
(including Harrods Aviation, Harrods Bank, and Harrods Estates) as an independent,
family-run business. In 1996, Mohamed spotted a gap in the aviation industry, and
launched Air Harrods, a luxury helicopter chartering service.
In 1997, Mohamed learned that the Second Division team, Fulham Football
Club (FFC) was for sale, saw its potential, and bought it. He promised the fans that
within five years FFC would be playing in the Premiership. Mohamed poured
money into the club’s grounds, players and management, instructing Kevin Keegan
to take over as club manager. As a result, Fulham was transformed. Within three
years, the club had enjoyed two league championship wins and promotion to the
Premiership.
Al-Fayed has enjoyed widespread success, and his wealth is currently estimated
at $1.2 billion.
Experimental studies of coins and notes

On a much more concrete level, attitudes to money have been studied by looking
at the public’s reaction to their actual currency. One reason for this is the public
misunderstanding or misuse of currency, along with hostility to changes in it.
Notes and coins, though being overtaken by “plastic” and “electronic” money, are
still the physical manifestation of money to most people. Looking at attitudes to
national currency certainly gives insight into money attitudes.
One experiment undertaken in 1947 has led to considerable research being
done on the psychology of coins from various countries. Bruner and Goodman
(1947) argued that values and needs play a very important part in psychophysical
perception. They entertained various general hypotheses: the greater the social
value of an object, the more it will be susceptible to accentuation: and the greater
the individual need for a socially valued object, the more marked will be the
operation of behavioural determinants. Researchers asked rich and poor ten-year-
olds to estimate which of an ascending and descending range of circles of light
corresponded to a range of coins. Another control group compared the circle of
light to cardboard discs of identical size to the coins. They found, as predicted, that
coins (socially valued objects) were judged larger in size than grey discs, and that
the greater the value of the coin the greater was the deviation of apparent size from
actual size. Second, they found that poor children overestimated the size of coins
considerably more than did rich children. Furthermore, this was true both with
coins present and with coins from memory.
Because this experiment demonstrated that subjective value and objective needs
actually affected perception of physical objects, it provoked considerable interest
and many replications have been done. Studies have been done in different
countries (Dawson, 1975; McCurdy, 1956) with different coins (Smith, Fuller &
Forrest, 1975) and with poker chips as well as coins (Lambert, Soloman & Watson,
1949) and it was found that although there have been some differences in the
findings, the effects have been generalisable. Tajfel (1977) noted that about 20
experiments have been done on the “overestimation effect” and only two have
yielded unambiguously negative results. Nearly all the researchers have found that
motivational or valuable stimuli had effects on subjects’ perceptual judgements of
magnitude as well as size, weight, and brightness.
Two other methodologically different studies have looked at the value–size
hypothesis. Hitchcock, Munroe and Munroe (1976) compared 84 countries’
per capita incomes and the average size of the currency to determine whether
“persons in poor countries have greater subjective need than persons in wealthy
countries, and whether a country’s coinage allows institutional expression of
the level of need” (p. 307). They found a correlation of - .19 (p < .05) between
GNP per capita and the mean size of all coins minted for a country, and a
correlation of - .25 (p < .025) between GNP per capita and the size of the least-
valued coin.
They concluded that these data indicate the potential usefulness of viewing
institutional-level data from a psychological perspective. The difference was
especially marked when the countries’ lowest-level coins were compared. The
governments of the poorer countries seemed to be using the principle that although
the low-value coins (used more by the poor than the affluent) would buy very
little, if they could be given substantial size and weight they would at least be
psychologically reassuring.
Furnham (1985a) did an unobtrusive study on the perceived value of small
coins. The four smallest coins of the country (England) were dropped in the street
and observers recorded how people who saw the coins reacted. In the study of over
200 people, 56 people who saw the smallest (½p) coin ignored it, 44 ignored the
1p coin, 16 the 2p coin and 10 the 5p coin. It was concluded that because of the
fact that money is both a taboo and an emotionally charged topic, unobtrusive
measures such as these are particularly useful, particularly in times of high inflation
or unemployment, or where there were changes in the coinage.
Bruce, Gilmore, Mason, and Mayhew (1983) were interested in the introduction
of two new coins into British currency that were small relative to their value
compared with other coins present in the system. They were made because small
coins are cheaper to produce and easier to handle, and it brought British coinage
Money today 29
into line with the coins of other nations. In a preliminary series of studies the
authors found that it was not the colour of a coin (gold vs. copper vs. silver) that
made it appear more valuable, but rather its thickness and elaborate edge. Further,
in Britain “seven-sidedness”, rather than a purely circular coin, is seen as more
valuable. In the main study they found that their adult subjects appeared to follow
specific “rules” about the value-conferring features of coins. These rules refer to
the shape, colour, edge and sidedness of the coins.
In a second series of studies, Bruce, Howarth, Clark-Carter, Dodds and Heyes
(1983) looked at the extent to which the new British £1.00 coin might be
confused with existing coins. They found that the new coin could easily be
confused with a coin one twentieth of its value and a different colour, but of
similar circumference. Where coins have the same shape and circumference it is
most important that the thickness of the more valuable is sufficiently great to
make the weight difference between the two coins very easily detectable. They
concluded that more ergonomic work is needed before coins are introduced into
circulation in order to study problems of confusion to the public.
Furnham and Weissman (1985) showed all the British coins to over 60
Americans (in America) who had never been to Britain, or previously seen British
currency. Only one subject was able to rank order the coins correctly according
to worth. Whereas over half of the sample could identify the relative worthlessness
of the two smallest coins (1p, ½p), less than a third correctly identified the rank of
the top five coins.
In a second study the authors asked 4- and 9- to 10-year-old children various
questions about British coins when showing them all the coins of the realm, e.g.
“Which coin can you buy most with?” and “Point at the 10p piece”. They found
that whereas the 9- to 10-year-olds were accurate in their answers (90% or more),
in each case 4-year-olds were often wrong. The 4-year-olds seemed to be operating
on much the same principles as the American adults had done. That is, given the
choice the children (and foreign adults) assumed that size was positively correlated
with worth (circumference, not volume) and that silver coins were more valuable
than copper or gold-coloured coins.
Some studies have looked at the effects of inflation on the perception of money,
one using coins, the other notes. Subjects are shown paper cuts of circular coins or
oblong notes and required to estimate the correct size. Lea (1981) showed that
subjects tended to overestimate the sizes of identical coins as a function of inflation.
That is, subjects made bigger estimates of coins given their old pre-decimalisation
names (2 shillings) than their new name (10 pence). Although there are some
alternate hypotheses that may be entertained, the most satisfactory explanation
appears to be that because inflation has reduced the actual worth of the same sized
coin, they are perceived as smaller.
Furnham (1983) found evidence of the same phenomenon when considering
notes. Subjects were asked to identify rectangles corresponding in shape to a £1.00
note withdrawn from circulation in 1979 and a £1.00 note currently being used.
The notes differed slightly in colour, shape and design but were broadly similar. As
predicted, subjects tended to overemphasise the size of the old note (10.71 cm vs.
9.69 cm) and underemphasise the new note (8.24 cm vs. 9.05 cm).
Together these studies provide evidence for the value/need money perception
hypothesis and the effects of inflation on the perceived size of actual money.
These results could be extrapolated to the abstract, nebulous concept of money
rather than just actual coins and notes. Indeed these results confirm non-
experimental observations in the area such as that poorer people overestimate the
power of money.
Leiser and Izak (1987) argued that a culture with high inflation – such as Israel
in the 1980s – leads to people having changing attitudes to their coinage. They
found that it was the attitude of the public to a given coin that best predicted what
they called the money size illusion. Further, the biases in estimated sizes remained
even after the coin was withdrawn.
The introduction of a new coin offers interesting and important opportunities
for research. One example was the introduction of the euro in 2002. Numerous
studies were done such as those by Jonas, Greitemeyer, Frey, and Schulz-Hardt
(2002), who showed how the size and denomination of the currency changed (i.e.
German Deutschmark, Italian lira) had a powerful anchoring effect on what people
thought about their new currency.
One recent study proved what many of us know: we react differently to money
notes/bills as a function of their use. Di Muro and Noseworthy (2012) found that
people spend small notes/bills quickly because they are often worn, dirty and seen
as contaminated. Their conclusion was that money is not as fungible as previously
thought – its physical appearance influences the way it is spent:
People actively seek to acquire and retain crisp currency because it affords a
source of pride to be expressed around others; however, people actively seek
to divest worn currency because they are disgusted by the contamination
from others. This suggests that the physical appearance of money matters
more than traditionally thought, and like most things in life, it too is
inextricably linked to the social context (p. 12).
In another scatological study Kardos and Castano (2012) showed that some money
stinks, in the sense that it is acquired immorally. They showed that the greater the
guilt felt by acquiring money (lottery ticket on procurement) the less likely it is to
be spent because of the desire not to handle “dirty” money.
Money today
Certainly changes in technology have changed our money. Most of us use plastic
rather than metal or paper money. We transfer money electronically from our
personal computers. Yet, our follies and foibles with regard to money remain.
Money today 31
There persists a great interest in very rich people as well as famous people whose
money habits remain very unusual.
3
DIFFERENT APPROACHES TO
THE TOPIC OF MONEY
I sell, therefore I am. You buy, therefore I eat.

Craig Dormanen
What better way to prove that you understand a subject than to

make money out of it?
Harold Rosenberg
Money changes people just as often as it changes hands.

Al Batt
The entire economic system depends on the fact that people are
willing to do unpleasant things in return for money.
Scott Adams
Introduction
There are no grand psychological “theories” of money, although various psycho-
logical paradigms or traditions have been applied to the psychology of money.
These include psychoanalytic theories, Piagetian development theories, behaviourist
learning theory and, more recently, interesting ideas emerging out of economic
psychology and behavioural economics.
Lea, Tarpy and Webley (1987) have noted that there is an experimental and
social psychology of money, as well as numerous important psychometric studies
on the topic. They argue that we need to move toward a new psychological
theory of money that takes cognisance of the symbolic value of money. They
believe psychologists need to move on from arguing and demonstrating that
people are clearly irrational or arational with regard to money and look at the
many institutions and rituals that accept, sanction, even encourage less than
rational economic behaviour.
They argue that money represents not only the goods that it can purchase but
also the source of the goods and how they were obtained. Its meaning is also
derived from its form. They believe that money’s function of expressing value can
be carried out at various levels of measurement.
1. Nominal: Here money operates only at the level of equivalence. That is

with a particular kind of money you can buy a particular item of goods
or service.
2. Ordinal: Here money has different forms that can be ranked greater or
less than each other.
3. Interval/Ratio: This means we have a true zero and a ratio scale such
that we know and accept the difference between £20 and £30 is the
same as between £70 and £80. This is the system we have today.
Lea, Tarpy and Webley’s theory is that money is deeply symbolic. Behaviour
toward and with money can only be understood through an historical and
developmental perspective. Principally money represents an exchange evaluation,
but there are many subsidiary meanings, which affect how it is used and can even
limit its general applicability.
What money symbolises differs between individuals and groups but these
symbols are relatively limited in number and stable over time. Hence they can be
described and categorised. But rather than ask what psychological characteristics
money possesses, it is more fruitful to ask how these characteristics affect behaviour
with and toward money. Thus certain coins or notes, either because of their
newness, weight or cleanliness, may also be spent before others. Similarly
substituting coins for notes may have the effect of stimulating small transactions.
Although it may be possible to draw up an exhaustive list of the major symbolic
associates of various types of money, and even document which groups are more
likely to favour one symbol over another, a psychological theory of money will
only be useful when the symbol is related to behaviour.
Ideally, according to Lea et al. (1987), their early psychological theory of money
had three factors:
1. Factors associated with the development of symbolism. Thus, for

particular individuals in particular cultures, shapes, colours and icons
have particular value and importance. Hence national differences in the
size, colour and iconography of currency. Note how this changes with
major changes in government as in the case of Hong Kong, South Africa,
the former Soviet Union and Yugoslavia over the past decade.
Different approaches to the topic of money 35
2. Factors concerning symbolism itself. These are to do with the range and
meaning (positive, negative and neutral) attached to all forms of
currency from the traditional (coins, notes, cheques) to more modern
forms of currency including new works of art which are bought, not for
aesthetic pleasure, but as an exclusive source of investment.
3. Factors associated with the use of money. For example, why certain
types of money are saved and others spent; why some are considered
more safe than others, or more personal and more desirable than others;
why money is unacceptable as a gift and why casinos use chips rather
than cash. Indeed the meaning of money is more observable in the way
it is used.
Money is not psychologically interchangeable. It is of value and is a measure of

value. It is a complicated symbol imbued by individuals and communities with
particular meanings, which in part dictates how it is used by economic forces. It
should be acknowledged that individuals display constant and important monetary
behaviours. Individuals act on the economy; the collective behaviour of individuals
(sometime few in number) shapes economic affairs. On the other hand, a person’s
economic status and situation in society determines not only how much money they
have but how they see that money. We shape our economy and it shapes us. The
laws and history of a particular economy (i.e. Western Europe) do affect in small and
big ways the conscious and unconscious behaviour of all citizens of that Union.
One of the most fundamental differences between the major social sciences
interested in money (anthropology, economy, psychology and sociology) concerns
the assumption that people behave rationally and logically with respect to their
own money. While econometricians and theorists develop highly sophisticated
mathematical models of economic behaviour (always aggregated across groups),
these nearly always accept the basic axiom of individual rationality. Psychologists
on the other hand have delighted in showing the manifest number of faulty logical
mistakes that ordinary people make in economic reasoning. Sociologists and
anthropologists have also demonstrated how social forces (norms, rituals, customs
and laws) exist that constantly render the behaviour of both groups and individuals
a- rather than ir-rational.
The opposite of rational is impulsive, whimsical, and unpredictable. Economists
accept that there are people of limited knowledge, intelligence and insight. And
they know that business people with non-rational motives and who make use of
non-rational procedures will fail rather than survive. Economic behaviour that
reflects human frailty or poor reason is classified as a short-term aberration that has
little impact on economic developments in the long run.
The whole rationality issue is a difficult one: doing unpaid work, giving to
charity and playing the national lottery may be regarded as irrational. This is often
to take a very narrow view of rationality. Clearly work provides many social
benefits while gambling is exciting. What the economist often means by rational is
behaving in such a way as to maximise income.
There are various synonyms for rationality like optimising or maximising. But
as Lea et al. (1987) note “ … we have seen that, in an analysis of real human choice
behaviour, the rationality assumption is at best unproven, generally unhelpful, and
sometimes clearly false” (p. 127). Yet they believe it remains reasonable for econo-
mists to use rationality assumptions. However, they do point out that economic
psychology’s preoccupation with the rationality question is futile. Rather than
attempt to define whether an individual’s behaviour is rational, maximising or
optimising we should shift our attention to what is maximised and why. It is rather
pointless being obsessed with the rationality question if this leads researchers to
ignore the content of that behaviour.
Essentially the rationality argument can be presented at different levels:
1. The most strict and least acceptable meaning of economic rationality is

that people are almost exclusively materially driven and that with both
perfect knowledge and cool logic they choose “rationally” material
satisfaction. This version has been both theoretically and empirically
discredited.
2. The second version is that people nearly always behave rationally with
respect to economic situations; societies and individuals supposedly
“economise”. The trouble with this idea is that although it may be
possible to show that in the production and pricing of goods both
primitive and modern peoples act rationally, they frequently behave
quite irrationally in the exchanging of goods within economical gift-
giving. In this sense all individuals and societies are, at once, rational and
arational.
3. The third position is to treat rationality as simply a provisional set of
assumptions upon which to base a theory or model. Rationality is a form
of conceptual simplification that can be revised or rejected if unhelpful
or if the data do not fit the theory. Many social scientists would be happy
with this level of analysis.
4. The final level of analysis is to treat economic rationality as an “institu-
tionalised value” (Smelser, 1963). This is more than a psychological or
sociological postulate but a standard of behaviour to which individuals
and organisations hope to aspire. It is a standard to which people may
conform or deviate and, hence, contains the concept of social control.
As Katona (1975) noted the real question is not whether the consumer is rational
or irrational. Consumers’ decisions are shaped by attitudes, habits, sociocultural
norms, and group membership. People prefer cognitive short cuts, rules of thumb,
routines – they are rarely capricious and whimsical and, for psychologists, never
incomprehensible. Likewise, the behaviour of whole groups follows logical patterns
that may differ greatly from postulated forms of rational behaviour. In short, the
consumer behaves psycho-logically. People get multiple benefits from behaviours
involving money such as giving and gambling.
Psychological theories of money neither assume monetary rationality nor rejoice
in the countless examples of the ir- and arationality of ordinary people with respect
to their money. They have set themselves the task, however, of trying to understand
how ordinary people acquire and demonstrate their everyday monetary attitudes,
beliefs and behaviours.
The biological psychology of money

The rapid rise of biological psychology over the last 30 years has been dramatic. It
has developed theoretically with many evolutionary and sociobiological theories as
well as developments in neuroscience.
In a very important paper Lea and Webley (2006) sought a biological perspective
on money. They note that money is a “problem for a biological account of human
motivation” and may be conceived as a pure creation of culture. In this sense the
culture-dominated sciences like sociology offer a very different account to the
biological sciences. Their review started from four assumptions:
(1) For humans (but not for other species), money has an extraordinary
incentive power, similar to that of other motivators such as food and sex.
(2) Whereas the incentive power of food, sex and most other motivators is
easily understood in biological terms, that of money is not. (3) A biological
explanation of the incentive power therefore needs to be provided because
the science of money is still disconnected from the science of life and the gap
needs to be bridged. (4) This task has hitherto been neglected. (p. 196)
They proffer two rather different theories to account for the self-evident
motivational power of money:
Tool Theory: money is a tool to exchange scarce resources. It is an incentive
“only because and only insofar as” it can be exchanged for goods and services that
are the strong incentives. Money is instrumental, a means to an end, as recognised
by economics. It is a generalised reinforcer: very useful for acquiring practically
every material good.
Drug Theory: money affects the nervous system but is a perceptual or
cognitive drug like pornography. Money acquires incentive power because it
mimics the behavioural, neural or psychological action of a natural incentive. In
this sense it is addictive and this may, in part, explain the powerful motivational
power that it has.
The Tool Theory explains situations where money gives real but indirect access
to rewards; it explains cases where money motivation is a real underlying function
whereas that is not the case with Drug Theory. The authors note: “ … if Tool
Theory fails, Drug Theory is then the only possible biological theory, and vice
versa” (p. 165).
They try to integrate Tool and Drug Theory into other accounts of money
motivation. Economic theories tend to be tool theories, while psychological
theories tend to be drug theories. Lea and Webley note: “ … money is sought for
reasons that go beyond its instrumental function. To varying degrees and in
differing ways, therefore, these classic sociological accounts are versions of Drug
Theory” (p. 168).
Next they note how so many money research areas support a drug theory
perspective:
• Perceiving coins and the money illusion: people misperceive coin size
because the value of money gives it special status, which interferes with normal
perceptual and cognitive processes.
• Money conservatism: people resist the changing of their currency though
they accept some additional forms of money like credit cards. The reaction of
people to the introduction of new, safer, more durable money is emotive
rather than calculative and therefore supports Drug Theory.
• Gifts and money restrictions: the purchasing of some things like sex or the
giving of money gifts is not socially acceptable and seen to be socially and
psychologically destructive, which supports Drug Theory.
• Relationships: money is a powerful symbol as well as channel of power in
relationships, which has a strong drug-like quality.
• Money status and addiction: materialism, hoarding, etc., clearly fits the less
rational Drug Theory.
In short the evidence is that money has a value and an emotional charge that is
above its simple economic use. It is better conceived of as a cognitive drug. Drug
Theory, they argue, captures the “parasitic and functionless” quality of money
motivation so regularly shown by people.
They conclude with three points:
1. Although money is an efficient tool, and so gains incentive power by

enabling us to fulfil a wide range of instincts, a Tool Theory of money
motivation is inadequate. The majority of non-economic accounts of
money (and even some economic accounts) either take this view or require
a more elaborated Tool Theory than is usually assumed. Modern empirical
work has uncovered substantial evidence in favour of this conclusion, and
we believe that it would be widely if not universally accepted.
2. The inadequacies of Tool Theory can be overcome, and the phenomena

that it fails to explain can be integrated, by asserting that money also
acts as a drug. That is, we conclude that money derives some of its
incentive power from providing the illusion of fulfilment of certain
instincts. This argument has formed the core of the present article, and
although we believe it is well grounded in the data we have reviewed, it
will inevitably be more controversial. In particular, the alternatives of a
more elaborate Tool Theory, or an entirely different way of partitioning
the possible kinds of theory, cannot be ruled out at this stage, and
perhaps they never could be.
3. The incentive power of money depends partly on the illusory fulfilment
of the human instincts for reciprocal altruism and object play, though
there may well be other instinctive systems that money can also
parasitise. This conclusion is more speculative, and is likely to be the
most controversial of all. However, insofar as it is persuasive, it would
provide the best evidence in favour of the Tool/Drug analysis, since it
would show that the analysis has been deployed fruitfully. (p. 175)
They note that the high number of quotes, proverbs and aphorisms about money
are both cynical and sceptical, but still about the motivational power of money.
Cynical aphorisms assert the fact that money is indeed very powerful, despite many
protestations to the contrary, while sceptical aphorisms assert the real limitations
about the power of money. People quite clearly believe in a Drug Theory assertion
that money is a dangerously powerful force in their lives.
Clearly people are prepared to do or sell almost anything for money. In that
sense Lea and Webley (2006) are right that it is a very strong incentive, no doubt
with a biological origin.
The economics of money

Most libraries contain hundreds of books with the term money in the title but nearly
all are found in economics. There are books on monetary theory; monetary policy;
money and capital markets; internal money; money, politics and government policy;
and the relationship between money, income and capital. Economists note that
money may be analysed according to substance: copper, silver, gold, paper or nothing.
The great bulk of money is credited by banks that mobilise securities to circulate
money. Further, bank deposits have important merits: they are convenient, entirely
homogeneous, and not intrinsically valuable, representing only “money on paper”.
As Finn (1992) noted, economists are not so much interested in the meaning of
money per se but rather wealth and material prosperity. Wealth can be held in
various forms, money being one, and that is what we all want and chase. Economics
is the science of the motive to maximise wealth. This is argued to be a primary,

pre-eminent and powerful motive for all behaviour.
People accumulate wealth to consume goods and services that increase utility
(satisfaction and happiness). Thus the cost of utility can be calculated. The more
wealth you have, the more opportunities you have to increase utility. Utility theory
supposed it provided a comprehensive view of human decision making. Homo
economicus: the utility maximiser. This was replaced by rational preference theory.
Finn (1992) summarises the approach of his discipline thus:
In sum, economists believe that most of the people most of the time will
respond positively when they have a chance to increase their wealth because
people believe that increased wealth will lead to increased welfare. Similarly,
people will change their behaviour to reduce the loss of wealth when any loss
is inevitable. Even though the canons of evidence in the discipline do not
allow for a scientifically respectable interpretation of the meaning of wealth
for individuals, economists proceed with the matter-of-fact point of view that
more of nearly every good thing is better than less, and there are very few
good things that more wealth is not helpful in attaining. (p. 666)
Whilst there are passionate theoretical debates and policy implications, there is
substantial agreement between economists. The following axiomatic points, made
by Coulborn (1950) are probably not in dispute:
[M]oney may be defined as a means of valuation and of payment; as both a

unit of account and as a generally acceptable medium of exchange. Money
is an abstract unit of account; the “mathematical apparatus” used to express
price. It is a common denominator for precision in calculation. Money does
have a legal status but the “commercial” idea of general acceptability is vital
to any definition of money. Money should be portable, durable, divisible and
recognisable. The common unit of account should be of suitable size. Money
now no longer needs to be intrinsically valuable.
In a barter economy, ratios of exchange fixed by a rigid custom inhibit economic

progress. Money-based systems, unlike barter, generalise purchasing power and
make for full satisfaction in exchange. Over time money has imperfections and any
durable goods (e.g. gold) may serve as a link between present and future values.
Money can mean the loan of money: hence there is a money market where money
is borrowed and the price of money refers to the rate of interest at which money is
borrowed. There is often a difference between real, nominal, and legal capital.
Real capital refers to actual goods and services (i.e. stocks in a warehouse); nominal
capital refers to the agreed contemporary values of the real capital; while legal
capital is the amount on which companies pay fixed interest and dividends.
Various technical terms refer to monetary groups:
1. Legal tender: a lawful form of payment.

2. Currency: coins, notes, and the whole tangible media of exchange.
3. Cash: anything which is customary in payment, synonymous with
medium of exchange, especially coins and notes.
4. Commodity money: e.g. gold coins where the metal is equal to the face
value (full bodied).
5. Token money: usually base metal coins that were once commodity money.
6. Representative money: notes that are freely convertible into full-bodied
commodity money.
7. Fiat money: money that the state says shall be legal tender.
8. Bank money: notes and bank deposits issued by individual banks.
9. Substitute money: all deposits, including treasury notes, and notes.
10. Credit: a belief in payment or repayment; all bank deposits are therefore
credits.
11. Overdrafts: also a form of credit where people are allowed to draw out
more than they deposited.
The functions of money are well known. Money is a medium of exchange: while
paper and plastic money are intrinsically worthless, they are guarantees of value that
can be used in exchange for goods and services. Money is also a unit of account:
we can judge the cheapness or dearness of goods by using money. Third, money is
a store of value: unlike perishable goods money does not rot, but it does change
value over time, particularly in times of political instability. Finally, money is a
standard of deferred payment: buying and selling can take place before a commodity
actually goes on to the market (as in future trading).
What, according to economists, are the qualities of good money?
First, its portability: i.e. it is easily carried. Indeed electronic money or plastic
money may be rather too easily moved so that it can elude proper authorities of the
law.
Second, good money has durability: it stands up to wear and tear. Paper money
may last as little as six months because it “wears out”, while coins can last 20 to 30
years even with problems of inflation. Coins can be made of anything including
plastic but frequently follow the specific symbolism of gold, silver, and bronze.
Third, good money must ensure recognisability: it should be immediately
recognisable for its exact worth.
Fourth, it needs to be homogeneous: one note or coin needs to be as
acceptable as any other. Even rare coins, if part of the official currency, can serve
in acceptable exchange/payment of debt.
Fifth, naturally, money must be relatively stable: the value of money should not
vary widely, erratically or unpredictably.
Sixth, it must also be limited: the supply of money needs to be controlled,
otherwise if too scarce or too plentiful it could seriously change in stability.
Where does money go? How does it circulate: money is earned for producing
“real worth” – goods and services (wages, salaries). Money is spent on consuming
the goods produced including “necessities”, amusements and savings. Money is
invested for future prosperity – investments, stocks, etc. Finally there is money
management – attempts by the government to control the money system and
prevent both depression and inflation. Economists are not interested in the everyday
monetary behaviour of individuals. They are always interested in aggregated data
and building theories to explain it.
Economic anthropology and primitive money

The anthropologists have undertaken numerous detailed studies of how money is
used in different cultures. They often describe what objects are valued and used to
barter and the difference between particular types of money. The history of most
cultures is the transition from special purpose, socially embedded concepts and uses
of money to that which is depersonalised and disembedded, and measure of objects,
relations, services and even persons.
They often write about special-purpose money: special for particular purposes,
times and people. Modern anthropologists remain interested in money’s materiality,
what it is made from, as well how particular groups like corporate investors and
traders talk about it. For them the symbolism and iconography of money remains
very interesting. They are interested in groups that form their own local currency
and who expose the taken for granted monetary order.
Maurer (2006) suggested that it is the task of money anthropologists to expose the
gap between the economists’ cold rational view of money and how it is used and the
social, semiotic and arational aspects of modern money usage. Traditionally anthro-
pologists have looked at primitive money and the functional uses of money in
society. One of the more intriguing anthropological contributions has been to
describe what constitutes money, and secondly how it is commonly “transacted”.
Early studies showed how some tribes fought not with weapons but possessions;
how ritualised “gift-giving” has such important meanings. Anthropologists have
taken a special interest in how groups evolve complex monetary systems and rules
and the functions they fulfil. The use of money is seen as a highly symbolic,
ritualised game with implicit and explicit rules.
Unlike psychology, anthropology has long been interested in economics and
consumption (Douglas & Isherwood, 1979). Economic anthropology is concerned
with the economic aspects of the social relations of persons. Indeed there are
standard textbooks on economic anthropology (Dalton, 1971; Herskovitz, 1962;
Thurnwald, 1932). Although there have been a number of well-established
authorities in this field, Karl Polanyi’s work is perhaps the best known. Anthro-
pologists have long been aware that nearly all economic concepts, ideas and theories
are based on only one type of economy – industrial capitalism. Some have argued
that these modern economic concepts (maximising, supply, demand) are equally
applicable to primitive societies, while others are not convinced.
One of the major tasks of economic anthropology is to detect economic
universals in human society by sampling the many forms in which they are manifest
across cultures: for instance, whereas the deferment of wants, through saving and
investing, may be considered good for some cultures, most primitive cultures
dictate that resources should be expended on food and shelter.
Thurnwald (1932) suggested that a characteristic failure of most primitive
economies is the absence of any desire to make profits from either production or
exchange. Various distinctions have been made, such as objects that are treated as
treasure and hoarded as such or articles of daily use; whether the object is regarded
as capital capable of yielding profit; and also whether the object is the potential
source of others of its own kind. Certainly, what is interesting about anthro-
pological studies of money is not only the range of objects used as money but also
the fact that primitive money does not fulfil many of the functions that current
money does.
Whereas economists seem concerned with only non-social aspects of money,
such as its worth, divisibility, etc., anthropologists look at money which is used in
reciprocal and redistributive transactions, in terms of the personal roles and social context
of what occurs. The exchange of whatever serves as money – be it armbands, pigs’
tusks, shells or stones – as well as its acquisition and disposition is a structured and
important event that often has strong moral and legal obligations and implications
which might change various status rights and social roles.
Because money is a means of reciprocal and redistributive payment used fairly
infrequently to discharge social obligations in primitive societies, its portability and
divisibility are not very important. The introduction of Western-style money does
more than just displace indigenous money; it has inevitable repercussions on the
social organisation of a people. This is because Western-style money allows both
commercial and non-commercial (traditional) payments to be earned with general-
purpose money earned in everyday market transactions. Hence patrons, elders and
heads of families and clans lose some control over their clients and juniors who can
earn their own cash and dispose of it as they wish.
The essence of the anthropological message is this: money has no essence apart
from its uses, which depend on the traditional transactional modes of each culture’s
economy. Money is what it does and no more. For Douglas (1967) money rituals make
visible external signs of internal states. Money also mediates social experience,
and provides a standard for measuring worth. Money makes a link between the
present and the future. But money can only perform its role of intensifying
economic interaction if the public has faith in it. If faith in it is shaken, the
currency is useless. Money symbols can only have effect so long as they command
confidence. In this sense all money, false or true, depends on a confidence trick.
There is no false money, except by contrast with another currency that has more
total acceptability. So, primitive ritual is like good money, not false money, as
long as it commands assent.
Thus, whereas economists see the origin of money in terms of commercial
issues, anthropologists stress non-commercial origins as in bride payments, sacrificial
and religious money, status symbols, as well as the payment of fines and taxes.
Certainly money used for non-commercial payments appears to occur before it is
used for commercial purposes, suggesting that anthropologists’ theories of the
origins of money are correct (Lea et al., 1987).
Anthropologists have already emphasised the variety of moneys existing in any
culture – that is the number of items that serve as money. Thus great art is now seen
as an investment today rather than purely as an aesthetic object. Further, anthropologists
have always been sensitive to the symbols of money and the symbolic value of ritual
possessions. This observation is always manifest when a country decides to change its
currency (coins and notes) even if there is no change in value. Equally, as we see with
the introduction of a pan-European currency, the symbols on notes and coins (or
lack of them) is a source of much passion and speculation.
The sociology of money

The line between economics, political science and sociology is rarely clear. Just as
we have the subdiscipline of economic psychology so there is economic sociology.
Early sociologists, such as Herbert Spencer, Emile Durkheim and Max Weber,
recognised the sociological implications of the division of labour and how societies
try to regulate cooperation and equitable exchange among economic agents by
law, customs and codes (Smelser, 1963). Most economic sociology has examined
advanced capitalist societies.
Social theorists and political economists like Adam Smith and Karl Marx are
happily claimed by sociologists as one of their own. Marx claimed that money
transformed real human and natural faculties into mere abstract representations.
Further, he thought money appeared as a disruptive power for the individual and for
social bonds. It changed fidelity into infidelity, love into hate, hate into love, virtue
into vice, vice into virtue, servant into master, stupidity into intelligence and
intelligence into stupidity.
Sociologists do not see economic forces and factors like money supply, fiscal
policies, etc. as separate from other social factors. Often economists see individuals
and financial institutions as autonomous, free-acting, undersocialised, atomised
agents (Baker & Jimerson, 1992) rather than as socialised agents constrained and
stifled by social forces. Further, sociologists argue that money has multiple meanings
and definitions and is used in many different spheres. “It is not as colourless, neutral,
fungible and objective as economists contend. Money is shaped by objective social
relations (social structure) and cognitive classifications and evocative meanings
(culture)” (Baker & Jimerson, 1992, p. 680).
Baker and Jimerson (1992) have suggested that for the sociologist there are two
dimensions that provide a framework to understand the sociology of money. First,
the structured vs. cultural perspective. The structured perspective concerns

money in the interpersonal and regulatory context of exchange. It is about
communication and exchange at a personal level and the legal and political
mechanisms governing trading and markets. Second, there is the independent vs.
dependent variable approach: i.e. money as a cause, catalyst or facilitator vs.
money as an effect, consequence or result. Most economists take the independent
variable perspective while many sociologists take the dependent variable perspective.
Zelizer (1989) has noted that sociologists are interested in the uses, users, sources,
control and allocation of money and all the extra economic factors (i.e. the family)
that influence economic behaviour. Sociologists are also interested in the organisation
of finance in families, private corporations and the state as well as the role of culture
and government in the attempts to control and shape monetary behaviour.
Economic sociologists are also particularly interested in social organisations, be
they formal (business, hospitals), informal (neighbourhoods, gangs) or diffuse
(ethnic groups). The roles individuals have within them, the behavioural norms
that develop, the values they implicitly or explicitly hold, and the structures they
impose are all central to the economic sociologists’ concepts of institutionalisation.
Sociologists tend to reject materialistic definitions of money, preferring, like
anthropologists, to focus on the social relationships that monetary transactions
involve. Sociologists reject the economic idea that modern money is general
purpose, fulfilling all the possible monetary functions. There exists no form of
money that serves all such functions simultaneously. Legal-tender notes are rarely
used to store value in practice. Notes and coins represent standard units of value
without literally embodying them; indeed, if they did so they would be worth
considerably more than their legal-tender equivalents. Cheques, credit cards and
bank drafts serve only as means of payment. These different forms of money
inevitably fulfil different functions.
Sociologists are interested in control, particularly control of the money supply
and attempts to control inflation, deflation and economic depression. They are
also interested in monetary networks, which are networks of information. Dodd
(1994) notes that there are five factors that must be in place for a network to be
defined as such:
First, the network will contain a standardised accounting system into which
each monetary form within the network is divisible, enabling its exchange with
anything priced in terms of that system.
Second, the network will rely on information from which expectations regarding
the future can be derived: money is acceptable as payment almost solely on the
assumption that it can be reused later on.
Third, the network will depend on information regarding its spatial characteristics:
limits placed on the territory in which specific monetary forms may be used will
probably derive initially from measures designed to prevent counterfeiting,
although they will eventually refer to the institutional framework governing the
operation of a payments system.
Fourth, the network will be based on legalistic information, usually in the form
of rules, concerning the status of contractual relationships, which are fleeting and
conclusive: to pay with money is literally to pay up.
Fifth, the operation of the network presupposes knowledge of the behaviour
and expectations of others. This is usually derived from experience, but can also be
sought out and even paid for. Such information is vital in generating trust in
money’s abstract properties. Monetary transactions are often impersonal, even
secretive, and networks need to be able to cope with this. A network is an abstract
aggregated concept that reflects the typical sociological level of analysis.
In an excellent, comprehensive paper entitled The Social Meaning of Money,
Zelizer (1989) rejects the utilitarian concept of money as the ultimate objectifer,
homogenising all qualitative distinctions into an abstract quality. She believes that
too many sociologists have accepted economists’ assumptions that money per se
and market processes are invulnerable to social influences – free from cultural or
social constraints.
Yet all sociologists have argued and demonstrated how cultural and social factors
influence the uses, meaning, and incidence of money in current society. Zelizer
(1989) believes that the extra economic social basis of money remains as powerful
in modern economic systems as it was in primitive and anxious societies. Central
to sociological (as well as anthropological and psychological) conceptions of money
are the following fundamental points.
First, while money does serve as a key rational tool of the modern economic
market, it also exists outside the sphere of the market and is profoundly shaped by
cultural and social structural factors.
Second, there are a plurality of different kinds of moneys; each special money is
shared by a particular set of cultural and social factors and is thus qualitatively distinct.
Third, the classic economic inventory of money’s functions and attributes, based
on the assumption of a single general-purpose type of money, is thus unsuitably
narrow. By focusing exclusively on money as a market phenomenon (the traditional
economic view) it fails to capture the very complex range of characteristics of
money as a non-market medium. A different, more inclusive understanding is
necessary, for certain moneys can be indivisible (or divisible but not in mathe-
matically predictable portions), non-portable, deeply subjective, and therefore
qualitatively heterogeneous.
Fourth, the assumed dichotomy between utilitarian money and non-pecuniary
values is false, for money under certain circumstances may be as singular and
unexchangeable as the most personal or unique object.
Fifth, the alleged freedom and unchecked power of money manifests untenable
assumptions. Culture and social structure set inevitable limits to the monetisation
process by introducing profound controls and restrictions on the flow and liquidity
of money.
Extra economic factors systematically constrain and shape: (a) the uses of money,
earmarking, for instance, certain moneys for specified uses; (b) the users of money,
designating different people to handle specified monies; (c) the allocation system of
each particular money; (d) the control of different monies; and (e) the sources of
money, linking different sources to specified uses.
In order to demonstrate the sociology of special or modern money sociologists
have examined domestic money: husbands’, wives’ and children’s money, and how
changing conceptions of family life and gender relationships affect how family
money is used (this will be examined in some detail later). Domestic or family
money is clearly a very special kind of currency. Regardless of its source, once
money enters the household its allocation (timing as well as amount) and uses are
subject to rules quite distinct from the market. Only changes in gender roles and
family structure influence the meaning and use of money. Domestic money usage
and attitudes show the instrumental, rationalised model of money and the market
economy to be wanting. Money in the home is transformed by the structure of
social relations and the idiosyncratic system of each family. Equally institutional,
charitable, gift and dirty money all take on unique social meanings.
What sociologists share with anthropologists and psychologists is an interest in
the meaning individuals, groups, societies and cultures give to money and how that
meaning affects its use. Further, they are particularly interested in how institutions
use all forms of money.
Religion and money

At their core, although religions differ a great deal on many issues, they share
numerous beliefs about money and materialism. What they preach and what some
of their leaders actually do is, of course, another matter. The texts of the three
Religions of the Book (Christianity, Islam and Judaism) and those of Hinduism,
Buddhism and other eastern religions (Sikhism, Zoroastrianism) were all written in
a time of comparative poverty. Yet, like all texts, they are ponderous, metaphoric
and often contradictory. As a result they supply excellent material for theological
scholars to “decode and interpret” for centuries.
In Christianity there are many references to wealth and riches resulting from
(i.e. being the reward for) a good life and “fearing the Lord” (Job 42:10–17; Proverbs
3:16 and 8:18). Equally there is a theme of optimality: the happiness derived from
wealth is all about having neither too much nor too little money (Proverbs 30:8–9).
Further, because wealth is essentially a gift of God, so it belongs to Him.
The Old Testament is clear that wealth is also the reward of diligence and hard
work. Wealth brings security and protection. But there is also and always the
warning (Psalms 62:10; Job 1:21; Ecclesiastes 5:12), essentially that one should never
make wealth a principle goal or good; and that the gain of it wrongly or use of it
selfishly is to sin against God.
In summary:
• Wealth is no substitute for goodness and righteousness.

• Riches do not last: you cannot take it with you.
• Wealth can encourage a person to ignore both God and his fellow man.
• Wealth can lead to arrogance, pride and hubris: it can damage character and
judgement.
• It is the poor, humble and meek that most put their trust in God.
• Wealthy people have a special duty to help and support the poor: to ensure
and enshrine principles of social justice.
• Those who oppress the poor to increase their wealth are amongst the most
wicked and damned.
The New Testament is full of references to money. Jesus paid taxes to both the
government and the temple. Paul was self-supporting and paid all his debts. But
there are many references to the dangers of wealth. It is not money itself, but the
love of money that is at the root of all evils (1 Timothy 6:10). Exploitation, shameful
gain, greed and covetousness are all constantly condemned.
Jesus did mix with people of wealth (Nicodemus; Zacchaeus) but it is the
attitudes of some rich people – arrogance, haughtiness and snobbery – that is
questioned. Riches are a poor and insecure foundation for life. Further, they are a
diminishing asset where “moth and rust destroy, and where thieves break in and
steal” (Matthew 6:19–21). Certainly, the desire for wealth can blind us to what is
important and damage judgement. To spend time and energy in the all-pervasive
pursuit of wealth is not to understand the nature of “true riches” (1 Timothy 6:7,
6:17–18).
There are various parables concerning wealth, for example the parable of the
rich man and Lazarus the beggar whose roles are reversed in the afterlife (Luke
16:19–31). The warning is about the consequences for the rich who show lack of
concern and awareness of the poor. The rich man is condemned for sins of
omission, not commission, for being irresponsible and doing nothing. Further fiscal
obligation cannot take the place of personal awareness and gift giving.
Many people will also recall the story of an incensed Jesus clearing the temple
of money changers (Matthew 21:12–13). The issue was not a deep distrust of the
bureau de change, but the wilful exploitation of peoples’ credulousness and trust.
Worse, the exploitation of another’s need is represented.
There is also the parable of the “shrewd manager” (Luke 16:1–13), who
encouraged others to join him in falsifying accounts. It’s a puzzling proverb with
four lessons: First, if people put as much effort into their Christian life as they do
making money, they would be better for it. Second, money is a means to an end,
not an end in itself. Third, a person’s conduct in money matters is a simple, sure
marker of character: if a person can be trusted with money, he or she can be
trusted with anything. Finally, there is room only for one supreme loyalty and
that is to God.
There are texts, particularly in Corinthians, on the role of giving money away,
charitable donations and the like. It is best that giving is systematic (i.e. continuous
and planned), that it is proportional (to income and wealth, as in a percentage) and
that it is universal among believers: hence tithing. Giving to other believers is
symbolic of community. Concern for others can be shown in practical giving.
At the heart of the New Testament message about money, materialism and
possessions is the simple question “do I possess my (many) possessions or am I
(fundamentally) possessed by them?” It’s about the folly of being a slave to material
things, luxuries and the supposed “comforts” that they bring. Possessions can lead
to possessiveness. Money blinds people to what is important: its acquisition, storage
and usefulness is a real test of character. Thus the wealthier a man is, the more he
needs God.
Wealth can give one a false sense of independence. People believe it can open
all doors and ensure all escape routes. Further, it can cost too much with respect to
pride and self-worth – “thirty pieces of silver”, where the money you make costs
too much. The more you have, the more difficult it may be to leave this world and
consider the next one.
There seem to be five simple principles to bear in mind for people of any
religion or none. First, did we acquire money in ways that influenced or harmed
no one, but enriched and helped the community? Second, is money a master
whom we serve, or a friend who can help others and ourselves? Third, do we use
our money wisely, judiciously, and in order to help others? Fourth, people are
always more important than things, money, machines. Finally, there are times
when giving money is not enough; the giving of oneself (time, skills, energy,
concern) is the greatest gift of all.
The sacred and the profane

For the economist money is almost profane: it is not treated irreverently or
disregarded but it is commonplace and not special. It has no spiritual significance.
However, money can be sacred – it is feared, revered, and worshiped. Belk and
Wallendorf (1990) point out that it is the myth, mystery, and ritual associated with
the acquisition and use of money that defies its sacredness and spirituality.
For all religions, certain persons, places, things, times, and social groups are
collectively defined as sacred and spiritual. Sacred things are extraordinary, totally
unique, set apart from, and opposed to, the profane world. Sacred objects and
people can have powers of good or evil. “Gifts, vacation travel, souvenirs, family
photographs, pets, collections, heirlooms, homes, art, antiques, and objects
associated with famous people can be regarded as existing in the realm of the sacred
by many people” (Belk & Wallendorf, 1990, p. 39). They are safeguarded and
considered special, and of spiritual value. Art and other collections become for
many people sacred personal icons.
Equally, heirlooms serve as mystical and fragile connections to those who are
deceased. They can have more than “sentimental value” and some believe that a
neglected or damaged heirloom could unleash bad luck or evil forces.
Unlike sacred objects, profane objects are interchangeable. They are valued
primarily for their mundane use value. Sacred objects often lack functional use and
cannot, through exchange, be converted into profane objects. Further, exchange
of sacred objects for money violates their sacred status, because it brings them into
inappropriate contact with the profane realm.
In Western societies money cannot buy brides, expiation from crimes, or
(ideally) political offices. The Judeo-Christian ethic is paradoxical on money.
People with money acquired honestly may be seen as superior, even virtuous, and
removing the desire to accumulate money is condemned. Believers are called on
to be altruistic, ascetic, and selfless, while simultaneously being hard working,
acquisitional, and, frankly, capitalistic. The sacred and profane can get easily
mixed up.
Belk and Wallendorf (1990) also believe that the sacred meaning of money is
gender and class linked. They argue that women think of money in terms of the
things into which it can be converted, while men think of it in terms of the power
its possession implies. Similarly, in working-class homes men traditionally gave
over their wages to their wives for the management of profane household needs
with a small allowance given back for individual personal pleasures, most of which
were far from sacred. Yet in a middle-class house, a man typically gave, and indeed
sometimes still gives, his wife an allowance (being a small part of their income) for
collective household expenditure.
Money (an income) obtained from work that is not a source of intrinsic delight
is ultimately profane, but an income derived from one’s passion can be sacred. An
artist can do commercial work for profane money and the work of the soul for
sacred money. From ancient Greece to twentieth-century Europe, the business of
making money is tainted. It is the activity of the nouveau riche, not honourable
“old money”.
Thus, volunteer work is sacred, while the identical job that is paid is profane.
The idea of paying somebody to be a mother or home-keeper may be preposterous
for some because it renders the sacred duty profane. But the acts of prostitutes
transform a sacred act into a formal business exchange. Some crafts people and
artists do sell their services but at a “modest”, almost non-going-rate price because
their aim is not to accumulate wealth but to make a reasonable income and not
become burdened by their work.
Belk (1991) considered the sacred uses of money. A sacred use – for example,
a gift – can be “desacralised” if a person is too concerned with price. Sacralising
mechanisms usually involve the purchase of gifts and souvenirs, donations to
charity, as well as the purchase of a previously sacralised object. The aim is to
transform money into objects with special significance or meaning. Money-as-
sacrifice and money-as-gift are clearly more sacred than money-as-commodity.
Charity giving is a sacred gift only when it involves personal sacrifice and not
when there is personal gain through publicity or tax relief. Money used to
redeem and restore special objects (e.g. rare works of art, religious objects) also
renders it sacred.
Thus, to retain all money for personal use is considered antisocial, selfish,
miserly, and evil. To transform sacred money (a gift) into profane money by selling
it is considered especially evil. Many people refuse to turn certain objects into
money, preferring to give them away. Money violates the sacredness of objects and
commodifies them. Equally, people refuse money offered by those who have been
voluntarily helped. The “good Samaritans” thereby assign their assistance to the
area of the gift rather than a profane exchange. Thus, a gift of help may be
reciprocated by another gift.
The argument is thus: the dominant view of money concentrates on its profane
meaning. It is a utilitarian view that sees money transactions as impersonal and
devoid of sacred money. But it becomes clear when considering the illogical
behaviour of collectors, gift-givers, and charity donors that money can and does
have sacred meanings, both good and evil. Further, it is these sacred meanings that
so powerfully influence our attitudes to money.
Money in literature
The sheer number of references to money by dramatists, poets, novelists and
wits has merited a long and comprehensive anthology (Jackson, 1995). The
editor points out that such a book is not in itself a study in economics, “though
a few of the dismal science’s more graceful and pungent prose stylists have earned
their place beside the poets” (p. vii). Literature shows well the fantasies, lunacies
and dreads which surround ordinary peoples’ experience of money. It has been
noted that after love and death few subjects have been more attractive to writers
than money.
Many people know of Chaucer’s crooks and swindlers and Dickens’ Scrooge.
Writers satirise avarice, highlight the arrogance of the rich, and may howl
outrage, disgust and disdain at those who show love of money. Jackson (1995)
believes that the modern novel owes much to the concept of money. Novels
often describe the following: spendthrifts, gamblers and philanthropists;
embezzlers, blackmailers and swindlers; banks and bankers; merchants and wage
slaves, financial manias and young provincial men on the make. The novel
possesses its characteristic sharp attention to the ways in which the mechanisms
of money draw up characters from all levels of society and ease or shove them
towards their destinies.
Writers and literature have often been seen as antimaterialist, heroically
championing human values against the cold, pitiless calculations of the market.
There is the image of the unworldly poet versus the wicked capitalist. This may be
more the vision of idealistic readers than pragmatic writers whose frequent
economic insecurity keeps them sufficiently worldly minded.
Many writers feel and express the inconsistencies and contradictory values about
money in their culture. Thus, art alone for its own sake is an indulgence and a
trivial thing, but done for money is somehow cheap and “hackwork”. People like
to believe that great writers cannot be bought; that the literary conscience ought to
resist the temptations of money.
Most obviously, money and literature are both conventional systems for
representing things beyond themselves, of saying that X is Y. A poem asks us
to believe that it represents a nightingale or a raven; a coin asks us to believe
that it represents a bushel of wheat or a number of hours of labour. Neither
money nor writing would have been possible without the human mind’s
capacity to grasp that one thing may be a substitute for another dissimilar
thing, which is to say that both conventions are a product of out ability to
make and grasp metaphors. My love is a rose petal; a loaf of bread is a groat.
(Jackson, 1995, p. xiii)
Many writers have reflected on money:
“Money talks” because money is a metaphor, a transfer, and a bridge. Like

words and language, money is a storehouse of communally achieved work,
skill, and experience. Money, however, is also a specialist technology like
writing; and as writing intensifies the visual aspect of speech and order, and as
the clock visually separates time from space, so money separates work from the
other social functions. Even today money is a language for translating the work
of the farmer into the work of the barber, doctor, engineer, or plumber. As a
vast social metaphor, bridge, or translator, money – like writing – speeds up
exchange and tightens the bonds of interdependence in any community. It
gives great spiral extension and control to political organisations, just as writing
does, or the calendar. It is action at a distance, both in space and in time. In a
highly literate, fragmented society, “Time is money”, and money is the store of
other people’s time and effort.
(McLuhan, 1964)
As ever, writers’ and novelists’ observations about people’s use and abuse of money
are considerably more perspicuous, wry and insightful than the writings of social
scientists. Like anthropologists and psychologists, writers of fiction dwell on the
symbolism of money, its captivating power and the bizarre things individuals do to
acquire it.
Other approaches
The criminology of money

It has been suggested that “money is still seen as a dark force that lies at the root of
a pervasive social malaise … the stories of modern-day criminals, from drug dealers
to double-dealing savings and loan executives, are repeatedly told as a warning

against the seductive lure of money, and popularist politicians warn of the
corruption that money breeds in the political system” (Coleman, 1992).
Whilst there are crimes of passion it is generally agreed that the desire for money
is the most fundamental motivation, at least for white-collar crime. In societies and
groups where economic change is seen as a competitive sport and where monetary
wealth is seen as proof of competitive victory, crime can flourish because the
impersonal, calculating worldview inhibits the ethical restraints of obligation and
responsibility that inhibit criminal behaviour. However, it is clear that who steals
from whom and why has different repercussions. Thus, stealing from customers,
peers and one’s boss at work are perceived very differently. In some organisations
there are organised systems of theft. As Coleman (1992) has observed, opportunity
influences a lot of money crimes.
The philosophy of money

Philosophers often critique those who write about money. As an example,
Wolfenstein (1993) contrasted the views of two great thinkers of the twentieth
century and their views on the “conceded” social meanings of money. For Marx
money was all about the alienation of labour and the brutal exploitation of workers
in the process of producing surplus value, while for Freud it “signifies sadomasochistic
relationships” (p. 279). Wolfenstein argues that the true meaning of money is
concealed and that various writers have rather strange and fortuitous ways of
thinking about it.
The politics of money is concerned with everything that governments do to
generate, control, tax and distribute money. Money has always been seen as the
chief source of power and influence. Political acts can cause political activity and
ensure growth and stability or, indeed, the reverse.
All the great political “isms” – capitalism, socialism, Marxism and communism
– have a lot to say about money. Political scientists are interested in how money is
converted into political influence. In the West political party lines are often most
clearly differentiated on issues of monetary policy. It takes money to get elected
and election promises often entail lists of promises about tax and the redistribution
of money.
The social ecology of money

This perspective is essentially around scarcity and survival (Walker & Garman,
1992). Money, which provides access to essential goods and services, is about the
thriving and survival of people in the market economy. Thus, how individuals,
groups, governments and societies choose to spend it is all-important. All allocations
involve opportunity costs and attempts to maximise satisfaction.
So, money and time are closely linked: time is invested to yield money, but its
purchasing power is reduced over time. Time has money value measured as a wage
rate. Therefore people are encouraged to act rationally and thus need to be
informed about options, payoffs, benefits, etc. Many factors influence monetary
decision making. There are sensible ways to accumulate, protect and allocate
money over the lifetime. Thus individual budgeting and family resource
management are topics of great interest to those in human ecology.
Behaviourist approaches
Behaviourist research has been concerned with how money becomes a
conditioned reinforcement and hence a valued and meaningful object. Research
in this tradition has been limited to studies on animals in which animals of various
sorts (rats, chimpanzees, cats) perform a task in order to get tokens (poker chips,
iron balls, cards), which, like money, can be exchanged for desirable objects such
as food. Hence money is valued because it represents or is associated with various
desirable objects.
As well as animal studies there is a vast literature on “token economies”,
which is effectively the application of behaviourist “monetary” theories to clinical
populations such as mental patients (especially schizophrenics), disturbed adolescents
and recidivists. A token economy is a self-contained economic system where
clients/patients are paid (reinforced) for behaving appropriately (socialising,
working), and in which many desirable commodities (food, entertainment,
cigarettes) can be purchased. Thus luxuries (indeed necessities) must be earned
(Ayllon & Azrin, 1968).
Numerous studies have shown the benefits of token economies (Ayllon &
Roberts, 1974) but they have also received various criticisms on clinical grounds.
These include the fact that as there is little comparative research (only a no-
treatment control condition) it is difficult to establish whether token economies are
better or worse than other conditions; that token economies are often aimed at
institutional rather than individual needs; that token economies violate many
individual rights in total institutions; and, perhaps most importantly, that
conditioned behaviour does not generalise to new environments where the token
economy does not operate (Bellack & Hersen, 1980).
4
MONEY AND HAPPINESS
Money won’t buy happiness, but it will pay the salaries of a large
research staff to study the problem.
Bill Vaughan
I asked for riches, that I may be happy; I was given poverty, that I
might be wise.
Anon
Give me the luxuries of life and I will willingly do without

the necessities.
Frank Lloyd Wright
When I was young, I used to think that wealth and power would
bring me happiness … I was right.
Gahan Wilson
All I ask is the chance to prove that money can’t make me happy.
Spike Milligan
Introduction
It seems perfectly self-evident to many people that money brings happiness: and the
more money the more happiness. Indeed it is (or perhaps was) one of the axioms of
economics. The question is how much money do you need to achieve maximum
happiness? There are also issues like what should you spend your money on to maximise
your happiness? There are questions of things that money can not buy, like health,
which we know impacts considerably on happiness. Most people assume that
sufficient money is indeed necessary for happiness; but what is sufficient?
In one of the first books in the area Myers (1992) noted:
More money means more of the good things of life – a trip to Hawaii, a
Colorado condo, a hot tub, flying business class instead of coach, a large-
screen video system, the best schools for one’s children, season tickets to the
Philharmonic or the Lakers’ games, eating out and eating well, stylish clothes,
a retirement free from financial worry, and a touch of class in one’s
surroundings. Wouldn’t you really have a Buick – or better a BMW or
Mercedes? Wouldn’t you rather have the power and respect that accompanies
affluence? Knowing that money is one way that we keep score in the game
of life, wouldn’t you rather win? And who wouldn’t rather have ample
security than be living on the edge? (p. 32–33)
Myers and Diener (1996) concluded from data that happiness in the USA remains
relatively stable over time, despite the steady increase in average national income.
Yet, the University of Chicago’s National Opinion Research Centre found that
only one in three Americans rated themselves as “very happy” in both 1990 and
1957, despite per-person income increasing from $7,500 to $15,000+ (Myers &
Diener, 1996).
There have been doubters and critics. As Schor (1991) put it:
Do Americans need high-definition television, increasingly exotic vacations,

and climate control in their autos? How about hundred-dollar inflatable
sneakers, fifty-dollar wrinkle cream, or the ever-present (but rarely used)
stationary bicycle? A growing fraction of homes are now equipped with
Jacuzzis (or steam showers) and satellite receivers. Once we take the broader
view, can we be so sure that all these things are really making us better off?
(p. 115)
Campbell, Converse and Rogers (1976) carried out a famous early study of well-
being, using an American national sample. When the question was asked directly,
money was not rated as important by the majority – it came 11th. Sixteen per cent
thought it was very important, compared with 74% for a happy marriage and 70% for
being in good health. There was also an indirect measure of what people felt about
the importance of domains, correlated with overall life satisfaction. Here money did
better, coming third after family life and marriage. So, which conclusion is right? A
problem with this study is that the money variable was made rather strong – “A large
bank account, so that you don’t have to worry about money”.
King and Napa (1998) presented people with a number of fictitious persons,
varying their income, happiness and meaning in life, and asked how desirable such
Money and happiness 57
a life would be. The desirability, moral goodness and expected heavenly rewards
were thought to be greatly affected by happiness and meaning in life, while money
had either no effect at all or a fraction of the effect of happiness and meaning.
Wealth was generally irrelevant for a student sample, but more evident for adults.
Curiously students thought that money would influence heavenly rewards, a little,
perhaps a result of the Protestant Work Ethic. The money variable was less extreme
than in the previous study – the incomes of the fictitious persons varied from
$20–30k to over $100k.
We shall see that many, but not all, researchers agree that an income of two to
three times the national average is sufficient to maximise happiness.
Happiness and well-being

The word “happiness” means several different things (joy, satisfaction) and therefore
many psychologists prefer the term “subjective well-being” (SWB), which is an
umbrella term that includes the various types of evaluation of one’s life one might
make. It can include self-esteem, joy, feelings of fulfilment. The essence is that the
person himself/herself is making the evaluation of life. Thus the person herself or
himself is the expert here: is my life going well, according to the standards that I
choose to use?
It has also been suggested that there are three primary components of SWB:
general satisfaction, the presence of pleasant affect and the absence of negative
emotions including anger, anxiety, guilt, sadness and shame. These can be
considered at the global level or with regard to very specific domains like work,
friendship, recreation. More importantly SWB covers a wide scale from ecstasy to
agony: from extreme happiness to great gloom and despondency. It relates to long-
term states, not just momentary moods. It is not sufficient but probably a necessary
criterion for mental or psychological health. The relatively recent advent of studies
on happiness, or “subjective well-being”, has led to a science of well-being
(Huppert, Baylis & Keverne, 2005).
All the early researchers in this field pointed out that psychologists had long
neglected happiness and well-being, preferring instead to look at its opposites:
anxiety, despair, depression. Just as the assumption that the absence of anxiety and
depression suggests happiness is false, so it is true that not being happy does not
necessarily mean being unhappy.
Overall, many studies demonstrate positive correlations between income and
well-being, with the average reported well-being being higher in wealthier than
poorer countries.
There is an extensive philosophic literature on the nature of happiness. From
the great Hellenic philosophers through all the great world religions to (relatively)
modern political thinkers the question about happiness has been pondered.
Kesebir and Diener (2008) offer a psychological perspective on five fundamental
questions:
1. What is this thing called happiness? Progress can only occur once
concepts are clearly articulated and operationalised. Psychologists have
settled on the concept of subjective well-being. That is how individuals
see their life conditions and circumstances. It is what people say they
experience: it is not (perhaps cannot be) objectively defined.
2. Can people be happy? This is in part to do with the contrast between
actual and ideal happiness. Pessimists may argue that happiness is a
non-achievable illusion, while optimists disagree. As personally defined
it is clear most people claim to be happy.
3. Do people want to be happy? The answer is of course yes: it is a
desirable goal, but itself is not sufficient for a good life. It does not rule
out the value for striving for other things.
4. Should people be happy? The answer is clearly yes because it is not
only the correlate and consequence but also the cause of things like
better health, social relationships, and achievements, as well as being
associated with prosocial or altruistic behaviour.
5. How to be happy? This has been discussed extensively elsewhere but
the most important issue concerns the extent to which the major plot of
happiness is dispositional and not able to be radically increased.
There are other questions, like “Are there any counterintuitive findings about
happiness?” One is that happiness is stable and very much genetically determined.
It has been observed that it is no easier trying to become happy than to become
taller. Possessions and money have relatively little effect on long-term happiness.
Diener (2000) has defined subjective well-being (SWB) as how people
cognitively and emotionally evaluate their lives. It has an evaluative (good–bad) as
well as a hedonic (pleasant–unpleasant) dimension.
The Positive Psychology Centre at Penn State University has a website dedicated
to answering frequently asked questions like “Isn’t positive psychology just plain
common sense”. They note 13 points (abbreviated here) as an example:
• Wealth is only weakly related to happiness both within and across nations,
particularly when income is above the poverty level.
• Activities that make people happy in small doses – such as shopping, good
food and making money – do not lead to fulfilment in the long term, indicating
that these have quickly diminishing returns.
• Engaging in an experience that produces “flow” is so gratifying that people are
willing to do it for its own sake, rather than for what they will get out of it.
Flow is experienced when one’s skills are sufficient for a challenging activity,
in the pursuit of a clear goal, when immediate self-awareness disappears, and
sense of time is distorted.
• People who express gratitude on a regular basis have better physical health,
optimism, progress toward goals and well-being, and help others more.
• Trying to maximize happiness can lead to unhappiness.
• People who witness others perform good deeds experience an emotion called
“elevation” and this motivates them to perform their own good deeds.
• Optimism can protect people from mental and physical illness.
• People who are optimistic or happy have better performance in work, school
and sports, are less depressed, have fewer physical health problems, and have
better relationships with other people. Further, optimism can be measured and
it can be learned.
• People who report more positive emotions in young adulthood live longer
and healthier lives.
• Physicians experiencing positive emotions tend to make more accurate
diagnoses.
• Healthy human development can take place under conditions of even great
adversity due to a process of resilience that is common and completely ordinary.
• Individuals who write about traumatic events are physically healthier than
control groups that do not. Writing about life goals is significantly less distressing
than writing about trauma, and is associated with enhanced well-being.
• People are unable to predict how long they will be happy or sad following an
important event.
Positive psychology is the study of factors and processes that lead to positive
emotions, virtuous behaviours and optimal performance in individuals and groups.
Although a few, mainly “self”, psychologists were always interested in health,
adjustment and peak performance, the study of happiness was thought to be
unimportant, even trivial.
The first books on the psychology of happiness started appearing in the 1980s.
Then there came the appearance of a few specialist academic journals but it was not
until the turn of the millennium that the positive psychology movement was
galvanised into action by significant grant money as well as the research focus of
many renowned psychologists. Positive psychology today encompasses considerably
more than the study of happiness. There are at least two major journals in this area
– The Journal of Positive Psychology and the Journal of Happiness Studies.
The psychology of happiness attempts to answer some very fundamental
questions pursued over the years by philosophers, theologians and politicians. The
first series of questions is really about definition and measurement of happiness; the
second is about why certain groups are as happy or unhappy as they are; and the third
group of questions concerns what one has to do (or not do) to increase happiness.
Most measurements of happiness are carried out using standardised question-
naires or interview schedules. It could also be done by informed observers: those
people who know the individual well and see them regularly. There is also
experience sampling, when people have to report how happy they are many
times a day, week or month when a beeper goes off, and these ratings are
aggregated. Yet another is to investigate a person’s memory and check whether

they feel predominantly happy or unhappy about their past. Finally, there are
some as yet crude but ever developing physical measures, looking at everything
from brain scanning to saliva cortisol measures. It is not very difficult to measure
happiness reliably and validly.
Many researchers have listed a number of myths about the nature and cause of
happiness. These include the following, which are widely believed but wrong:
1. Happiness depends mainly on the quality and quantity of things that

happen to you.
2. People are less happy than they used to be.
3. People with a serious physical disability are always less happy.
4. Young people in the prime of life are much happier than older people.
5. People who experience great happiness also experience great
unhappiness.
6. More intelligent people are generally happier than less intelligent
people.
7. Children add significantly to the happiness of married couples.
8. Acquiring lots of money makes people much happier in the long run.
9. Men are overall happier than women.
10. Pursuing happiness paradoxically ensures you lose it.
Positive psychology (Linley, 2008; Seligman, 2008) shifts the focus to exploring
and attempting to correct or change personal weakness to a study of strengths and
virtues. Its aim is to promote authentic happiness and the good life and thereby
promote health. A starting point for positive psychology for both popular writers
and researchers has been to try to list and categorise strengths and values. This has
been done, though it still excites controversy.
Positive psychology has now attracted the interest of economists and even
theologians as well as business people. It is a movement that is rapidly gathering steam
and converts to examine scientifically this most essential of all human conditions.
Interestingly there is no suggestion that predictors and correlates of
happiness in adults are any different from those in children. However, nearly all
psychologists acknowledge the importance in early child development of bonding
with parents and other adults and developing social skills and social relationships.
All researchers have documented the social correlates and predictors of happiness
and well-being, particularly the role of parents, sibling and friends (Holder &
Coleman, 2007).
Health and wellness are, it seems, systematically related to the age, sex, race,
education and income states of individuals. We know the following:
1. Women report more happiness and fulfilment if their lives feel rushed
rather than free and easy.
2. Women are more likely than men to become depressed or to express
joy.
3. There is very little change in life satisfaction and happiness over the life
span.
4. There are social class factors associated with mental health and happiness
but these are confounded with income, occupation and education.
5. There is a relationship between health, happiness and income but the
correlation is modest and the effect disappears after the average salary
level is reached.
6. Better educated people – as measured by years of education – are
positively associated with happiness.
7. Occupational status is also linked to happiness with dramatic differences
between Classes I and V.
8. Race differences in health and happiness in a culture are nearly always
confounded with education and occupation.
9. There are dramatic national differences in self-reported happiness which
seem to be related to factors like national income, equality, human
rights, and democratic systems.
10. Physical health is a good correlate of mental health and happiness but it
is thought to be both a cause and an effect of happiness.
The dark side of happiness

We know intuitively that happiness and well-being are a very desirable state. The
positive psychologists and affective scientists have “proved” that people think more
clearly and make better decisions when happy. We know happy people build and
maintain healthier relationships with others, which brings many benefits. It is clear
we are more creative when in a positive state of mind. And there is now very clear
evidence of the health-related benefits of being happy. After all that is why it is
called “well-being”.
But could there be a darker side to happiness? Gruber, Mauss and Tamir (2011)
took a leaf out of a book by Aristotle in order to ask four questions:
1. Can there be a wrong degree of happiness?

Is more happiness better, or is there an optimal amount? Are all those injunctions
about moderation true? There are quite a few reasons to doubt the “more is better”
argument.
2. Is there a wrong time/place for happiness?

Extremely happy people may not have enough experience of setbacks and
frustrations. They may be less vigilant about threats of all kinds. When faced with
problems we have a flight or fight option. Negative emotions trigger powerful
physiological forces that prepare us to confront others. Happiness can make people
gullible, naive and inattentive. Showing sadness could engender offers of help.
Showing fear, anger and sadness can be very useful in life.
3. Are there inappropriate/wrong/misguided ways to pursue happiness?

The higher one sets the target often the more disappointed and discontented one
may become by not hitting it. It has maladaptive outcomes because it sets people
up for disappointment. Often the happiness junkies become egocentric and damage
their personal relationships. The person in blind pursuit of happiness can be
obsessively self-focused, less reflective but also less attentive to others who are, or
at least can be, a major source of happiness.
Equally the therapy literature shows that the more people accept, rather than
reject, negative feelings, the better they feel. It’s like soap in the bath: the more you
try to grab it the cloudier the water, the more difficult it is to find.
4. Are there wrong types of happiness?

Are there different flavours of happiness? Can it mean great excitement and great
calm? At its base level it is defined as the presence in amount of positivity over that
of negativity.
But some things that may in the short term bring happiness to the individual
could cause the opposite effect. They may impair social functioning through
selfishness. Because of cultural conventions certain happiness-inducing activities
should result in embarrassment, guilt and shame. Some cultures value contentment
and calm over excitement. Some define happiness more socially than others:
personal hedonic experience vs. social harmony.
Happiness, it is argued, comes to those who do not single-mindedly pursue it.
It’s not healthy to be acutely and chronically happy, cheerful or positive. Some
situations require other emotions.
Affluenza
In his book of the above name (which introduced a new, now well-known
neologism, Oliver James) a British clinical psychologist, proposed the following
theory: increasing affluence in a society, particularly where it is characterised by
inequality, leads to increasing unhappiness. The thesis is that modern capitalism
makes money out of misery. It encourages materialism but leaves a psychic void. The
increasing emotional stress of people in the West is a response to the sick, unequal,
acquisitive societies. Just as “dieting makes you fat” so “retail therapy makes you sad”.
Affluenza is a “rich person’s disease”; a corruption of the American dream.
Affluenza comes from affluence plus influenza: money makes you sick; capitalism
and consumerism are recipes for illness. It is a painful, socially transmitted, and
highly paradoxical “disease” that is the result of a false premise. The belief is that
wealth and economic success lead to fulfilment, whereas in effect it leads to an
addiction to wealth accumulation and the neglect of personal relationships that are
the real source of happiness. It is an unsustainable and seriously unhealthy addiction
to personal (and societal) economic growth. It is most acute in those who inherit
wealth and seem to have no purpose, direction or superego.
The data for the book Affluenza came from interviews. The conclusion is that
placing a high value on appearance, fame, money and possessions leads to emotional
distress. It results in over consumption, “luxury fever”, alienation and inappropriate
self-medication using alcohol, drugs and shopping to attempt to bring meaning and
satisfaction. James (2007) blames many of the problems of modern societies –
anxiety, depression, eating disorders, emotional distress, family breakdown,
medication, on Affluenza. The emptiness and loneliness many people feel is because
they have “traded off” authentic, genuine and intimate relationships for wealth
accumulation and consumption.
The vaccine for the virus is a change in lifestyle, but also a change in society.
Thus James attacks advertising, which is, in his view, mendacious, misleading
and always hyperbolic. He believes women’s magazines are the “devil’s work”.
He approves of societies that try to hold affluenza at bay by laws and taxes that
increase equality.
The thesis is not new. There are hundreds of religious texts and sermons
condemning conspicuous consumption and advocating what we now call “down
shifting”. Many have argued that materialism leads to a commodification of
ourselves and often deprives us of what we most need. The thesis has also been
proposed by political thinkers, particularly of the left, who have made many attacks
on “selfish capitalism”, liberal market-forces ideology and the free market. James’
cures look to many like an insupportable model of a brave new world where all
sorts of activities/marketing are barred or controlled.
Criticisms have been harsh and many. The book has been accused of being little
more than sermonising, sensationalist journalism and ranting cant. A fact-heavy
book with a light-weight message. Some reviewers accused the author of being
unfamiliar with the research that could both “back up” and challenge his position,
and also state that he could be more dispassionate, disinterested and even-handed.
He is overly strident about some issues, such as child-rearing. Worse, he makes a
number of propositions for a saner, happier society, without sufficient evidence
that they would, indeed, work.
It seems all the modern evils are due to affluenza – from a false sense of
entitlement to an inability to delay gratification or tolerate frustration, from
workaholism to a destruction of the environment. Some have seen the book as
little more than a collection of anecdotes about poor little rich boys.
There is also the question about causation: does social and economic inequality
cause emotional distress or the other way around? Inequality itself is evil: but this
single factor is used to explain everything. Other explanations could also be put
forward, such as the rise of secular liberalism as opposed to religious faith or moral
and intellectual relativism.
Some attacked the inconsistencies in James’ crypto-political agenda. How much
state intervention and how much legislation do we need to ensure that people have
more balanced expectations and employ money in more appropriate ways? Many
accused James (2007) of a select and simplistic reading of his own data. He “cherry
picks” both his statistics and his case studies.
However, the thesis of the book has caused enough interest for schools to
introduce an Affluenza Discussion Guide with the following sorts of questions:
• Shopping fever – How often do you shop? Is it recreation for you? Do you
bring a list of what you need and follow it or do you shop by impulse?
• A rash of bankruptcies – Have you ever been seriously in debt? What did
you do about it? Do you know people who are deep in debt?
• Swollen expectations – How do you think new technologies are affecting
your life? Do you feel you need to keep up with faster computers and other
technologies? Why or why not?
• Chronic congestion – Choose a product that you use regularly, and do a
“life-cycle analysis” of it – that is, research where it comes from; what it’s
made of; how long you will use it; and where it will end up.
The Easterlin paradox

Perhaps the most influential work on the relationship between money and
happiness can be dated back to the work of Easterlin (1974). He attempted to
answer three questions:
• At the individual level, are richer people happier than poorer people?
• At the country level, is there evidence richer countries are happier than
poorer ones?
• At the country level, do countries grow happier as they grow richer?
His results are shown here (Figure 4.1) in a well-known, if simplified, graph.
Easterlin found, as predicted, that within a given country people with higher
incomes were more likely to report being happy. Although income per person rose
steadily in the USA between 1946 and 1970, average reported happiness showed no
long-term trend and declined between 1960 and 1970. The differencein inter-
national and micro-level results fostered an ongoing body of research. All other
measures of happiness, including physiological, measured a similar pattern of results.
In the 40 years since the publication of the Easterlin (1974) finding, numerous
researchers have tried to explain the paradox or puzzle, particularly economists. It
16,000 100
Personal
14,000 income 90
80
Percentage very happy

Average income after taxes
12,000
70
in 1990 Dollars
10,000
60
8,000 50
Satisfaction
6,000 40
30
4,000
20
2,000
10
0 0
1930 1940 1950 1960 1970 1980 1990 2000
Year
FIGURE 4.1 The evidence for the Easterlin hypothesis

Source: Adapted from Myers (1992).
is the story of diminishing returns on real income. Indeed it may be only that it is
a paradox for economists, as other social scientists have never assumed a simple
linear relationship between the two. Some have even tried to calculate the effect.
The original idea of the paradox was that cross-sectional data seemed to
contradict time series data. At any period of time richer countries had happier
people but when you look at trends the relationship disappears. Some suggest
the reason is that the market economy puts the relationship under pressure
(Ott, 2001).
The Easterlin hypothesis proposes that societal-level increases in income do not
lead to corresponding increases in societal happiness up to a point. This research
has led to much debate in the area, with many authors suggesting that income does
in fact correlate with happiness. Recent investigations by Diener, Ng, and Tov
(2009), for instance, concluded that the best predictors of life judgements were
income and ownership of modern conveniences, when assessing a population from
140 nations. When looking more closely at this relationship, the authors suggested
that self-assessed well-being at an individual level is very strongly predicted by
income (Diener et al., 2009). Further, Diener and Biswas-Diener (2002) found
substantial correlations, ranging from .50 to .70, between average well-being and
average per capita income across nations.
Much research supports this. Recent cross-sectional studies conclude that
income and happiness are at least positively related (Diener & Biswas-Diener,
2002; Kahneman, Krueger, Schkade, Schwarz & Stone, 2006).
Malka and Chatman (2003) showed that the relationship between well-being
and income varies dependent on participants’ extrinsic and intrinsic orientations
towards work. Those with more extrinsic work orientation show a stronger
relationship between income and subjective well-being.
Interestingly, different payment methods can also impact on the relationship
between income and happiness (DeVoe & Pfeffer, 2011). The authors suggest that
making time salient will impact upon the link between money and happiness;
connecting time and money (paying by the hour) is found to cause individuals to
rely more so on income when assessing their subjective well-being.
The evidence seemed clear about the first question. Even after controlling for
various other sources of happiness, richer people are happier than poorer people,
though the relationship is not really linear.
Faced with various criticisms, Easterlin et al. (2010) updated Easterlin’s (1974)
analysis using many datasets from developed and developing countries. They
showed that over a ten-year period there is no relationship between aggregated
subjective well-being and happiness. Thus, as a country experiences material
aspirations that go with economic growth, people experience social comparison
and hedonic adaptation. They suggest that personal concerns with health and
family life are as important as material goods in sustaining happiness. Earlier, Ball
and Chernova (2008) did an analysis of over 30 countries and concluded thus:
(i) Both absolute and relative income are positively and significantly correlated
with happiness, (ii) quantitatively, changes in relative income have much
larger effects on happiness than do changes in absolute income, and (iii) the
effects on happiness of both absolute and relative income are small when
compared to the effects of several non-pecuniary factors. (p. 497)
The answer to the second question has exercised the minds of many and now there
must be hundreds of papers that have addressed this issue. Essentially the papers fall
into three categories:
1. Attempting to explain the data by processes that allow the basic

economic utility model to remain
Thus it has been argued that adaptation theory explains these results – that is, that
people soon become accustomed to increased wealth and that it therefore shows
less effect. It is relative, not absolute income that carries advantage. Economists
argue that personal income may be evaluated relative to others – social comparison
– or to oneself in the past – habituation (Clark, Frijters & Shields, 2008). The
utility function of money is that it brings consumption and status benefits to
individuals but if costs and inflation rise and others also experience a rise in income
the benefits are not felt.
Boyce, Brown and Moore (2010) tested and confirmed their rank-income
hypothesis, which stated that a person’s ranked income within his/her comparison
group predicted general life satisfaction, whereas absolute income had no effect:
Our study underlines concerns regarding the pursuit of economic growth.

There are fixed amounts of rank in society – only one individual can be the
highest earner. Thus, pursuing economic growth, although it remains a key
political goal, might not make people any happier. The rank–income
hypothesis may explain why increasing the incomes of all may not raise the
happiness of all, even though wealth and happiness are correlated within a
society at a given point in time. (p. 474)
Another related argument is that increased national wealth has negative as well as
positive advantages, such as environmental degradation, crime and unemployment.
In fact the data showing income without happiness gets worse if you introduce some
of these other country-wealth related variables (Di Tella & McCulloch, 2008).
One argument is all about income inequality rather than absolute income. As
America has got richer over the past 40 years the gap has widened between rich and
poor, and though it has made poorer groups richer their perception of unfairness and
lack of trust has made them less, rather than more happy (Oishi et al., 2011).
Angeles (2011) argued that there is no paradox at all because of two things: first,
the data don’t show how much happiness has actually increased; and second, many
things other than money affect a person’s happiness:
To finalise, we note that our results do not imply that economic growth
guarantees a happier nation. Indeed the small magnitude of the effect of
income on happiness means that economic growth can be easily overcome
by other factors such as the prevalence of marriage, widespread
unemployment or public health. There is, however, no reason to be negative
about economic growth and suggest its demise as an objective of public
policy. Other things being equal, economic growth should have a positive
direct effect on average happiness. The most important effects, however,
may well be indirect. Economic growth could matter more for its influence
on unemployment, family relations and health than for the larger incomes
that define it. A good dose of prudence and modesty in policy advice would
thus be commendable. (p. 72)
2. A reanalysis of bigger and better datasets

While some studies done in different countries over different time periods have
shown broadly similar results (Gardes & Merrigan, 2008), others suggest that if
other factors are taken into account the income effect on happiness clearly goes up
(Powdthavee, 2010). Some have suggested that the problem lies in the measurement
of happiness or well-being. Zuzanek (2013) pointed out differences in affective vs.
cognitive and momentary vs. remembered aspects of well-being:
Real-time or “experienced” well-being is, arguably, a by-product of a

balanced time use and a match of respondents’ skills and activity challengers
that are assisted by but not necessarily determined by income. As the income
grows, rising earnings become less important in arriving at life satisfaction
and happiness, while the role of other factors contributing to subjective well-
being, such as career progression, use of time, work–family balance, health,
and lifestyle, increases. In short, time and lifestyle become more precious
than money. (p. 10)
Beccheti and Rossetti (2009) also point to the data on “frustrated achievers”, who
are people whose improvement in monetary well-being is accompanied by a reduction
in life satisfaction – that is, that the cost of pursuing the goal of more money leads
to a deterioration in health and relationships. They suggest that up to a third of the
population may be considered frustrated achievers.
Graham (2011), who was fascinated by the extensive debate about the Easterlin
hypothesis, noted a considerable country effect – people in poorer countries are
made happier by money compared to those in richer countries. She concluded:
The paradox of unhappy growth, meanwhile, suggests that the rate of

change matters as much to happiness as do per capita income levels, and
that rapid growth with the accompanying dislocation may undermine the
positive effects of higher income levels, at least in the short term. … A mirror
image of this paradox at the micro level – the happy peasant and frustrated
achiever phenomenon – again suggests that the nature and pattern of
economic growth, and in particular instability and inequality issues – can
counterbalance the positive effects of higher income levels for a significant
number of respondents.
The income–happiness relationship is also mediated by factors such as
inequality levels and institutional arrangements, particularly as countries get
beyond the basic needs level. The complexity of the relationship – and the
range of other mediating factors – seems to increase as countries go up the
development ladder. Rising aspirations and increasing knowledge and

awareness interact with pre-existing cultural and normative differences, as well
as the extent and quality of public goods, which are in turn endogenous to the
cultural and normative differences. At the same time, because global
information and access to a range of technologies is now available to countries
at much lower levels of per capita income than was previously the case, they
have access to the benefits associated with higher income levels, such as better
healthcare, quite early on in the development process. (p. 237)
Headey, Muffels and Wooden (2008) examined the data from five developed
countries but included wealth/net worth, disposable income and consumption as
measures of money. They argued that wealth confirms economic security, which
must lead to well-being. Their data showed much clearer evidence of the effect of
changing financial circumstance on well-being: in short “that money matters more
to happiness than previously believed” (p. 81).
Equally some have shown that money does increase happiness. Gardner and
Oswald (2006) traced lottery winners who they compared to a control group who
did not win any money. They found the winners went on to exhibit significantly
better psychological health compared to those who did not win. Similarly Frijters,
Haisken-DeNew and Shields (2004) showed that after the unification of Germany
there was a clear and sustained increased in the life satisfaction of East Germans
attributable to their increased wealth and freedom.
3. To question whether happiness itself is a good thing

Gruber et al. (2011) have proposed that there may be a wrong degree and time for
happiness, wrong ways to pursue it and wrong types of happiness. In this sense it is
not even a really desirable goal. Similarly Gandelman and Porzecanski (2013) have
noted that in most countries happiness inequality is less than income inequality and
therefore not really related to the pecuniary dimensions of life.
This research has led to much debate in the area, with many authors suggesting
that income does in fact correlate with happiness. Recent investigations by Diener
and Tov (2009), for instance, conclude that the best predictors of life judgements
were income and ownership of modern conveniences when assessing a population
from 140 nations. When looking more closely at this relationship, the authors
suggest that self-assessed well-being at an individual level is very strongly predicted
by income (Diener et al., 2009). Further, Diener and Biswas-Diener (2002) found
substantial correlations, ranging from .50 to .70, between average well-being and
average per capita income across nations.
Much research supports this. Recent cross-sectional studies conclude that
income and happiness are at least positively related (Diener & Biswas-Diener,
2002; Kahneman et al., 2006).
Happiness causes success

Whilst most of the research has concentrated on the literature that looks at the
(causal) effect of income/money on happiness/well-being at the individual/group
level there is also research that suggests dispositional happiness brings success in part
measured by money.
Indeed, Boehm and Lyubomirsky (2008) reviewed cross-sectional, longitudinal
and experimental evidence that happy people earn more money. Happy people
experience and show more positive emotions that others like and that leads to
career success. Happy people seem more job engaged; are more favourably rated
by others; obtain more social support; are less likely to be made redundant; are
better at customer service and sales; and report more job satisfaction. The authors
note that happiness is not the only resource which brings job success but it is often
one that is overlooked.
Similarly Diener and Chan (2011) used seven types of evidence in a long review to
show that (causally) higher happiness/subjective well-being leads to better health and
longevity. They suggest that the data imply that high well-being can add four to ten
years to your life. As health is a major predictor of work success it is clear how happiness
can, through the moderating effect of physical and mental health, lead to great wealth.
Happiness or life evaluations?

Diener, Ng, Harter and Arora (2010) investigated the impact of money on one’s
evaluations of one’s life. They suggest that life evaluations were closely related to
income and the ownership of material goods, yet people’s positive emotional
feelings were most related to psychosocial factors, including the ability to count on
others, as well as to learn new things. It may be that in Myers and Diener’s (1996)
early study “happiness” was not defined as precisely as the assessment of life
evaluations vs. emotional feelings as in more recent research. The authors based
their assessment of happiness on data from the National Opinion Research Centre
(Niemi, Mueller & Smith, 1989). Current research therefore suggests that income
predicts some aspects of satisfaction and happiness, but not all (see Table 4.1).
Other variables
What other factors influence (mediate and moderate) the relationship between wealth
and happiness? We know that all sorts of factors have been shown to be reliably
related to subjective well-being, including gender, age, health, race, education,
religious affiliation, marital status, etc. Various factors have been investigated:
• Age. One study showed that after controlling for various relevant factors there
was a positive association between income and happiness for young (18–44) and
middle-aged (45–64) people, but not for older (over 65) individuals (Hsieh,
2011). Money may buy happiness but clearly more for younger than older people.
TABLE 4.1 Income as a predictor of happiness and well-being
Study Assessing income Scale used to measure Findings

vs. well-being
Caporale, Life satisfaction European Social Survey (ESS): “All things considered, The results provide clear evidence of a strong significant
Georgellis, how satisfied are you with your life nowadays? Please relationship between income and life satisfaction. An
Tsitsianis & Yin answer using this card, where 0 means extremely increase in income from the base band (€7–120) to the
(2009) dissatisfied and 10 means extremely satisfied.” next income band raises the expected value of life
satisfaction score by 0.27 points, while the movement to
the middle income band (€350–460) increases life
satisfaction by 0.71 points. A move to the highest band
(> €2,310) improves the score by 1.08 points.
DeVoe & Pfeffer Well-being “If you were to consider your life in general these The association between income and happiness was
(2011) days, how happy or unhappy would you say you are, entirely absent for non-hourly workers, but was
on the whole” – very happy, fairly happy, not very significantly positive for hourly workers.
happy, not at all happy
Diener & Tov Life The Gallup World Poll Life judgements were best predicted by income and
(2009) judgements ownership of modern conveniences. The best predictors
and emotions of emotions were social and personal factors.
Easterlin, Life satisfaction The World Values Survey (WVS): “All things For a worldwide sample of 37 countries with intermittent
McVey, Switek, considered, how satisfied are you with your life as a life satisfaction data (1–10 scale) for periods ranging from
Swangfa & whole these days?” Dissatisfied (1) – Satisfied (10). 12 to 34 years up to 2005, there is no significant relation
Zweig (2010) between the improvement in life satisfaction and the rate
of economic growth.
TABLE 4.1 (continued)
Study Assessing income Scale used to measure Findings

vs. well-being
Kahneman & Emotional Life evaluation – Cantril’s Self-Anchoring Scale: More money does not necessarily buy more happiness,
Deaton (2010) well-being and “Please imagine a ladder with steps numbered from 0 but less money is associated with emotional pain. Above
life evaluation at the bottom to 10 at the top. The top of the ladder a certain level of stable income, individuals’ emotional
represents the best possible life for you, and the well-being is constrained by other factors in their
bottom of the ladder represents the worst possible life temperament and life circumstances. The data suggest
for you. On which step of the ladder would you say that $75000 is a threshold beyond which further
you personally feel you stand at this time?” increases in income no longer improve individuals’ ability
to do what matters most to their emotional well-being.
Rate your current life on a ladder scale: 0 “the worst
possible life for you” and 10 “the best possible life for
you.”
Questions about emotional well-being had yes/no
response options and were worded as follows: “Did you
experience the following feelings during a lot of the day
yesterday? How about _______ .” Each of several
emotions (e.g. enjoyment, stress) was reported separately.
Oishi, Kesebir & Well-being Three-point happiness item on the GSS: “Taken all Participants were on average happier at times of relative
Diener (2011) together, how would you say things are these days – national income equality than of relative national
would you say that you are very happy, pretty happy, or income inequality. However, income inequality of the
not too happy?” year was unrelated to the mean happiness of the middle,
upper-middle and top income group. The negative link
between income inequality and happiness was only
applicable to low-income individuals.
• Work. To earn more money takes time and sacrifice. To acquire more money
means to sacrifice quality, time, and effort, which in turn leads to reduced
happiness. Kaun (2005) has argued that much income-generating time is ill-
spent because it comes at the cost of companionship and connection to the
community, which is essential to human satisfaction. Pouwels, Siegers and
Vlasblom (2008) make the same point: money has to be earned; that takes
time. Working hours have a negative effect on happiness.
• Physical health. Chronic ill-health has an impact on one’s ability to work for
money and also one’s subjective well-being. However, as Rijken and
Groenewegen (2008) showed, money may not bring happiness but it does
help affect social deprivation and loneliness, which are related to life satisfaction,
happiness and well-being.
• Individualism and autonomy. In a big meta-analysis Fischer and Boer
(2011) found that individualism, not wealth, was a better predictor of well-
being. Individualism promotes and permits affective and intellectual autonomy.
People are encouraged to pursue affectively pleasant experiences; to cultivate
and express their own directions, ideas and passions; and find meaning in their
own uniqueness – all of which encourage happiness.
• Social comparisons. If a person is in the habit of comparing themselves with
others they tend always to express less satisfaction (McBride, 2010).
• Face-consciousness. The idea of “face” or presenting a positive, favourable
social image is very important in many Asian countries. Zhang, Tian and
Grigoriou (2011) showed that people can be assessed on the extent to which
they are face-conscious and that the more face-conscious a person is, the more
powerful an effect his/her financial situation has on his/her happiness. For the
face-conscious a poor financial situation can dramatically decrease life
satisfaction and increase negative moods.
• Higher order needs. If money can fulfil a person’s particular higher order
needs it will bring about happiness. These include the need for autonomy,
competence and relatedness (Howell, Kurai & Tam, 2013).
Diener and Oishi (2000) have noted that people have a “malleable” desire for
material goods and services and that, on average, they are happier when they get
them. Wealthy societies seem to gain little from extra wealth. They concluded:
If wealthy societies are reaching the postmaterialistic point where added

goods and services enhance SWB very little, we may be at a critical crossroads
in terms of public policy and individual choices. People in wealthy nations
feel an increasing time shortage, and yet many are working even longer
hours than before. People seek a level of material wealth undreamed of by
earlier generations, and make sacrifices in time and personal relationships to
attain it. However, despite the picture of a “good life” presented in the media
and in advertising, people may want to reassess their priorities. To the extent
that individuals or societies must sacrifice other values to obtain more wealth,
the pursuit of income is not likely to be worth the costs. After World War II,
people had no computers or televisions, indoor plumbing was not taken for
granted, and many people had ice boxes rather than refrigerators. Yet,
people report being about as happy as they are now. Thus we must question
then whether we need a trip to Antarctica, a larger home with more
bathrooms, and a high-status automobile to be truly happy. Certainly if these
items require us to make sacrifices in self-growth, leisure time, and intimate
relationships, they may interfere with happiness rather than enhance it. As
long as people want more goods and services, they will tend to be somewhat
dissatisfied if they do not get them. Thus, the educational challenge is to
convince people that other pursuits may sometimes lead to greater fulfilment
than does the pursuit of more money. (p. 18)
When people do not get love and support from others and are money-seeking it
can lead to their avoiding attachments to others and thus to more pain. Zhou and
Gao (2008) have argued that anticipation of (all) pain heightens the desire for social
support and the desire for money because the former is a primary psychological
buffer against pain, and the latter a secondary one.
Hacker and Pierson (2010) highlight that in recent years in the USA there has
been growing income inequality among social classes, with researchers suggesting
that this may be linked to happiness. Oishi et al. (2011) assessed survey data from
between 1972 and 2008, coming to the conclusion that Americans were on average
happier in years when national income was more equal. The authors explained the
inverse relation between income inequality and happiness through feelings of
fairness and general trust.
Similarly, Helliwell (2003) described how, despite many findings showing that
well-being and income correlate (Diener & Biswas-Diener, 2002), when factors
such as quality of government, human rights and health are controlled, these
correlations drop substantially. Helliwell (2003) proposes that instead of income
being the main predictor of well-being, “people with the highest well-being are
those who live where social and political institutions are effective, where mutual
trust is high and corruption is low” (p. 355).
Such findings suggest that the relationship between money and happiness is not
simple and linear but is in fact impacted by numerous variables (see Table 4.2).
Is there a limit?
Frey and Stutzer (2002) propose that above a moderate level of income (in the
US $10,000 per capita income) individuals only experience minimal increases in
TABLE 4.2 Impacts on the money/happiness relationship
Impacting variable Why?
National income Increasing income in well-off societies results in smaller rises in

change well-being than those experienced as a result of income increases in
poor nations (Hagerty & Veenhoven, 2003).
The income–well-being correlation in the USA was reported to be .13
(Diener, Sandvik, Seidlitz & Diener, 1993), compared to .45 in the
slums of Calcutta (Biswas-Diener & Diener, 2001).
Governance Diener, Diener, and Diener (1995) report that human rights in nations
correlate with average well-being.
Nations with democratic governments score high on individual
well-being (Donovan & Halpern, 2003).
Effective and trustworthy governance correlates with the well-being of
nations (Helliwell, 2003).
Religion Religious people are suggested to experience greater well-being on
average than non-religious people (Diener, Suh, Lucas, & Smith, 1999).
well-being. Diener and Seligman (2012) further investigated this “limit” and
analysed nations with per capita GDP above US$10,000. The correlation between
well-being and income was only .08. This confirms the suggestion that once a
moderate level of income is achieved, well-being can only be predicted minimally.
Interestingly, Diener and Seligman (2012) looked further into this issue. The
authors presented a table comparing life satisfaction between a number of groups of
people from around the world. Respondents from the Forbes list of the 400 richest
Americans scored highly – supporting previous correlations between income and
well-being. However, the Maasai of East Africa were nearly equally satisfied. The
Maasai people are highly traditional, with no electricity or running water, and live in
huts made of dung. These results thus imply that luxury is not necessary in order to
achieve well-being. Interestingly, however, slum dwellers in Calcutta, and the
homeless in California, are less happy with their lives. This suggest that physical needs
and desires may be a crucial moderator of the impacts of income on well-being.
Overall, many studies demonstrate positive correlations between income and
well-being, with average reported well-being being higher in wealthier than
poorer countries.
Diener and Oishi (2000) have noted that people have a “malleable” desire for
material goods and services and that on average they are happier when they get
them. Wealthy societies seem to gain little from extra wealth.
Money and pain

Pain comes in many forms, such as physical pain, social exclusion pain, and
monetary loss pain. Mikulincer and Shaver (2008) state that while money can act
as a pain buffer among people who do not get love and support from others,
money seeking can lead to people avoiding attachments to others and thus to more
pain. Social support and money alleviate pain, while the loss of those two factors
results in an upsurge of pain awareness.
The argument is that money is a shield and a painkiller. It has been shown to
activate dopaminergic pathways and has actually been used as a substitute for drugs in
certain programs. Activated brain areas of anticipator monetary loss are similar to
those of physical pain. Money can be used to distance and buffer people when they
buy certain products like sex. People from broken, conflicted, poor and unsupportive
families overemphasise the power of money. Similarly, pain-prone people crave
money to cope with their anxiety concerning competence, safety and self-worth.
Likewise, if money buffers pain, when people are primed with money ideas
they seem less likely to seek out social support. Money is activated when social
support fails.
What to buy to increase happiness?

In an interesting twist to the money–happiness debate three researchers suggest it
has to do with the way people spend their money (Dunn, Gilbert, & Wilson,
2011). Because people don’t know the basic scientific facts about what brings about
and sustains happiness they spend it unwisely. They suggest eight pieces of advice
for spending money right to increase happiness:
1. Buy experiences not things. This is not about the acquisition of material
goods but the participation of social experiences. Possessions like a big
car should be defined in terms of what it can do, rather than in terms of
something one has.
2. Help others instead of yourself. Giving to others in terms of gifts, donations,
but also in terms of volunteering brings benefits as all benefactors know.
It is called prosocial spending and brings many rewards.
3. Buy many small pleasures instead of a few big ones. It is the frequency
not the intensity of pleasure that is important. This reduces the hedonic
treadmill problem of adaptation. Novelty, surprise and joy are the result
of breaking up or segmenting small pleasures. Frequent fleeting
pleasures are more important than sporadic and prolonged experiences.
4. Buy less insurance. People over-estimate their vulnerability to negative
events. People have efficient coping systems and defence mechanisms
that help them overcome all sorts of issues of loss. Insurance, warranties,
exchange policies, are therefore not money well spent.
5. Pay now and consume later, not the other way around. This is partly
because the anticipation of pleasure brings “free” happiness. Thinking
about future events triggers stronger emotions than thinking about
past events: i.e. anticipation is more powerful than reminiscence. Also,
instant gratification choices are often about vices. Anticipating future

purchases can create uncertainty and the possibility of choice.
6. Think about what you’re not thinking about: happiness is in the details.
Look at the small things when you buy experiences.
7. Beware of comparison shopping: this can be distracting as [shoppers]
do not focus on what aspects of purpose bring happiness but rather only
the attributes that distinguish one product from another. Doing
comparison shopping tends to make people over-estimate the hedonic
pleasure of one purchase over another.
8. Follow the herd instead of your head: others’ ratings are helpful because
they often say what made them happy or show the joy (or lack of it)
non-verbally.
What difference does it make to prime “time” vs. priming “money”? Mogilner
(2010) found a dramatic difference – if you prime people to think about time they
spend more of it with friends and family and less time working, while if you prime
money people work more and socialise less, both of which decrease happiness:
“simply increasing the relative salience of time (vs. money) can nudge someone to
spend that extra hour at home rather than at the office, there finding greater
happiness” (p. 1353).
Various studies have shown how priming “time vs. money” changes the
evaluation of time (DeVoe & Pfeffer, 2007). Recently Pfeffer and DeVoe (2009)
showed that people primed to think of their own time in terms of money were less
willing to volunteer their time.
Indeed, this observation has been substantiated in economic studies such as that
of Becchetti, Trovato and Iondono-Bedoya (2011), who showed that wealth
increases material assets but not social assets and that richer people tend to have
fewer social contacts and relationships, which are a key ingredient in happiness.
In another priming study, Bijleveld, Custers and Aarts (2011) primed people by
high or low value coins and showed how this prompted them to concentrate more
strongly on their task and details, which actually reduced their performance.
Another priming study looked at how money priming affected mating
preferences. Yong and Li (2012) primed Singaporean males and females with large
and small sums of money. They found, as predicted, that males but not females
raised their minimum requirements for a date after being primed with large
resources. Thus, make men feel they have large resources through simple priming
and they seek out “better quality” mates in terms of attractiveness.
In an imaginative study, Yang, Wu, Zhou, Mead, Vohs and Baumeister (2012)
primed either “clean” or “dirty” money. It has been established that priming
cleanliness activates higher moral standards. They argued that handling literally
dirty money, which may have a chequered past of shady characters and dirty deeds,
activates a “dirty self” and selfish goals. They were able to show in seven experiments
that handling dirty money in fact encouraged people to cheat others:
One might have thought that handling dirty money would make people less
enamoured of money, because people do not want to have dirty things. We
consistently found the opposite: the dirty money participants were most
prone to make decisions that brought them the most money, regardless of
interpersonal considerations of fairness and reciprocity. We assume this is not
because dirt made money more desirable. Rather, our findings suggest that
dirty money reduced the subjective appeal and relative power of the values
of fairness and reciprocity, evoking instead selfish notions of exploitation and
greed. Dirty money did not make people actually dislike fairness, but when it
came to trading off fairness against greed, people who had handled dirty
money tended to choose greed.
All these results are consistent with the assumption that many people
have ambivalent attitudes toward money, characterised by two different sets
of associations. Clean money evokes the positive benefits of money for
facilitating fair trade, cultural progress, and the capacity to marshal resources
to tackle personal and social problems. In contrast, dirty money may evoke
the many crimes, abuses, and shady dealings that have throughout history
marked the often illicit pursuit of personal financial gain at the expense of
others. (p. 15)
Hansen, Kutzner and Wanke (2012) found that money primes ideas of personal
strength and resources. They demonstrated experimentally that money primes
affect consumers’ evaluations of products on the basis of product descriptions.
Money primes seem to encourage people to focus on the primary features of an
advertised product.
Money and happiness

The data tend to show the following: when individuals of different wealth are
compared in terms of their well-being, richer ones are on average happier.
However, the effect of money on happiness is very small, expressed by a correlation
of about .13, which accounts for a very small part of the variation in happiness. A
major exception to this is that the effect of money is greater for poor individuals,
and for poor countries, while there is very little effect for those on average incomes
or above. The explanation for this pattern of results is that poor people and those
in poor countries spend their money on more essential commodities, like food.
The effect is also greater for those keen to be rich and have material possessions.
Comparison with the income or possessions of others is more important than the
absolute amount received: people do not want to have less than others, especially
when the differences are thought to be unfair.
Health and mental health are affected by money more than happiness is. This is
not due to spending money but to having better health-related behaviour and
better coping styles, which are parts of class subcultures. There are two important
causes of unhappiness – marital break-up and unemployment. Both are more
common for poorer individuals; however this is not due to having less money.
5
MONEY ATTITUDES, BELIEFS
AND BEHAVIOURS
An advantage of being rich is that all your faults are called

eccentricities.
Anon
I don’t wake up for less than $10,000 a day.

Linda Evangelista
I get so tired listening to one million dollars here, one million

dollars there, it’s so petty.
Imelda Marcos
The advantage of a classical education is that it enables you to

despise the wealth that it prevents you from achieving.
Russell Green
Introduction
All languages are rich with slang words associated with money: Bacon, Beans, Brass,
Bullets, Bunce, Buttons, Cabbage, Charms, Chips, Clink, Coconuts, Corn, Crap, Dingbats,
Dirt, Dough, Ducats, Filthy Lucre, Gilt, Gingerbread, Gravy, Grease, Greenbacks, Hardware,
Honey, Iron, Juicem Junk, Kopecks, Lettuce, Lolly, Loot, Lucre, Manna, Mazuma, Moolah,
Muck, Nuggets, Peanuts, Pieces, Push, Pony, Readies, Rivets, Rocks, Rubbish, Salt, Sand,
Sauce, Shekels, Spondulicks, Spus, Stuff, Sugar, Swag, Trash, Wad … and many more.
These reflect, in part, our different attitudes to money. There is considerable
interest in how and why people have such different attitudes to money and the
consequences thereof (Blaszczynski & Nower, 2010).
All researchers and speculators have remarked how people get caught up in the
psychological alchemy that transforms cash into objects, services, and fantasies.
Many are fascinated by how parents and cultures influence the development of an
individual’s personal money meanings (Sato, 2011). “People bearing psychological
money scars have lost their connection with the original purpose and use of bank
notes” (Forman, 1987, p. 2).
The extent to which money is imbued with psychological meaning is clearly
apparent from the following quote by Wiseman (1974):
One thinks of kleptomaniacs, or of the women who drain men of their

resources, to whom money, which they are always striving to take away,
symbolizes a whole series of introjected objects that have been withheld
from them; or of depressive characters who from fear of starvation regard
money as potential food. There are too those men to whom money signifies
their potency, who experience any loss of money as a castration, or who are
inclined, when in danger, to sacrifice money in a sort of “prophylactic self-
castration”. There are, in addition, people who – according to their attitudes
of the moment towards taking, giving or withholding – accumulate or spend
money, or alternate between accumulation and spending, quite impulsively,
without regard for the real significance of money, and often to their own
detriment. There is the price that every man has, and the pricelessness of
objects, and the price on the outlaw’s head; there are forty pieces of silver
and also the double indemnity on one’s own life.
Behind its apparent sameness lie the many meanings of money. Blood-
money does not buy the same thing as bride-money and a king’s ransom is
not the same kind of fortune as a lottery prize. The great exchangeability of
money is deceptive; it enables us to buy the appearance of things, their
physical form, as in the case of a “bought woman”, while what we thought
we had bought eludes us. (pp. 13–14)
For both modern and ancient peoples, money has a magic quality about it. The
alchemists, whose ultimate blend of magic, religion and science failed, still held the
power of fascination for money. Most people believe, according to pollsters and
clinical psychologists dealing with money problems, that many of their everyday
problems would be solved if they had significant amounts of money. The myths,
fables, and rituals surrounding money have increased with modern society and
there is a formidable money priesthood – from accountants and actuaries, to
stockholders and friendly/building societies.
Money ethics
Tang (1992, 1993, 1995) and colleagues (Tang, Furnham & Davis, 1997; Tang &
Gilbert, 1995) have done a lot of empirical work on what he called the Money
Ethic Scale (MES). Tang believes attitudes to money have an affective component
Money attitudes, beliefs and behaviours 83
(good, evil), a cognitive component (how it relates to achievement, respect, freedom)

and a behavioural component. He set out to develop and validate a clear,
straightforward, multidimensional scale. He started with 50 items tested on 769
subjects, which he reduced to 30 easy statements which had five clear factors. The
questions and the labels given to the factors are set out in Table 5.1.
Various hypotheses were tested and confirmed. Thus the ability to budget
money was correlated with age and sex (female). High-income people tended to
think that money revealed one’s achievements (hypothesis 3) and was less evil,
while young people were more oriented to see money as evil.
Table 5.1 Factor loadings for the Money Ethic Scale
Factor 1: Good Factor 2: Evil
1. Money is an important factor in the lives of all of us 15. Money is the root of all evil
2. Money is good 4. Money is evil
17. Money is important 21. Money spent is money lost
46. I value money very highly (wasted)
24. Money is valuable 32. Money is shameful
36. Money does not grow on trees 19. Money is useless
27. Money can buy you luxuries 37. A penny saved is a penny
14. Money is attractive earned
45. I think that it is very important to save money
Factor 3: Achievement Factor 4: Respect (self-esteem)
5. Money represents one’s achievement 20. Money makes people

9. Money is the most important thing (goal) in my life respect you in the
8. Money is a symbol of success community
3. Money can buy everything 31. Money is honourable
25. Money will help you
express your competence
and abilities
12. Money can bring you many
friends
Factor 5: Budget Factor 6: Freedom (power)
47. I use my money very carefully 11. Money gives you autonomy
48. I budget my money very well and freedom
43. I pay my bills immediately in order to avoid interest 7. Money in the bank is a sign
or penalties of security
29. Money can give you the
opportunity to be what you
want to be
30. Money means power
Note: N = 249.
Source: Tang (1992).
High Protestant Ethic subjects (PEs) reported that they budgeted their money
properly and tended to see money as evil and freedom/power. High Leisure Ethic
individuals (LEs) were more oriented to see money as good and less as evil,
achievement, and freedom/power. Also, as predicted, economic and political
values were positively associated with achievement respect/self-esteem and power.
Social and religious values were negatively correlated with achievement and power.
Tang and Gilbert (1995) found that intrinsic job satisfaction was related to the
concept that money is symbolic of freedom and power, while extrinsic job satisfaction
was related to the notion that money is not an evil. They found that (mental health)
workers with self-reported low organisational stress tended to believe money was
inherently good. Further, those that claimed they budgeted their money carefully
tended to be older, of lower income, higher self-esteem, and low organisational
stress. As before, those who endorsed Protestant Work Ethic values tended to think
money represented an achievement and was inherently good.
Using a shortened version of the scale Tang (1995) found that those who
showed a highly positive attitude to money expressed strong economic and
political values but not religious values; and they tended to be older with lower
pay satisfaction. Thus, those who value money seem to have greater dissatisfaction,
no doubt because of the perceived inequity between pay reality and expectations.
Tang (1995) argued that those who endorse the money ethic are usually
motivated by extrinsic rewards, and are most interested in and satisfied by profit
or gain, sharing bonuses and other contingent payment methods of compensation.
People who endorse the money ethic are clearly materialistic and sensitive to
monetary rewards.
Tang et al (1997) did a cross-cultural analysis of the short MEQ comparing
workers in America, Britain and Taiwan. After controlling for age, sex, and
educational levels, American workers thought “Money is Good” and that they
“Budget Money well”. They had the highest scores on the Short Money Ethic
Scale, organisation-based self-esteem, and intrinsic job satisfaction. Chinese
workers had the highest endorsement of the Protestant Work Ethic, the highest
“Respect for Money” score, yet the lowest intrinsic job satisfaction. British workers
felt that “Money is Power” and had the lowest extrinsic job satisfaction.
Tang and Kim (1999) found that money ethic related to organisational
citizenship behaviour, job satisfaction and commitment in a group of American
mental health workers. Tang, Chen and Sutarso (2008) have suggested that the
love of money leads to unethical behaviour but that this is moderated by
Machiavellianism and the perception of others’ integrity. In numerous studies he
and colleagues have shown that love of money per se is not powerfully related to
unethical behaviour, except where it is moderated or mediated by other factors
(Tang & Liu, 2011).
None of these findings are counterintuitive and Tang has demonstrated
empirically what many have observed: the successful economics of SE Asia are
highly materialistic, stressing hard work and economic rewards. In one study
Luna-Arocas and Tang (2004) identified four money profiles: Achieving Money
Worshippers, Careless Money Admirers, Apathetic Money Managers and Money
Repellent Individuals.
Money locus of control

How do you make money and become rich? Is it a matter of hard work or chance,
ability and effort versus fate and good fortune? Does fortune favour the brave? Are
you captain of your ship and master of your fate? Or is the only way to become
rich to win the lottery or be left money by a relative?
There is an extensive literature on locus of control that concerns people’s
belief (generalised expectancy) that outcomes are within their control. Internals
believe that they are captains of their ship; masters of their fate; while externals
believe it is powerful forces and other people as well as plain chance that
influences behaviour.
There are numerous locus of control scales focusing on such issues as health.
However, few have been devised to measure money beliefs. Furnham (1986)
devised an economic locus of control scale, but more recently Steed and Symes
(2009) devised an internal wealth locus of control scale. They tested and confirmed
a simple but important hypothesis: those who believed they were more in control
of their wealth took part in more wealth-creation behaviour.
Thus, locus of control seems to have self-fulfilling properties. Those who
believe they can manage and increase their money do so; while those who believe
wealth creation is a matter of chance leave it to fate.
The structure of money attitudes

Social psychologists and psychometricians have been particularly interested in
measuring attitudes to money (Luft, 1957). Rim (1982) looked at the relationship
between personality and attitudes towards money: stable extraverts seemed more
open, comfortable and carefree about their money than unstable introverts.
Personality variables seem, however, to be only weak predictors of money attitudes
and behaviour.
Wernimont and Fitzpatrick (1972) used a semantic differential approach (where
40 adjective pairs were rated on a 7-point scale) to attempt to understand the
meaning that different people attach to money. In their sample of over 500
Americans they used such diverse people as secretaries and engineers, nursing sisters
and technical supervisors. Factor analysis revealed a number of interpretable factors,
which were labelled shameful failure (lack of money is an indication of failure,
embarrassment and degradation), social acceptability, pooh-pooh attitude (money is not
very important, satisfying or attractive), moral evil, comfortable security, social
unacceptability and conservative business values. The respondents’ work experiences,
sex and socioeconomic level appeared to influence their perceptions of money. For
instance employment status showed that employed groups view money much
more positively and as desirable, important and useful, whereas the unemployed
seemed to take a tense, worrisome, unhappy view of money.
Other researchers have attempted to devise measures of people’s attitudes
towards money. Rubinstein (1980) devised a money survey for Psychology Today to
investigate readers’ attitudes and feelings about money, to get an idea of its
importance in their lives, what associations it evokes and how it affects their closest
relationships. Some of these questions were later combined into a “Midas” scale
but no statistics were presented.
The free-spenders were classified by statements such as: “I really enjoy spending
money”; “I almost always buy what I want, regardless of cost” and reported being
healthier and happier than self-denying “tight wads”. Those who scored high in
penny-pinching had lower self-esteem and expressed much less satisfaction with
finances, personal growth, friends, and jobs. They also tended to be more pessimistic
about their own and the country’s future, and many reported classic psychosomatic
symptoms like anxiety, headaches, and a lack of interest in sex. Although over
20,000 responses were received from a moderately well distributed population, the
results were only analysed in terms of simple percentages and few individual
difference variables were considered.
Rubinstein’s (1980) data did reveal some surprising findings. For instance, about
half her sample said that neither their parents nor their friends knew about their
income. Less than a fifth told their siblings. Thus, they appeared to think about
money all the time and talked about it very little, and only to a very few people.
Predictably, as income rises so does secrecy and the desire to cover up wealth.
From the extensive data bank it was possible to classify people into money contented
(very/moderately happy with their financial situation), neutral and money
discontented (unhappy or very unhappy with their financial situation). The two
differed fundamentally on various other questions (see Table 5.2).
It seemed that the money contented ruled their money rather than let it rule
them. When they wanted to buy something that seemed too expensive, for
example, they were the most likely to save for it or forget it. The money troubled,
in contrast, were more likely to charge it to a credit card. Note, too, how the
money troubled appeared to have many more psychosomatic illnesses.
Rubinstein also looked at sex differences. Twice as many working wives as
husbands felt about their income “mine is mine”. Indeed, if the wives earned more
than their husbands over half tended to argue about money. Contrary to popular
expectation, the men and women assigned equal importance to work, love,
parenthood, and finances in their lives. The men, however, were more confident
and self-assured about money than the women. They were happier than the
women are about their financial situation, felt more control over it, and predicted
a higher earning potential for themselves.
There were interesting and predictable emotional differences in how men and
women reacted to money (Table 5.3).
Surveys such as Rubinstein’s give a fascinating snapshot of the money attitudes,
beliefs, and behaviours of a particular population at one point in time. It is a pity,
Table 5.2 The money contented and the money troubled
Money Money Money Money

contented* troubled* contented* troubled*
Has inflation substantially altered your I think most of my friends have:

way of living in the past year?
Yes, a great deal 5% 40% More money
Yes, somewhat 26% 45% than I do 17% 59%
No, not very much 46% 12% About as much
No, not at all 22% 2% money as I do 42% 32%
Over my head 0% 12% Less money than
I do 41% 9%
Relative to your present income, There always seem to be things

how deeply in debt are you? I want that I can’t have
Enough to feel Strongly agree 7% 50%

uncomfortable 4% 44% Agree 35% 42%
Not much 37% 26% Disagree 37% 7%
Very little or not at all 59% 17% Strongly disagree 20% 2%
None 24% 6%
What are your major fears? Which of the following have bothered
you in the past year?
Not having enough Constant worry

money 10% 63% and anxiety 7% 50%
Loss of a loved one 43% 56% Fatigue 24% 49%
Not getting enough out 19% 52% Loneliness 16% 47%
of life Feeling worthless 6% 34%
Not advancing in career 14% 40% Headaches 10% 33%
Becoming ill 41% 51% Insomnia 10% 28%
Feeling guilty 6% 26%
Weight problems 13% 25%
Lack of interest
in sex 12% 25%
Feelings of
despair 4% 24%
Note: *Since respondents were asked to circle all that apply, percentage sums sum to more than 100%.
Source: Rubinstein (1980).
however, that these results were not treated to more thorough and careful statistical
analysis. Others, however, have concentrated on developing valid instruments for
use in psychological research in the area.
Yamanchi and Templer (1982), on the other hand, attempted to develop a fully
psychometrised Money Attitude Scale (MAS). A factor analysis of an original selection
of 62 items revealed five factors labelled Power–Prestige, Retention Time, Distrust,
TABLE 5.3 Money associations and gender
Women* Men*
In the past year, can you recall associating money with any of the following?
Anxiety 75% 67%
Depression 57% 46%
Anger 55% 47%
Helplessness 50% 38%
Happiness 49% 55%
Excitement 44% 49%
Envy 43% 38%
Resentment 42% 31%
Fear 33% 25%
Guilt 27% 22%
Panic 27% 16%
Distrust 23% 25%
Sadness 22% 20%
Respect 18% 19%
Indifference 16% 16%
Shame 13% 9%
Love 10% 13%
Hatred 8% 7%
Spite 9% 8%
Reverence 2% 5%
None 2% 5%
Note: *Since respondents were asked to circle all that apply, percentages sum to more than 100%.
Source: Rubinstein (1980).
Quality and Anxiety. From this a 29-item scale was selected, which was demonstrated
to be reliable. A partial validation – correlations with other established measures
such as Machiavellianism, status concern, time competence, obsessionality, paranoia
and anxiety – showed that this questionnaire was related to measures of other
similar theoretical constructs. Most interestingly, the authors found that money
attitudes were essentially independent of a person’s income.
Gresham and Fontenot (1989) looked at sex differences in the use of money using
the MAS. They did not confirm the factor structure, finding different but similar
factors labelled Power–Prestige (use money to influence and impress), Distrust-Anxiety
(nervous about spending and not spending money), Retention-Time (money behaviours
which require planning and preparation for the future) and Quality (purchasing of
quality products as a predominant behaviour). Clear sex differences were found on all
but the retention-time factor. Unexpectedly, despite many views to the contrary,
females, more than males, seemed to use money as a tool in power struggles. Also,
women were more anxious about money in general than men and also tended to be
more interested in the quality of products and services that they bought.
Medina, Saegert and Gresham (1996), in a cross-cultural study, looked at Mexican

Americans vs. Anglo-Americans’ attitudes to money using the MAS. After a useful
review of the literature they formulated and tested four cross-cultural hypotheses:
compared to Anglo-Americans, Mexican Americans will have lower Power/Prestige
and Retention-Time, but higher Distrust-Anxiety and Quality scores. Mexican
Americans had lower Retention-Time and Quality scores. The authors suggest that
the way Mexican Americans are discussed in the Hispanic consumer behaviour
literature must be called into question. However, it does become clear that different
ethnic and national cultures do hold different attitudes towards money and presumably
related behaviours regarding such things as saving, spending and gambling. Attitudes
to time and fate (control) are clearly important cultural correlates of attitudes to money.
McClure (1984) gave 159 American shoppers a 22-item questionnaire about
money: spending habits, perceived control over finances, importance of money to
one’s life, preferences about monetary privacy, and conflict resulting from money.
He also administered three personality tests. He found that extraverts tended to be
more extravagant and less stingy than introverts. People with strong feelings of
control over their money reported less general anxiety and tended to be more
extroverted. Neurotic introverts considered money more important in their lives
and were more private about it compared to stable introverts. Despite clear links to
personality, the results showed the attitudes measured in the questionnaire were
unrelated to demographic differences of gender, education, occupation or religion.
Prince (1993) was interested in the relationship between self-concept, money
beliefs and behaviours. He found themes in the questionnaires such as envy,
possessiveness, and non-generosity. Money envy was shown to be associated with
negative beliefs about other people and their money as well as personal values
expressing possessiveness.
Furnham (1984) conducted a study which had three aims: (i) to develop a
useful, multifaceted instrument to measure money beliefs and behaviours in Britain;
(ii) to look at the relationship between various demographic and social/work
beliefs and people’s monetary beliefs and behaviours; and (iii) to look at the
determination of people’s money beliefs and behaviours in the past and the future.
He asked the following questions:
1. I often buy things that I don’t need or want because they are in a sale or
reduced in a sale, or reduced in price.
2. I put money ahead of pleasure.
3. I sometimes buy things I don’t need or want to impress people because
they are the right things to have at the time.
4. Even when I have sufficient money I often feel guilty about spending
money on necessities like clothes, etc.
5. Every time I make a purchase I “know” people are likely to be taking
advantage of me.
6. I often spend money, even foolishly, on others but grudgingly on myself.

7. I often say “I can’t afford it” whether I can or not.
8. I know almost to the penny how much I have in my purse, wallet or
pocket all the time.
9. I often have difficulty in making decisions about spending money
regardless of the amount.
10. I feel compelled to argue or bargain about the cost of almost everything
that I buy.
11. I insist on paying more than my (our if married) share of restaurant, film,
etc. costs in order to make sure that I am not indebted to anyone.
12. If I had the choice I would prefer to be paid by the week rather than by
the month.
13. I prefer to use money rather than credit cards.
14. I always know how much money I have in my savings account (bank or
building society).
15. If I have some money left over at the end of the month (week) I often
feel uncomfortable until it is all spent.
16. I sometime “buy” my friendship by being very generous with those I
want to like me.
17. I often feel inferior to others who have more money than myself, even
when I know that they have done nothing of worth to get it.
18. I often use money as a weapon to control or intimidate those who
frustrate me.
19. I sometimes feel superior to those who have less money than myself
regardless of their ability and achievements.
20. I firmly believe that money can solve all of my problems.
21. I often feel anxious and defensive when asked about my personal
finances.
22. In making any purchase, for any purpose, my first consideration is cost.
23. I believe that it is rude to enquire about a person’s wage/salary.
24. I feel stupid if I pay more for something than a neighbour.
25. I often feel disdain for money and look down on those who have it.
26. I prefer to save money because I’m never sure when things will collapse
and I’ll need the cash.
27. The amount of money that I have saved is never quite enough.
28. I feel that money is the only thing that I can really count on.
29. I believe that money is the root of all evil.
30. As regards what one buys with money I believe that one only gets what
one pays for.
31. I believe that money gives one considerable power.
32. My attitude towards money is very similar to that of my parents.
33. I believe that the amount of money that a person earns is closely related
to his/her ability and effort.
34. I always pay bills (telephone, water, electricity, etc.) promptly.
35. I often give large tips to waiters/waitresses that I like.
36. I believe that time not spent in making money is time wasted.
37. I occasionally pay restaurant/shop bills even when I think I have been
overcharged because I am afraid the waiter/assistant might be angry
with me.
38. I often spend money on myself when I am depressed.
39. When a person owes me money I am afraid to ask for it.
40. I don’t like to borrow money from others (except banks) unless I
absolutely have to.
41. I prefer not to lend people money.
42. I am better off than most of my friends think.
43. I would do practically anything legal for money if it were enough.
44. I prefer to spend money on things that last rather than on perishables
like food, flowers, etc.
45. I am proud of my financial victories – pay, riches, investments, etc. – and
let my friends know about them.
46. I am worse off than most of my friends think.
47. Most of my friends have less money than I do.
48. I believe that it is generally prudent to conceal the details of my finances
from friends and relatives.
49. I often argue with my partner (spouse, lover, etc.) about money.
50. I believe that a person’s salary is very revealing in assessing their
intelligence.
51. I believe that my present income is about what I deserve, given the job
I do.
52. Most of my friends have more money than I do.
53. I believe that my present income is far less than I deserve, given the job
I do.
54. I believe that I have very little control over my financial situation in terms
of my power to change it.
55. Compared to most people that I know, I believe that I think about
money much more than they do.
56. I worry about my finances much of the time.
57. I often fantasise about money and what I could do with it.
58. I very rarely give beggars or drunks money when they ask for it.
59. I am proud of my ability to save money.
60. In Britain, money is how we compare each other.
The results show six clear factors labelled thus: (1) Obsession (items 28, 43, 45, etc.);
(2) Power/Spending (items 3, 16, etc.); (3) Retention (items 7, 9, etc.); (4) Security/
Conservative (items 14, 55, etc.); (5) Inadequate (items 27, 32); and (6) Effort/Ability
(items 51, 53, 54).
Predictably, older, less well-educated people believed their early childhood to
be poorer than that of younger, better-educated people, reflecting both the average
increased standard of living and the class structure of society. Overall there were
few differences in the subjects’ perception of money in the past, but a large number
regarding money in the future. Older people were more worried about the future
than younger people, possibly because they had greater financial responsibility with
families, children and mortgages. Richer people were more concerned about the
future than poorer people. Politically conservative (right-wing) voters believed
that the country’s economic future was bright, while Labour (left-wing) voters and
those with high alienation and conservative social attitudes believed that it would
get worse.
Hanley and Wilhelm (1992) used the Furnham (1984) measure to investigate
the relationship between self-esteem and money attitudes. They found, as predicted,
that compulsive spenders have relatively lower self-esteem than “normal”
consumers and that compulsive spenders have beliefs about money that reflect its
symbolic ability to enhance self-esteem.
They note:
Descriptively, the findings of this study show that there are significant
differences between a sample of compulsive spenders and a sample of
“normal” consumers on five of the six money attitude and belief dimensions
under study. Compulsive spenders reported a greater likelihood than
“normal” consumers to be preoccupied with the importance of money as a
solution to problems and to use money as a means of comparison.
Additionally, compulsive spenders were more likely to report the need to
spend money in a manner which was reflective of status and power. In
contrast, the compulsive spenders were less likely than “normal” consumers
to take a traditional, more conservative approach to money. Compulsive
spenders were more likely to report that they did not have enough money for
their needs, especially in comparison to friends. Finally, compulsive spenders
reported a greater tendency, than did “normal” consumers, to feel a sense of
conflict over the spending of money. (p.16–17)
Baker and Hagedorn (2008) used two scales – the MAS and MBBS – to get a
meaningful and reliable four-factor measure to look at attitudes to money (see
Table 5.4). They found predictable correlations. Participant income was negatively
associated with frugality-distrust and anxiety; education was negatively correlated
with frugality-distrust, anxiety and power–prestige; gender was negatively
TABLE 5.4 Four-factor measure of attitudes to money
Factors Attitudes
F1: “Power–prestige” I use money to influence people to do things for me.

I admit I purchase things to impress others.
I own nice things in order to impress others.
I behave as if money were the ultimate success
symbol.
I sometimes boast about how much money I have.
I spend money to make myself feel better.
F2: “Retention-time” or I do financial planning for the future.

“planning-savings” I put money aside on a regular basis for the future.
I save now to prepare for my old age.
I keep track of my money.
I follow a careful financial budget.
F3: “Distrust” or I argue or complain about the costs of things I buy.

“frugality–distrust” It bothers me when I discover I could have bought
something for less.
After buying, I wonder if I could have paid less
elsewhere.
I automatically say I can’t afford it, whether I can or
not.
When I buy, I complain about the price I paid.
F5 (F4 in replication): “Anxiety” It’s hard for me to pass up a bargain.

I am bothered when I have to pass up a sale.
I spend money to make myself feel better.
I get nervous when I don’t have enough money.
I show worrisome behaviour when it comes to money.
Source: Baker and Hagedorm (2008).
correlated with power–prestige and frugality distrust; while age was strongly
negatively correlated with all factors except planning/saving.
Earlier Lynn (1991) also used some of the items from Furnham’s (1984) scale to
look at national differences in attitudes to money over 43 countries. He argued that
various studies have shown that people respond with greater work effort when
they are offered financial incentives. It is probable, however, that people differ in
the importance they attach to money and therefore in the degree to which they
will work harder in order to obtain it and it may be that there are national
differences in the strength of the value attached to money.
People from more affluent countries attach less value to money. The sex
differences show a general trend for males to attach more value to money than
females. The male scores are higher than females in 40 of the nations, and only in
India, Norway and Transkei was this tendency reversed. A possible explanation for
this sex difference is that males generally tend to be more competitive. There were
also high correlations between the valuation of money and competitiveness across
nations. The results were not dissimilar from related American studies (Rubinstein,
1980; Yamanchi & Templer, 1982).
Attitudes towards money are by no means unidimensional: factor analytic results
yielded six clearly interpretable factors that bore many similarities to the factors
found in Yamanchi and Templer (1982), such as power, retention and inadequacy,
as well as the hypothetical factors derived from psychoanalytic theory (Fenichel,
1947). Whereas some of the factors were clearly linked to clinical traits of anxiety
and obsessionality, others were more closely related to power and the way in which
one obtains money. Also, some factors more than others proved to be related to the
demographic and belief variables: obsession with money showed significant
differences on sex, education and income, and all the belief variables (alienation,
Protestant work ethic, conservatism), whereas the inadequacy factor revealed no
significant differences on either set of variables. These differences would not have
been predicted by psychoanalytic theory. It should also be noted that feelings of
alienation did not discriminate very clearly, thus casting doubt on a narrowly
clinical approach to money beliefs and attitudes.
Wilhelm, Varese, and Friedrich (1993) found that money beliefs contribute
more to an individual’s financial satisfaction than their perception of financial
progress. They found:
For both males and females money attitudes are significant contributors in
predicting current financial satisfaction. The money belief of “Effort” is
especially important for males, having the strongest relative contribution
across both objective indicators of financial wellbeing and other money
beliefs. The money belief of “Retention” is negatively associated with financial
satisfaction for males and is the third strongest predictor. Thus, for males,
financial satisfaction is increased as they possess a belief that they deserve
what they earn and a belief free from associating guilt with the spending of
money. A similar relationship between money beliefs of “Retention” and
“Effort” and financial satisfaction exists for females. In addition, for females
the money belief of “Spend” was also a significant predictor of financial
satisfaction suggesting that in addition to the absence of guilt related to the
spending of money, females are more financially satisfied if they also have the
belief that money can be used to feel good. (p. 196)
Lim and Teo (1997) used three established money scales to devise their own scale,
which had eight factors:
1. Obsession: concern or preoccupation with thoughts about money

(solve problems, achieve goals).
2. Power: money is a source of power because it offers autonomy and
freedom.
3. Budget: the ability to budget, be prudent, seek bargains.
4. Achievement: money is a reflection of achievements, success and ability.
5. Evaluation: money is a standard of evaluation and comparison with
others.
6. Anxiety: the extent to which people worry about money and are
defensive about the topic.
7. Retention: difficulties about making decisions and being cautious and
insecure about money.
8. Non-generous: a reluctance to give money to beggars, charity or
others.
There were few sex differences but some indication that there was some difference
between those with and without an austerity or hardship mindset:
People who had experienced hardship tended to view money as a form of

evaluation probably because they had experienced being looked down upon
when they were in desperate need of money. Similarly, the “hardship” group
experienced more financial anxiety than the “no hardship” group, probably
because they have undergone the emotional and psychological distress
associated with financial deprivation. Consequently, they tend to see money
as a means of comparison or evaluation. (p. 377)
Rose and Orr (2007) argued that the literature suggested four dimensions:
1. Status: the tendency to perceive money as a sign of prestige. Money is

used to impress people.
2. Achievement: the tendency to perceive money as a symbol of one’s
accomplishments. Money is valued as a sign of success.
3. Worry: the tendency to worry excessively about money. Money (or the
perceived lack thereof) is a source of anxiety.
4. Security: the tendency to save and value money for its ability to provide
a sense of safety or well-being. Money is important because it provides
money for the future (p. 746).
They then developed and tested a scale with these four items (Table 5.5). They
note that these dimensions are stable and measurable but not necessarily exhaustive.
Further, they note these symbolic meanings relate to both personal values and
specific consumer behaviours.
TABLE 5.5 Four dimensions of money
Construct Item
Worry I worry a lot about money.

I worry about my finances much of the time.
I worry about not being able to make ends meet.
I worry about losing all my savings.
The amount of money I save is never quite enough.
Status I must admit that I purchase things because I know they will impress
others.
I sometimes buy things that I do not need or want in order to impress
people.
I own nice things in order to impress others.
I sometimes “buy” friendship by being very generous with those I want to
like me.
Achievement Money is a symbol of success.
I value money very highly as a sign of success.
A high income is an indicator of competence.
Money represents one’s achievement.
I believe that the amount of money that a person earns is closely related to
his/her ability.
Security Saving money gives me a sense of security.
It is very important to me to save money for the future.
Doing financial planning for the future provides me with a sense of
security.
I prefer to save money because I am never sure when things will collapse
and I will need the cash.
It is very important to me to save enough to provide well for my family in
the future
Source: Rose and Orr (2007).
This measure has been used by others such as Keller and Siegrist (2006), who
empirically derived four types and looked at their stock investments:
1. Safe players
Safe players place high value on their personal financial security and on
saving. They tend to be cautious in financial matters, planning most purchases
carefully and large purchases intensively. They are thrifty and keep exact
records of spending …
Safe players associate money with success, independence, and freedom. They
are more interested in and self-confident about their handling of money than
the open books and money dummies types [see types 2 and 3 below]. Safe
players have a negative attitude about stocks, the stock market, and gambling,
and they do not like to disclose information about their personal finances.
2. Open books
Open books are more willing to disclose information about their personal
financial situations to others, but otherwise have little affinity for money.
They have a low obsession with money, low interest in financial matters, and
little self-confidence about handling money. They have a negative attitude
toward stocks, the stock market, and gambling. Financial security and saving
money have medium importance to them, but in comparison to safe players,
the importance is low.
3. Money dummies
People in the money dummies group also have a low affinity for money, a
low obsession with money, and little interest in financial matters. They have
a negative attitude toward stocks and gambling …
However, compared to safe players and open books, money dummies do
not believe it is unethical to profit from the stock market. Savings and
financial security are not as important to money dummies as they are to safe
players. Money dummies do not like to reveal information about their
personal financial situations.
4. Risk-seekers
The risk-seekers group has the most positive attitude toward stocks, the stock
market, and gambling. Risk-seekers tolerate financial risk well, and would
invest higher sums of money in securities. For risk-seekers, securities are not
associated with loss or uncertainty …
Risk-seekers associate money with success, independence, and freedom.
They have more interest in money and more self-confidence in handling
money than any of the other types. Predictably, they find financial security and
saving less important than the other segments. Risk-seekers do not like to
disclose information about their personal financial situations. (pp. 91–92)
One of the most recent attempts to develop a money beliefs measure was
that of Klontz et al. (2011), who tested their 72-item scale on 422 individuals.
They hypothesised that there were eight dimensions but their analysis revealed
four. These were labelled Money Avoidance, Money Worship, Money Status
and Money Vigilance. They found many correlates of these money attitudes.
They were eager to tease out what they called the four money scripts:
Money avoidance. Money avoiders believe that money is bad or that they do
not deserve money. For the money avoider, money is often seen as a force that
stirs up fear, anxiety, or disgust. People with money avoider scripts may be
worried about abusing credit cards or over-drafting their checking account;
they may self-sabotage their financial success, may avoid spending money on
even reasonable or necessary purchases, or may unconsciously spend or give
money away in an effort to have as little as possible in their control. (p. 12)
Money worship. “More money will make things better” is the most common
belief among Americans. Individuals who subscribe to this notion believe that
an increase in income and/or financial windfall would solve their problems …
money-worshipping money scripts may be associated with money disorders
including compulsive hoarding, unreasonable risk-taking, pathological gamb-
ling, workaholism, overspending, and compulsive buying disorder. (p. 14)
Money status. “Money is status” scripts are concerned with the association
between self-worth and net-worth. These scripts can lock individuals into the
competitive stance of acquiring more than those around them. Individuals
who believe that money is status see a clear distinction between socioeconomic
classes …
Money vigilance. For many people, money is a deep source of shame and
secrecy, whether one has a lot or a little … People who are secretive with
their money may be developing financial behaviours that are unhealthy for
their financial future. For example, individuals who hide money under their
mattress are guaranteeing themselves a rate of return less than inflation
leading them to insufficient preparation for retirement and perhaps their
children’s college education. (p. 15)
Medina et al. (1996) have tabulated some of many money questionnaires developed
by researchers and the possible factors that influenced them. This is a very useful
table (updated here in Table 5.6) for the future researcher in the area. It also
demonstrates the psychometric interest in money attitudes over the last 25 years.
What it shows is that there are a number of different questionnaires to choose from
if one is interested in research in the area. The choice of questionnaire should
probably depend on three things: (i) what one is interested in measuring and the
precise dimensions of most concern; (ii) the psychometric properties of the
questionnaire, specifically reliability and validity; and (iii) practical considerations
like the length of the questionnaire and its country of origin.
What this table does not show, however, is the factor structure of each questionnaire
and the overlap. Many have similar dimensions related to such things as obsession
with money; concern over retaining it; money as a source of power, etc.
Table 5.6 Empirical studies: methodological characteristics and demographic and personality factors that do and do not influence money attitudes
Empirical studies Scale used Sample Subjects Location Factors that influence Factors that do not
money attitudes influence money
attitudes
Wernimont and Modified Semantic 533 College students, Large US Mid- Work experience,
Fitzpatrick Differential (MSD) engineers, religious Western city socioeconomic
(1972) sisters, etc. level and gender
Yamanchi and Money Attitude Scale 300 Adults from different Los Angeles and Income does not
Templer (1982) (MAS) professions Fresno, CA affect money
attitudes
Furnham (1984) Money Beliefs and 256 College students England, Scotland Income, gender, age,
Behaviour Scale and Wales and education
(MBBS)
Bailey and Money Beliefs and NA College students US South-Western Gender
Gustafson (1986) Behaviour Scale city
Gresham and Modified Money Attitude 557 College students and US South-Western Gender
Fontenot (1989) Scale their parents cities
Bailey and Modified Money Beliefs 472 College students US South-Western Sensitivity and
Gustafson (1991) and Behaviour Scale city emotional stability
Hanley and Money Beliefs and 143 NA Phoenix, Tucson, Compulsive
Wilhelm (1992) Behaviour Scale Denver, and behaviour
Detroit
Tang (1992) Money Ethic Scale (MES) 769 College students, Middle Tennessee Age, income, work
faculty, managers, city ethic, social,
etc. political, and
religious values
Bailey and Lown Money in the Past and 654 College students, their Western US States Age
(1993) Future Scale relatives and other
professionals
Table 5.6 (continued)
Empirical studies Scale used Sample Subjects Location Factors that influence Factors that do not
money attitudes influence money
attitudes
Tang (1993) Money Ethic Scale (MES) 68 and 249 College students Taiwan
Wilhelm, Varese MBBS 559 Adult Americans USA Gender, financial
and Friedrich progress
(1993)
Bailey et al. (1994) MBBS 344, 291, Employed adults related USA, Australia, Geographical location
and to college students Canada
328
Lim and Teo (1997) MBBS, MAS 200 Students Singapore Gender differences
Roberts and MAS 273 Adults Mexican Compulsive buying
Sepulveda (1999)
Masus et al. (2004) MBBS 290 Students from Korea, Asian and American Culture
Japan, USA
Ozgen and Bayoglu Money in the Past and 300 Turkish students Ankara, Turkey Gender, age, family
(2005) Future Scale type
Burgess (2005) Modified Money Attitude 221 Urban South African Major metropolitan Values and culture
Scale cities
Engelberg and MAS 212 Swedish students Sweden Emotional
Sjoberg (2006) intelligence
Tatarko and MPPS 634 Adults Russian Social capital
Schmidt (2012)
Christopher et al. MPPS 204 Students American Materialism
(in press)
Note: NA = Not Available.

Source: Adapted from Medina, Saegert, and Gresham (1996).
Over the years money attitudes as measured by these scales have been related to
many variables. For instance, Engelberg and Sjoberg (2006) hypothesised and
found that those who were more emotionally intelligent were less money oriented. In
a later study using the same Swedish students, Engelberg and Sjoberg (2007) found
that obsession with money was linked to lower levels of social adjustment. Roberts
and Sepulveda (1999) were interested in Mexican versus American attitudes to
money and how they affected compulsive buying and consumer culture. They found
that attitudes to saving and money anxiety predicted compulsive buying.
Christopher, Marek and Carroll (in press) found a predicted link between money
attitudes and materialism.
One study looked at the relationship of money attitudes and “social capital”,
defined as the resources a person embeds in social relationships and which benefit
them. Tatarko and Schmidt (2012) found that the more social capital a person had,
the less obsessive – beliefs about its power, need to retain it, feelings of insecurity
and inadequacy – they were with money. The authors argue that social capital
provides social support and that when people do not have it they try to compensate
by accumulating financial capital.
In a study in South Africa, Burgess (2005) found money attitudes were related
to values. This power–prestige was related to low benevolence, self-transcendence
and security. One study looked at the factors that determined the money (financial
resources) parents transferred to their children. Hayhoe and Stevenson (2007) found
that parental money attitudes and values were one of the most important predictors
along with parental resources and family relationships.
On the other hand Chen, Dowling and Yap (2012) found that money attitudes
were not related to gambling behaviour in a group of student gamblers.
Two recent studies on money attitudes are worth considering. Furnham, Wilson
and Telford (2012) devised and tested a simple four-factor Money Attitude Scale:
money as security, freedom, power and love (Table 5.7). They found enough
evidence of the validity of the scale. Men believed money was more associated
with power. As in previous studies they found education and political orientation
clearly linked to money attitudes.
Von Stumm, Fenton-O’Creevy and Furnham (2013) used this measure and
others to test over 100,000 British adults. They found that associating money with
power was positively associated and associating money with security was negatively
associated with adverse financial events like bankruptcy, the repossession of house
or car and the denial of credit:
Table 5.7 The items for the Money Attitudes scale
Factor
Statement Mean SD 1 (22.6%) 2 (12.7%) 3 (8.8%) 4 (8.3%)
1. Relative to my income I tend to save quite a lot of money 2.70 1.22 .71
2. If I don’t save enough money I get very anxious 2.69 1.19 .69
3. I’d rather save money than spend it 2.91 1.09 .75
4. It is important to have savings, you never know when you may urgently need 4.17 0.88 .62
the money
5. With enough money, you can do whatever you want 3.36 1.26 .79
6. The main point of earning money is to feel free and be free 3.46 1.14 .77
7. There are very few things money can’t buy 2.70 1.33 .60
8. If I had enough money, I would never work again 2.29 1.33 .60
9. The best thing about money is that it gives you the power to influence others 2.11 1.19 .62
10. Money is important because it shows how successful and powerful you are 2.23 1.18 .73
11. You can never have enough money 2.65 1.36 .59
12. I have always been inspired by powerful tycoons 2.13 1.25 .71
13. I often demonstrate my love to people by buying them things 2.75 1.20 .80
14. I am very generous with the people I love 3.69 0.99 .80
15. The best present you can give to someone is money 1.53 0.81 .61
16. Money can help you be accepted by others 2.52 1.17 .57
Note: 1 = strongly disagree, 5 = strongly agree.

Money attitudes were here largely independent of income and education.

Viewing money as a power tool, a safety blanket, a way to receive and share
love, or as an instrument of liberation had little to do with one’s financial
means. Money attitudes were not much related to financial capability, except
for security, which was positively associated with three capabilities (i.e. with
making ends meet, planning ahead, and staying informed). This suggests that
people with a money-security attitude are also more capable of managing
their resources than those who do not associate money with security.
Power and security attitudes contributed most consistently to the odds of
experiencing adverse financial events, albeit in opposite directions: while
higher power was associated with an increase in risk, security was associated
with a decrease. It is plausible that people who associate money with power
try to demonstrate the latter by purchasing status symbols that are possibly
beyond their means. Higher power was especially associated with the risk for
car repossession: power-oriented individuals may purchase overly expensive
vehicles to signal higher social status but fail to keep up with the repayments.
(p. 348)
Measuring economic beliefs

Money beliefs are embedded in mere general economic beliefs. But there remains a
paucity of good instruments about for the assessment of economic beliefs. Although
there exist a number of questionnaires to measure conservatism and authoritarianism,
they all attempt to measure general social attitudes. Furthermore, these tests have been
criticised on numerous grounds including the fact that, first, often all scores go in the
same direction and, second, many of the items are vague, ambiguous or culture
specific. As a result investigators have attempted to develop short, accurate and simple
measures that are reliable, valid and economical (Wilson & Patterson, 1968).
Furnham (1985a) set about developing a new measure of economic beliefs. The
rationale for this test was based on that of Wilson and Patterson’s (1968) catch
phrase “measure of conservatism”, which has been shown to be very successful
(Eysenck, 1976; Wilson, 1975):
The solution proposed here then, is to abandon the propositional form of

item and merely present a list of brief labels or catch-phrases representing
various familiar and controversial issues. It is assumed that in the course of
previous conversation and argument concerning these issues, the respondent
has already placed himself in relation to the general population, and is able
to indicate his “position” immediately in terms of minimal evaluation

response categories. This item format is an improvement in so far as it
reduces the influences of cognitive processes task conflict, grammatical
confusion and social desirability. (Wilson & Patterson, 1968, p. 164)
Although this format may have the disadvantage of being “caught in time” and in
constant need of being updated (Kirton, 1978), as well as revealing a unitary score
from a multidimensional inventory (Robertson & Cochrane, 1973), it clearly has
many advantages because it is quick and reduces response sets.
A large pool of items was obtained by Furnham from various sources including
party-political pamphlets and manifestos, textbooks of modern British politics and
questionnaires on political beliefs and outlooks. From a large pool of items 50 were
selected to form the basis of the scale. Approximately half of the items represented
left- and half right-wing politico-economic views, thus controlling the response-
category bias. Careful examination of the data reduced this list to the 20 items set
out in Table 5.8. Further, as predicted, these items did discriminate those of widely
different political beliefs.
The Economic Belief Scale measures economico-political beliefs. Money and
related issues are clearly politically related and this short scale attempts to measure
how “left-” or “right-wing” people vary with respect to their economic beliefs.
The percentage of people who hold left-/right-wing economic beliefs changes
Table 5.8 The Economic Beliefs Scale: instructions, items, format and scoring
Economic beliefs
Which of the following do you favour or believe in?

Circle Yes or No. If absolutely uncertain circle “?”
There are no right or wrong answers; do not discuss these; just give your first reaction.
Answer all items.
1. Nationalisation Yes ? No 11. Strikes Yes ? No

2. Self-sufficiency Yes ? No 12. Informal black economy Yes ? No
3. Socialism Yes ? No 13. Inheritance tax Yes ? No
4. Free enterprise Yes ? No 14. Insurance schemes Yes ? No
5. Trade unions Yes ? No 15. Council housing Yes ? No
6. Saving Yes ? No 16. Private schools Yes ? No
7. Closed shops Yes ? No 17. Picketing Yes ? No
8. Monetarism Yes ? No 18. Profit Yes ? No
9. Communism Yes ? No 19. Wealth tax Yes ? No
10. Privatisation Yes ? No 20. Public spending cuts Yes ? No
Note: Scoring. Odd items score Yes = 3, ? = 2, No = 1; even items score Yes = 1, ? = 2, No = 3. The
higher the score the more economically left-wing (socialist) the beliefs.
over time often as a function of socio-political conditions. Whilst the psychometric

validity of the scale has been demonstrated it does not, as yet, appear to have been
used in money-related research.
Unconscious and conscious finance

Two groups of professionals claim to offer to help people with their money
problems: financial planners and therapists. The one deals with the conscious and
the rational; the other with the unconscious and irrational. Some try the
combination of the two. Thus Kahler and Fox (2005) talk about interior and
exterior finance. The former is the emotional intuitive aspects of money beliefs
and behaviours and the latter the cognitive and logical aspects. The aim is to
uncover (and challenge) the former to enable it to become integrated with the
latter. This confronts the pain of the repressed but making the unconscious
conscious is insufficient to ensure financial health, neither is being given knowledge
and instruction into the working of the financial worker. Both need to occur.
The idea is that hidden, unconscious beliefs have powerful consequences. We
all have numerous, powerful, unconscious “money scripts”, which are “partial
truths” passed down by parents and relations. It is a pointless waste of energy to try
to apportion blame or indeed to feel guilty. The exercise should be to confront and
challenge money scripts. Kahler and Fox (2005) list two dozen of these.
The idea of maladaptive money scripts is that some money behaviour leads to
some negative emotion and the way to avoid pain is to develop an unconscious
script, which may have had short-term protective functions but soon becomes
seriously maladaptive. The argument is that people medicate – behaviourally or
chemically – to avoid this pain. Medicating behaviours include compulsive
spending or saving, hoarding or even workaholism, while food, alcohol and drugs
act as chemical “medicines” to dull pain.
The money scripts are not necessarily bad or wrong but have been a way of
coping with particular circumstances. The idea is to deal with the psychic pain
and to use the energy as a tool for change. Kahler and Fox (2005) note: “Our
experience shows the only way to dissolve an emotion is to accept it and
experience it” (p. 57). Like all therapists they believe that people have to look at,
confront and, where necessary, change the “shadows” or their interior relationship
with money, which is the most difficult part of the whole financial integration
process. Avoiding, ignoring or medicating painful (money) emotions does not
work in the long run.
There are many ways of confronting interior finance voices, demons and
handicaps: journalising or diarising money behaviours and thoughts; individual or
group therapy; discharging anger. The authors note various blockers to releasing
the “authentic energy” or confronting one’s personal interior finance issues.
These “interior blocks” include financial dependency and victimhood; financial
co-dependency; fear; shame; guilt. They recommend forgiveness and letting go.
Having confronted and possibly “cured” internal financial issues it becomes

possible to move on to exterior finance issues like day-to-day money management
and the elimination of debt. This includes the usual things around designing a sensible
spending plan and a future investment and insurance plan. Kahler and Fox conclude
with advice on how to find and work with advisors as well as therapists. They suggest
the following seven questions that you might usefully ask a potential therapist:
1. What are the characteristics of your typical client?

2. What is your education?
3. What is the process you use? What is a typical session like?
4. What type of “interior work” have you done on yourself?
5. What is your relationship with money? What are your money scripts?
6. What is your engagement agreement or treatment plan?
7. How do you charge for your services?
Materialism
Materialism is the importance a person attaches to possessions and the ownership
and acquisition of material goods that are believed to achieve major life goals and
desired status such as happiness. Possessions for the materialist are central to their
lives, a sign of success and a source of happiness.
Materialism is seen as an outcome and driving force of capitalism that benefits
society because it drives growth. However, there can be negative social consequences
like economic degradation. Further, materialism for certain individuals can increase
their sense of belonging, identity, meaning and empowerment. We are what we
own. Others argue that the ideology of materialism is misplaced and leads to
individual and social problems like compulsive buying, hoarding, and kleptomania.
Materialism is really about self-enhancement (Kilbourne & LaForge, 2010).
Certainly societal attitudes to materialism vary over time with secular and religious
authorities often clashing. Many early Greeks, Medievals and Romantics condemned
materialism, arguing that the pursuit of possessions interfered with the pursuit of the
good. This idea has been confirmed by Promislo, Deckop, Giacalone and Jurkiewicz
(2010), who showed that materialism increased work–family conflict. Materialistic
workers were more prepared to let their work interfere with their family.
Research in this area suggests a model something like that shown in Figure 5.1.
Other factors have been shown to play a part. Thus Flouri (1999) showed peer
influence was important in determining adolescents’ materialistic attitudes along
with parental communication, parental materialism and religious beliefs. Perhaps
the easiest way to understand materialism is to see how it is measured by
psychologists. Consider the items of the well known, and much used, Materialism
Values Scale (Richins & Dawson, 1992).
Genetic
factors
Social
Materialism
values
Early
society
FIGURE 5.1 Materialism and work–family conflict
Others have developed scales for use with children, like Schor’s (2004) Consumer
Involvement Scale, which has three dimensions: Dissatisfaction (“I feel like other
kids have more stuff than I do”, “I wish my parents earned more money”);
Consumer Orientation (“I care a lot about my games, toys and other possessions”, “I
like shopping and going to stores”); and Brand Awareness (“Brand names matter to
me”, “Being cool is important to me”). Using this scale Bottomley, Nairn, Kasser,
Ferguson and Ormrod (2010) found that the more materialistic children were, the
lower their self-esteem, the more conflict they had with parents and the more
engaged they were in consumer society.
Indeed, most studies of those who hold strong materialistic values show negative
psychological correlates. For instance Dittmar (2005) showed that the greater the
discrepancy between a person’s perceived actual and ideal self the more they take
part in compulsive behaviour as a form of identity seeking.
Some researchers have looked at the relationship between materialism and
money-related behaviour. Tatzel (2002) developed a typology to describe the two:
1. Value seekers: materialists who were tight with money. These were
bargain hunters, collectors who saved to spend.
2. Big spenders: materialists who were loose with money. They were debt
prone, exhibitionists who “thingified” experience.
3. Non-spenders: non-materialists who were loose with money. They
were generous people who spent for recreation and self-development.
More recently Christopher et al. (in press) showed materialism in American

students was positively related to feelings of inadequacy about money and the
tendency to use money as a means of self-aggrandisement.
Numerous studies have been undertaken on materialism, which is defined as the
importance and value people attach to worldly possessions. Different societies at
different times have expressed very different attitudes to materialism. The ancient
Greeks and the nineteenth-century Romantics were against the pursuit of material
goods because they believed it “interfered” with the pursuit of the good. Thus,
some see it as associated with envy, possessiveness and non-generosity while others
see it relating to happiness and success – self-control and success versus spiritual
emptiness, environmental degradation and social inequity. This is why “post-
materialism” is seen as a good thing. Equally there is the emergence of the new
materialists who buy goods for durability, functionality and quality and who have
an ambiguous, even hypocritical attitude to issues.
Tatzel (2003) has noted the “consumer’s dilemma” with respect to materialism:
we are told it is psychologically unhealthy and morally wrong to be preoccupied
with money and materialism yet consuming is attractive and it seems that having
more money and possessions would make life better.
There are positive and negative social and individual consequences (Kilbourne &
LaForge, 2010). For some, materialism is associated with societal wealth growth and a
high standard of living found in capitalist societies. For others it has harmful consequences
for society, leading to inequality, exploitation, and general diminished well-being.
Consumption, some argue, is good for the development of identity, a sense of
belonging and meaning. Others point to the evidence of reduced well-being
among those who are most materialistic and the data on compulsive buying.
There is disagreement also about the correlates of materialism. Some studies
suggest males are more materialistic than females – others the opposite. Equally, the
data on age, education and income correlates of materialism are unclear.
There are many measures of materialism. Richins and Dawson (1992) suggest
that those measures have three dimensions:
1. Acquisition centrality: acquisition as central to life; a way of giving

meaning and an aim of daily endeavours.
2. Pursuit of happiness: the possession of things (rather than relationships
or achievements) as an essential source of satisfaction and well-being.
3. Possession-defined success: judging the quality and quantity of
possessions accumulated as the index of success: he who dies with the
most toys wins.
They also note the difference between instrumental and terminal materialism. The
former is a sense of direction where goals are cultivated through transactions with
objects, providing a fuller unfolding of human life, while the latter is simply the
aim of acquisition. They devised the following simple 18-point scale:
Success
I admire people who own expensive homes, cars, and clothes.
Some of the most important achievements in life include acquiring material
possessions.
I don’t place much emphasis on the amount of material objects people own
as a sign of success.*
The things I own say a lot about how well I’m doing in life.
I like to own things that impress people.
I don’t pay much attention to the material objects other people own.*
Centrality
I usually buy only the things I need.*
I try to keep my life simple, as far as possessions are concerned.*
The things I own aren’t all that important to me.*
I enjoy spending money on things that aren’t practical.
Buying things gives me a lot of pleasure.
I like a lot of luxury in my life.
I put less emphasis on material things than most people I know.*
Happiness
I have all the things I really need to enjoy life.*
My life would be better if I owned certain things I don’t have.
I wouldn’t be any happier if I owned nicer things.*
I’d be happier if I could afford to buy more things.
It sometimes bothers me quite a bit that I can’t afford to buy all the things I’d
like.
Note: Those items with an asterisk are reversed or anti-materialistic questions.
Rickins and Dawson also tested and confirmed various hypotheses such as the
idea that materialists are selfish and self-centred and more dissatisfied and discontent
with life.
Bottomley et al. (2010), who studied materialism in 11- to 15-year-olds, found
three identifiable dimensions: material dissatisfaction; consumer orientation; and
brand awareness. Further, they found materialism linked to television and computer
usage, negative attitudes to parents, lack of time doing homework and household
chores, and lower self-esteem. As has been found before they noticed that a
materialist orientation is generally associated with less generosity, caring less about
other people, having more conflictual relationships with people and treating others
in more objectifying ways.
Tatzel (2002) divided people into four groups based on high/low materialism
and tight/loose with money. The value seeking, bargain hunting, tight-with-
money materialist does price comparisons and saves to spend. The exhibitionistic,
trend conscious, debt-prone big spender is a loose-with-money materialist.
On the other hand there are two low materialist types: the tight-with-money,
price averse saver with an ascetic lifestyle, and the generous, recreative, experiencing
loose-with-money type.
Tatzel concludes that the underlying goal of all materialism is to overcome

insecurity by attaining social prestige, which is driven by total extrinsic materialism.
Many studies have addressed the origin of materialism. Flouri (1999, 2004)
provided evidence of a relationship between poor parenting (mother’s lack of
involvement), a child’s behavioural and emotional problems and materialism.
Certainly the data suggest that early family environments are very important
predictors of the adolescent’s materialism.
Similarly, Promislo et al. (2010) found evidence that a family’s materialistic views
affect the work–family conflict leading to individuals valuing money more than people.
Financial risk taking

We all, on a daily basis, take risks: with our health, wealth and safety. Some people
seem to be risk takers in all aspects of their lives. Why are some people more likely
to be risk takers than others? Is it due to their sex and age? While there is evidence
for “risk taking” as a personality style trait there is also evidence that people may be
rather inconsistent with respect to their health and wealth. They might be cautious
in one area but carefree in another.
Some people talk about risk tolerance – the extent to which a person chooses to risk
experiencing a less favourable outcome in the pursuit of a morally favourable
outcome. Others call it risk-preference or even more directly the “fear/greed trade off”.
More importantly, what they say about their approach to risk and their actual
risk-taking behaviour may be rather different. That is, a serious risk taker may not
think of him/herself as risky but “well-informed”, “adventurous” or “bold”.
Whilst this disparity or disconnect may in part be a function of boasting it may
equally be down to people not knowing their real taste for risk.
Because of its obvious importance there is a great deal of serious academic work on
personal financial risk taking. Many studies have sought to explore the personal factors
that determine an individual’s risk tolerance or appetite. The results of studies show
education, income and wealth are positively associated with financial risk taking (but
only slightly), while age and number of dependents is negatively associated with risk
taking (only slightly). The big difference is sex: males are more likely to take risks.
For example, one big study done in Australia (Hallachan, Faff & McKenzie,
2004) surveyed over 16,000 people and found seven factors all related to risk
tolerance: gender, age, number of dependents, marital status, tertiary education,
income and wealth. They found that those who were more risk tolerant (i.e. more
prone to financial risk taking) were:
• Males more than females.

• Married more than unmarried people.
• Better rather than less well educated.
• High income rather than low income.
• Higher net-wealth vs. lower net-wealth.
• Younger rather than older.
They were particularly interested in the relationship between age and gender,
which showed that older people were much less financially risky. After the age of
50, people seem to be generally much less risky. Also, the very rich tend not to be
as risky as many “highish” income earners.
Many studies have found that women are much less financially risky than males.
Indeed, women engage in less risky (and aggressive) behaviour and are more risk
averse in many aspects of their lives. Many have attributed this to evolutionary factors.
“For females the low-risk, steady-return investment in parenting effort often yields
highest returns, whereas for males, the higher risk investment in mating effort
produces a higher expected pay off” (Eckel & Grossman, 2002, p. 282).
One study asked whether it was gender-roles or sex differences themselves: that
is, was it masculinity and femininity more than biological gender? It showed that it
was a person’s masculinity, more than their biological sex, which was related to risk
taking. The researchers suggested that younger, better-educated businesswomen
were more likely to be more assertive and independent (as well as richer and more
experienced with money) and therefore more likely to take financial risks (Meier-
Pesti & Penz, 2008). They also pointed out that masculine over-confidence and
under-estimation of financial risk may be particularly misplaced.
Another study looked at a person’s general financial well-being as a function
of their knowledge about the world of finance (Shim, Xio, Barber & Lyons,
2009). The idea is that a person’s background and values predict their financial
knowledge and attitudes, which in turn affect their financial behaviour, including
risk taking.
Indeed, financial knowledge itself is highly related to financial risk taking. One
study showed that because men have better financial knowledge than women, they
tend to be greater risk takers (Wang, 2009). However, the relationship between
objective and subjective knowledge (what they really knew and what they thought
they knew) was not that strong. Some were poorly calibrated – that is they were greatly
over- or under-confident about their real knowledge. Interestingly, it was a person’s
subjective knowledge (that is their opinion/beliefs about their knowledge) that was
most closely related to their risk-taking behaviour (not their actual knowledge).
For many people it is harder to grow or even keep safe the money they have.
Increasingly, after years of proven probity, banks seem less safe places to store your
money. The crash of 2008, the Euro crisis, and state intervention to nationalise
banks have meant that many people see banks as insecure and interest rates are so
low that they try to find other ways to protect their money. People get asked:
pensions or property: which is the best investment (for your current money)?
There is also what is perceived to be both more complex and more risky,
namely the investment in stocks and bonds, or indeed other things like various
schemes that have become discredited. People at the peak of their income earning
ability – around 45–65 years – often think ahead to retirement. Changes in social
security systems as well as to financial services industries have meant that many
have taken an interest in the stock market.
There are many big questions here but two are of particular interest:
1. Why invest in the market at all?

2. Why choose one particular investment over another?
These ideas are of course linked. They are not only interesting academic questions
but they are also important for those who want to segment the investor market.
Even the most orthodox economists now seem able to admit that these decisions
are not based on rational analyses.
Over the years researchers have looked at various factors that they thought
possibly important: a person’s politics and values, their general attitudes to money
and to risk as well as their sex, age and occupational status. For example, in one
study Keller and Siegrist (2006) examined eight possible factors:
Attitudes to financial security: budgeting, importance, etc.

Attitudes toward stock investing: positive, willing, excited vs. negative,
uncertain, cautious.
Obsession with money: symbolic as well as functionally very important to
them personally.
Perceived immorality of the stock market: the ethics of what some call
casino capitalism.
Attitudes toward gambling: positive vs. negative.
Interest in financial matters: general awareness and beliefs they can handle
their money better.
Attitudes toward saving: happy and proud to be a saver vs. negative.
Frankness about finances: to what extent they disclose their actual situation
to acquaintances, friends and family.
In their study of over 1,500 Swiss adults, Keller and Siegrist found as noted
earlier through cluster analysis that they could differentiate quite clearly four
types of investor:
Safe players: cautious, playful, thrifty, record keeping and slightly obsessed.
They are self-confident, secretive and tend to avoid the stock market, which
they see as gambling.
Open books: they tend to be less obsessed, interested or self-confident
about their investing.
Money dummies: they are negative and not very concerned about financial
security.
Risk seekers: they find profiting from the stock market least unethical and
have an appetite for, and tolerance of, risk. They seek stock market investment
as a means to freedom, independence and success.
The authors found in their study that each type differed in their possession of
investment portfolios, their buying and selling of securities, their risk tolerance in
pursuit of capital, their responses to fluctuations and their sensitivities to ethical
issues.
Leiser and Izak (1987) argued that a culture with high inflation – such as Israel
in the 1980s – leads to people having changing attitudes to their coinage. They
found that it was the attitude of the public to a given coin that best predicted what
they called the money-size illusion. Further, the biases in estimated sizes remained
even after the coin was withdrawn.
The introduction of a new coin offers interesting and important opportunities
for research. One example was the introduction of the Euro in 2002. Numerous
studies were done such as those by Jonas et al. (2002), who showed how the size
and denomination of the currency changing (i.e. German Deutschmarks, Italian
lira) had a powerful anchoring effect on what people thought about their new
currency.
We know that, despite what economists say money is not strictly fungible at least
from the perspective of users. They do not treat all money the same: clean money is
kept longer than dirty or damaged money. Rarer coins and notes are horded. In
some countries the currency is a form of art. Favoured pictures and colours are spent
less quickly than those notes or coins that people do not find as pleasing. Those who
design money have to think carefully about the symbolic features in money such as
colour and what people and images appear on the currency.
Some indication of this issue could be seen in the 2013 debate in Great Britain
as to whom they should have on their bank notes. It was argued that they too often
showed “dead white males” and that great female leaders, scientists and writers
were underrepresented. Hence the call and vociferous debate on the design of bank
notes.
These issues equally apply to credit cards which are often very carefully designed
and coloured to indicate the wealth of the owner. Black is often the most “valuable”,
followed by gold, then silver, then perhaps the corporate colour of the organization
(bank) issuing them.
Thinking about money

Few would disagree with the proposition that everybody has a fairly complex set
of attitudes to the abstract concept of money as well as actual currency. Money is
clearly symbolic and imbued with moral and emotional meaning. These attitudes
clearly play a role in how people use money – whether they are compulsive savers
or profligate spenders, whether it includes pain or pleasure and whether it is sacred
or profane. What is abundantly clear is that money is far from value free and that
few people are dispassionate, disinterested, economically rational users of money.
Researchers in the area have attempted through self-report questionnaires to
understand the basic structure of money attitudes. Over the past 25 years many
different instruments have been constructed and psychometrically examined which
have purported to investigate the fundamental dimensions underlying money

attitudes. While there remains no agreement on the basic number of factors or how
they should be described, it is possible to see that some overlap. For instance, many
of the measures show attitudes about power, prestige and spending, where money
is seen as something one can use to influence and impress others. Also, most of the
measures found evidence of a retention factor, which is concerned with saving,
investing and carefully planning the use of money.
As well as self-report questionnaires that attempt to measure attitudes to money,
there has also been some work on more specific concepts like money ethics or
more general concepts like economic beliefs. What these studies show is that
money attitudes are inextricably linked with such things as political beliefs and
voting intentions.
Those who wish to research this area have a large choice of measures to
use. Some are better psychometrised than others and there is a large overlap
between them.
6
UNDERSTANDING THE
ECONOMIC WORLD
An economist is an expert who will know tomorrow why the things

he predicted yesterday didn’t happen today.
Evan Esar
Undermine the entire economic structure of society by leaving the

pay toilet door ajar so the next person can get in free.
Taylor Meade
Today the greatest single source of wealth is between your ears.

Brian Tracy
Education costs money: but then so does ignorance.

Sir Claus Moser
If it’s free, it’s probably not worth a damn.

Don Stepp
Introduction
This chapter examines the economic beliefs and behaviours of young people,
concentrating specifically on two things: stage-wise theories about the development
of economic ideas; and research into the development of specific economic
concepts like profit and interest rates. It looks at when and how young people
come to understand how the economic world works. It is, in essence, the
developmental psychology of money.
Many studies have looked at how young people acquire, think about, and use
money. They have shown age but also sex, family structure and school success
factors (Meeks, 1998; Mortimer, Dennehy, Lee & Finch, 1994). Some have been
experimental studies that have looked at such things as when and why children
share money (Leman, Keller & Takezawa, 2008) or give money away to charities
(Knowles, Hyde & White, 2012).
Webley, Burgoyne, Lea and Young (2001) noted that the transition from
economic child to economic adult is often sudden, violent and bewildering,
which may account for the relatively poor understanding in young people of
how the world of money works. They are faced with choices like staying in
education, going into the labour market or going into claimancy. They are also
confronted with issues like marriages and mortgages, which require a steadily
increasing time horizon.
Until recently there has been comparatively little research on the economic
beliefs and behaviours of young people (Berti & Monaci, 1998; Furnham, 1999a,
1999b, 2008; Furnham & Lunt, 1996; Thompson & Siegler, 2000). Even less
has been done on how knowledge and beliefs are acquired as opposed to the
content of the knowledge base (Berti & Bombi, 1988). Furthermore, it has not
been until comparatively recently that researchers have looked at young people’s
reasoning about economic issues such as consumption, saving, marketing and
work-related knowledge.
What is special about economic understanding is that it forms the basis of the
understanding of power in society and the concepts/ideology a child develops are
therefore of concern to educationalists and politicians (Webley, 1983). The need
to relate to the economic structure of any particular society – an idea more radically
expressed by Cummings and Taebel (1978) – and the importance of characterising
a child’s environment (e.g. exposure to own economic experience) are therefore
aspects that might distinguish the development of economic concepts from others.
Social values and ideology are intricately bound up with the latter and not the
former and can influence understanding profoundly. It is, quite simply, impossible
to understand the concept of poverty or wealth without understanding the structure
of society and the concept of inequality. In this sense the socioeconomic status of
the family and the culture in which a young person grows up should have a big
impact on when and how they acquire economic understanding.
The development of economic ideas and concepts in children

There is a long and patchy history of research into the development of economic
ideas in children and adolescents (Leiser, Sevon & Levy, 1990; Roland-Levy,
1990). Lunt’s (1996) review into children’s economic socialisation falls into three
phases: First, there was a small amount of descriptive work that established that
children had a clearly developing understanding of economic life. Second, researchers
attempted to map descriptions of children’s comprehension of economic matters
onto Piaget’s theory of the stages of cognitive development, producing classic
stage-wise theories. Third, an attempt is being made to introduce social factors into
the explanation of the development of economic understanding. This “third wave”
Understanding the economic world 117
shows that there has been a burgeoning of research in economic socialisation since
the mid-1980s and even more so over the past five years.
Although there have been a variety of studies that have claimed to support the
Piagetian view about the development of economic concepts in the child these
studies have found different numbers of stages. This might be due to several reasons:
the age ranges of the subjects were different; the number of subjects in each study
was different (sometimes perhaps too small to be representative); or there was
variation in the precision of the definition of stage boundaries.
Table 6.1 shows that there is disagreement about the number of stages, points of
transition and content of understanding at each stage.
Note, also, that researchers have rather “given up” on this approach of trying
to specify the stages children go through in getting to understand all, or even
specific concepts.
These stages suggest though that the child’s understanding of different economic
concepts always advances simultaneously, which is clearly not the case. Stage-wise
theories appear to have a number of implicit assumptions: the sequence of develop-
ment is fixed; there is a specific end-state towards which the child and adolescent
inevitably progresses; some behaviours are sufficiently different from previous
abilities that we can identify a child or adolescent as being in or out of a stage.
There is increasing criticism of the cognitive stage-wise approach. Dickinson
and Emler (1996) argued that economic transactions take place between people in
a variety of social roles and there is no clear and simple domain of economic
knowledge separate from the broader social world into which the child is socialised.
Different social groups possess different economic knowledge. Knowledge about
wealth lags in development. They suggest that there are systematic class differences
so that working-class children emphasise personal effort as the basis of wage
differentials, whereas middle-class children recognise the importance of qualifi-
cations. They argue that these differences in attribution bring about a self-serving
bias that acts to justify inequalities and therefore reinforces the status quo of socially
distributed economic resources. In this sense social class determines understanding
which maintains the system.
TABLE 6.1 Dates, samples and stages found in studies of the development of economic
understanding
Author Year Subject Age range Stages
Strauss 1952 66 4.8–11.6 9

Danziger 1958 41 5–8 4
Sutton 1962 85 Grade 1–6 6
Jahoda 1979 120 6–12 3
Burris 1983 96 4–5, 6–7, 10–12 3
Leiser 1983 89 7–17 3
Source: Furnham and Argyle (1998).

Leiser and Ganin (1996) reported a study of the social determinants of economic
ideology and revealed a complex relation between demographic, social and
psychological variables. Increased economic involvement was related to support for
free enterprise. Middle-class adolescents supported a version of liberal capitalism,
whereas the working classes were most concerned about inequality. Thus the social
conditions influence the system of financial allocation within the household, which
then creates consumers with particular orientations towards the economy, which
in turn reproduces the existing social organisation of the economy.
The questions here are: by what age can you assume that young people (children
and adolescents) have a good grasp of economic reality? When can they be considered
(by all practical measures) responsible economic agents? When should we expect them
to be economically literate?
The development of economic thinking

Although numerous studies of children’s understanding of different aspects of the
economic world have been carried out, it appears they have concentrated on some
topics rather than others (Berti & Bombi, 1988). For example, relatively few studies
exist on young people’s knowledge of betting, taxes, interest rates, the up and
down of the economy (boom, recession, depression, recovery, etc.) or inflation,
though the recent work of Thompson and Siegler (2000) may be an exception.
Money
Children first learn that money is magical. It has the power to build and destroy and
to do literally anything. Every need, every whim, every fantasy can be fulfilled by
money. One can control and manipulate others with the power of money. It can
be used to protect oneself totally like a potent amulet. Money can also heal both
the body and the soul. Money opens doors; it talks loudly; it can shout but also
whisper. Most importantly its influence is omnipresent.
Children’s first contact with money (coins and notes and more recently credit
cards) often happens at an early age (watching parents buying or selling things,
receiving pocket-money, etc.) but this does not necessarily mean that, although
children use money themselves, they fully understand its meaning and significance.
For very young children, giving money to a salesperson constitutes a mere
ritual. They are not aware of the different values of coins and the purpose of
change, let alone the origin of money, how it is stored or why people receive it
for particular activities.
Pollio and Gray (1973) carried out one of the first studies conducted with 100
subjects, grouped at the ages of 7, 9, 11, 13 and college students, on “change-
making strategies” and found that it wasn’t until the age of 13 that an entire age
group was able to give correct change. The younger subjects showed a preference
for small value coins (with which they were more familiar) when making change,
whereas the older ones used all coins available.
Berti and Bombi (1979) interviewed 100 children from 3 to 8 years of age on
where they thought that money came from. At level 1 children had no idea of its
origin: the father takes the money from his pocket. At level 2 children saw the
origin as independent from work: somebody/a bank gives it to everybody who
asks for it. At level 3 the subjects named the change given by tradesmen when
buying as the origin of money. Only at level 4 did children name work as the
reason. Most of the 4- to 5-year-olds’ answers were in level 1, whereas most of the
6- to 7- and 7- to 8-year-olds’ were in level 4. The idea of payment for work
(level 4) thus develops out of various spontaneous and erroneous beliefs in levels 2
and 3 where children have no understanding of the concept of work yet, which is
a prerequisite for understanding the origin of money.
Berti and Bombi (1981) later singled out six stages: Stage 1: No awareness of
payment; Stage 2: Obligatory payment – no distinction between different kinds of
money, and money can buy anything; Stage 3: Distinction between types of money
– not all money is equivalent any more; Stage 4: Realisation that money can be
insufficient; Stage 5: Strict correspondence between money and objects – correct
amount has to be given; Stage 6: Correct use of change. The first four stages clearly
are to be found in the preoperational period whereas in the last two, arithmetic
operations are successfully applied. Abramovitch, Freedman, and Pliner (1991)
found that 6- to10-year-old Canadian children who were given allowances seemed
more sophisticated about money than those who were not.
Despite these studies there is a lot we do not know: for instance how socioeconomic
or educational factors influence the understanding of money; when children
understand how cheques or credit cards work and why there are different currencies.
Are they becoming more or less sophisticated with regard to money concepts?
Prices and profit

There are a number of prerequisites before children are able to understand buying
and selling. A child has to know about the function and origin of money, change,
ownership, payment of wages to employees, shop expenses and shop owners need for
income/private money, which altogether prove the simple act of buying and selling
to be rather complex. The question is why are similar products differently priced?
What does price actually indicate about a product? Who decides the price of products?
When do children comprehend the laws of supply and demand? Webley &
Nyhus (2006) reviewed the studies in this area and showed that by the age of 10
children began to understand that pricing was influenced by supply and demand,
motivation and morality of salespeople, and product packaging. They note that
studies have shown that the social context (country, economic system) clearly
influences a person’s understanding because market economies afford more
opportunities to understand issues.
Furth (1980) pointed out four stages during the acquisition of this concept: (1) no
understanding of payment; (2) understanding of payment of customer but not of the
shopkeeper; (3) understanding and relating of both the customer’s and the
shopkeeper’s payment; and (4) understanding of all these things. Jahoda (1979), using
a role-play where the child had to buy goods from a supplier and sell to a customer,
distinguished between three categories: (1) no understanding of profit – both prices
were consistently identical; (2) transitional – mixture of responses; and (3)
understanding of profit – selling price consistently higher than buying price.
Berti, Bombi, and de Beni (1986) pointed out that the concepts about shop and
factory profit in 8-year-olds were not incompatible. They showed that through
training children’s understanding of profit could be enhanced. Both critical training
sessions stimulating the child to puzzle out solutions to contradictions between
their own forecasts and the actual outcomes, and ordinary tutorial training sessions
(information given to children) that consisted of similar games of buying and
selling, proved to be effective.
In a study with 11- to 16-year-olds, Furnham and Cleare (1988) also found
differences in understanding shop and factory profit. Only 7% of 11- to 12-year-
olds understood profit in shops, yet 69% mentioned profit as a motive for starting
a factory today, and 20% mentioned profit as an explanation for why factories had
been started. Young children (6 to 8 years) seemed to have no grasp of any system
and conceived of transactions as simply an observed ritual without further purpose.
Older children (8 to 10 years) realised that the shop owner previously had to buy
(pay for) the goods before he could sell them. Yet, they do not always understand
that the money for this comes from the customers and that buying prices have to
be lower than selling prices. They thus perceive of buying and selling as two
unconnected systems. Not until the age of 10 to 11 are children able to integrate
these two systems and understand the difference between buying and selling prices.
When and how do young people think about the free provisions of services?
Davies and Lundholm (2012) questioned 78 young people aged 11 to 23, using a
qualitative approach. They concluded:
Previous research focusing on students’ explanation of prices has consistently

categorised conceptions in terms of: (i) demand; (ii) supply; and (iii) supply
and demand. To some extent our data are consistent with this broad
classification. We found instances where individual students and groups of
students argued a case for the provision of a good or service for free: (i) only in
terms of merit or equity (demand-side argument); (ii) only in terms of costs of
production (supply-side argument); and (iii) in terms of a balance between
demand- and supply-side arguments. In our case the demand-side argument
is expressed only in terms of “need” rather than ability to pay. The relationship
between conceptions expressed by an individual regarding “what ought to be
the price” and “what causes price” remains an issue for future research. For
example, are conceptions of “what ought” in terms of “need” associated with
conceptions of “what is” in terms of “demand”. (pp. 86–87)
Because of the obvious political implications of the ideas of profit and pricing it
would be particularly interesting to see not only when (and how) young people
come to understand the concepts but also how they reason with them. It is equally
important to investigate when young people understand how competition (or lack
of it in monopolies) affects profit, the pressure of shareholders for profits and the
moral concept of profiteering.
Market forces
One of the most fundamental of all economic concepts is that of market forces:
supply and demand. The central question is when do children understand the
fundamental point that excess supply (over demand) forces prices down, while
excess demand over supply forces prices up.
There have certainly been few studies in the area: Berti and Grivet (1990)
examined the understanding of market forces in 8- to 13-year-old Italian children.
They found that children understood the logical effect of price charges on purchases
before they understood the effects of supply and demand on prices. Younger
children (8 to 9 years) confused economic and moral issues, seeing price changes as
designed to help poor people. People were not seen as profit maximisers.
Later American studies by Siegler and Thompson (1998) and Thompson and
Siegler (2000) threw further light on this issue. They found that children understood
the laws of demand before those of supply. They noted that (inevitably) the direct
links between cause and effect are understood before indirect ones and that positive
correlations are understood before negative ones. They also noted that there is
more fallacious thinking – that more sellers would lead to more sales.
In two studies of 64 Israeli, 6-, 8-, 10- and 12-year-olds, Leiser and Halachmi
(2006) first played a barter game with children. They argued that young children
understand, give and take by 3 to 4 years old, but they do not understand money
concepts like buy, spend and sell. Hence it may be possible to demonstrate that
even young children grasp the basic concept but not in monetary terms. They
provide wonderful examples of what they actually did in their study:
Football cards: Demand, barter

In Ido’s class, the kids collect soccer players cards, and sometimes they
exchange cards amongst them. The children in his class like Revivo best(which
one do you like best?). During every recess, Ido and Shmulik swap cards
(point) – Ido gives Shmulik a card with Revivo on it and Shmulik gives him in
return three regular cards.
During the last recesses, they met children from the other class (point)
and they too want to swap with Ido, and to get Revivo cards. Now both
Shmulik, and the other children are all around Ido, and each one of them
wants Ido to exchange the Revivo cards with him.
Will Ido now receive more regular cards for the Revivo card, or fewer
regular cards, or will he get just like before?
Hints:
1. How will Ido decide with whom to swap his card?
2. Will the children agree to give him five cards if he asks them?
3. If one other child offers five regular cards for the Revivo card, will other
children also be ready to offer more cards to Ido?
Chocolate balls: Demand, money

This (point) is Naama. Naama is a very good cook. She especially likes to
prepare delicious chocolate balls. Yoav (point) loves chocolate balls, and
always comes to buy chocolate balls from Naama. He pays 2 Shekel for every
chocolate ball.
Little by little, the children in the neighbourhood heard about the
tasty chocolate balls that Naama makes. They too came to buy chocolate
balls (point).
Now all the children are in front of Naama, and they all want to buy
chocolate balls from her. Will the price of chocolate balls go up or down, or
will it stay the same?
Hints:
1. If there remains only one chocolate ball, and all the children cry: “I want
it, I want it!”, whom will Naama give it to?
2. If one chocolate ball is left and all the children want to buy it, will Naama
be able to ask 5 shekel for it?
3. If Yoav decides that he is willing to pay 5 shekel for the ball, will other
children offer more money for the ball?
They found, to their surprise, that children found the questions about money
actually easier than those involving barter. However, they did find, as predicted,
that the understanding of market forces did go up with age. Children also found
demand-change questions easier than supply-change questions.
In a second study children were also asked if the buyer would be pleased by the
change. Again they found demand-change questions easier to understand.
Interestingly the authors also found evidence of confusion between moral and
economic issues. They note:
Why then is the effect of change in demand easier to understand than that
of changes in supply? We offer the following explanation. From the point of
view of the child, it is the seller who sets the price. This is what overtly
happens in buying situations children are familiar with: the buyer asks “how
much?” and the seller quotes a price. If demand increases, the seller can
exploit the situation and raise the price. Conversely, if demand drops, the
seller can try to ask for less. The type of causality involved here is the simplest
of all: a deliberate decision … When there is a change in supply, however,
the buyer is not in a symmetric status, and cannot simply declare a different
price: it is still the seller who decides, as far as the child is concerned. The
buyer can walk out, of course, but the seller sets the price. The customers are
not altogether powerless, though: If there are more suppliers, more buyers
may decide to try to shop elsewhere, demand will slacken and the seller,
sensing this, may decide to lower the price to lure them back. Thus while the
increased supply enables the buyers collectively to put pressure on a price,
this is a form of aggregate causality that is more complex, and harder for the
child to fathom. (pp. 14–15)
Banking
There has been a surprisingly large number of studies on children’s understanding
of the banking system. Jahoda (1981) interviewed 32 subjects of the ages 12, 14,
and 16 about banks’ profits. He asked whether one gets back more, less or the same
as the original sum deposited and whether one has to pay back more, less or the
same as the original sum borrowed. From this basis he drew up six categories: (1)
no knowledge of interest (get/pay back same amount); (2) interest on deposits only
(get back more; repay same amount as borrowed); (3) interest on loans and deposits
but more on deposit (deposit interest higher than loan interest); (4) interest same
on deposits and loans; (5) interest higher for loans (no evidence for understanding);
and (6) interest more for loans – correctly understood. Although most of these
children had fully understood the concept of shop profit, many did not perceive
the bank as a profit-making enterprise (only one quarter of the 14- and 16-year-
olds understood bank profit).
Ng (1983) replicated the same study in Hong Kong and found the same
developmental trend. The Chinese children were more precocious, showing a full
understanding of the bank’s profit at the age of 10. A later study in New Zealand
by Ng (1985) confirmed these additional two stages and proved the New Zealand
children to “lag” behind Hong Kong by about two years. Ng attributed this to
socioeconomic reality shaping (partly at least) socioeconomic understanding. This
demonstrated that developmental trends are not necessarily identical in different
countries. A crucial factor seems to be the extent to which children are sheltered
from, exposed to, or in some cases even take part in economic activity. In Asian
and some African countries quite young children are encouraged to help in shops,
sometimes being allowed to “man” them on their own. These commercial
experiences inevitably affect their general understanding of the economic world.
This is yet another example of social factors rather than simply cognitive
development affecting economic understanding.
Takahashi and Hatano (1989) examined the understanding of the banking
system of Japanese young people aged 8 to 13. Most understood the depository and
loan functions but did not grasp the profit-producing mechanism. First,
opportunities for children to take part in political and economic activities are very
limited. Second, children are not taught about banking in schools. Third, humans
do not have any “pre-programmed cognitive apparatus” to understand human
organisations. Finally, banks themselves do not attempt to educate consumers in
what they do.
Berti and Monaci (1998) set out to determine whether third grade (7- to 8-year-
old) children could acquire a sophisticated idea about banking after 20 hours’
teaching over a two-month period. It was a before and after study that taught
concepts like deposits, loans, interests, etc. They concluded:
While the notion of shopkeepers’ profit was successfully taught to third

graders who already possessed the prerequisite arithmetic skills in only one
lesson, in the present study it took 20 hours to teach the notion of banking
at the same school level. Should this notion be retained in a third grade
curriculum nevertheless? Or should that great amount of time be more
profitably spent teaching children more fundamental skills, such as writing
and arithmetic? Considering the key role of the bank in the economic system,
and the pivotal role of the children’s widespread misconceptions of banking
in supporting their misconceptions of other economic institutions, we think
that children’s understanding of banking should be promoted as early as
possible. Further, it should not be forgotten that some of the hours needed
to teach banking were in reality spent on arithmetic exercises, which allowed
children to practice operations which in any case they would have had to
practice (even if not calculating for exercising arithmetic skills meaningfully).
(p. 269)
It would be of particular interest to examine the understanding of children in

certain Muslim countries that consider usury a sin. It is also interesting to know
whether children can differentiate between banks, building societies, merchant
banks, offshore banks, etc. Recent political issues around banks and bankers
have indeed had an effect on children’s knowledge about, or attitudes to, banks
and bankers.
Possession and ownership

The topic of possessions and ownership is clearly related to both politics and
economics but has been investigated mainly through the work of psychologists
interested in economic understanding. Berti, Bombi, and Lis (1982) interviewed
120 children of ages 4 to 13 to find out children’s knowledge about: (a) ownership
of means of production; (b) ownership of products (industrial and agricultural); and
(c) ownership of product use. Children’s ideas about ownership of means of
production develop through the same sequences but at different speeds. The notion
of a “boss-owner” seem to occur at 8 to 9 years for the factory, 10 to 11 years for
the bus and 12 to 13 years for the countryside, perhaps due to the fact that 85% of
the subjects in the study had had no direct experience of country life.
Cram and Ng (1989) in New Zealand examined 172 children of three different
age groups (5/6, 8/9, 11/12 years) about their understanding of private ownership
by noting the attributes the subjects used to endorse ownership. Greater age was
associated with an increase in the endorsement of higher level (i.e. contractual)
attributes and in the rejection of lower level (i.e. physical) attributes, but there was
only a tendency in the direction. Nearly 90% of the youngest group rejected
“liking” as a reason for possessing, which increased to 98% in the middle and oldest
groups, whereas the differences on the other two levels were more distinct. This
indicates that, surprisingly, 5- to 6-year-olds are mainly aware of the distinction
between personal desires and ownership.
Concepts relating to means of production seem to develop similarly to those of
buying and selling. They also advance through phases of no grasp of any system, to
unconnected systems (knowledge that the owner of means of production sells
products but no understanding of how he gets the money to pay his workers) and
to integrated systems (linking workers’ payment and sales proceeds), depending on
the respective logic–arithmetical ability of the child. Although these concepts seem
to follow the same developmental sequence, it cannot be said whether, to what
extent and how, the same factors (experimental, maturation, educational) contribute
to the development of each concept.
Taxation
While there have been various books on adults’ beliefs and behaviours with
respect to tax of all forms (Berti & Kirchler, 2001; Lewis, 1982; Webley, Levine
& Lewis, 1991), there is almost no data on children’s and adolescents’
understanding. An exception is the studies that were part of the “Naïve Economics
Project” designed by Leiser et al. (1990), which had only one question (out of
20) on tax. It was “What would happen if there were no more taxes?” and the
multiple-choice options were: (a) don’t know; (b) good – people would have
more money; (c) bad – no public services; and (d) aware of both positive and
negative aspects. Researchers from different nations, including Algeria, America,
Austria, Denmark, France, Poland and Yugoslavia, reported on their findings.
Results are not strictly comparable as they used different-aged children and
reported their results quite differently.
For instance, Lyck (1990) interviewed 164 Danish children and found 11% of
8-year-olds, 30% of 12-year-olds, 86% of 14-year-olds and all parents understood
the concept of tax (from this question). He noted:
The word tax in Danish (skat) means (1) treasure, (2) darling and (3) tax.
Denmark has a large public sector, large public expenditures, and high
personal income tax rates (50–68%). It was surprising that many children did
not know about taxes and public goods. In Denmark, few taxes are “ear-
marked” and are in this way invisible and maybe difficult to grasp. Almost all
of the small children thought “tax” always meant “treasure” and some
“darling”. Older children thought it was rent or other expenses. Among
adults and the children with knowledge of taxes, an overwhelming majority
found tax rate reductions to be bad because less public goods would be
available (25 of 30 adults). (p. 587)
Kirchler and Praher (1990) interviewed thirty 8-, 11- and 14-year-old Austrian
children. They found that one third of the children thought that abolishing all
taxes would not be a good idea. Older children especially were aware of the
utility of taxes and believed that abolishing them would have negative and
positive consequences (13%, 53% and 86% of the respective age groups). Young
children either said abolishing taxes would be good (37%, 37% and 10% of the
respective age groups) or were unable to answer (50%, 10% and 3%). These
results do suggest, however, that by 14 years Austrian children have a reasonable
grasp of the concept of tax. In America, Harrah and Friedman (1990) interviewed
similar groups of American children. They found 56% of 8-year-olds said (a) and
44% (b), while for 11-year-olds, 20% said (a) 46% (b) and 30% (c). Most of the
14-year-olds (60%) said (c) while 33% said (d). These results suggest that American
children are perhaps less familiar with or sympathetic to the concept of taxation
compared to Austrian children.
Wosinski and Pietras (1990) studied around 90 Polish children in the specified age
groups. They found both 8- and 11-year-olds very ignorant of tax. The middle
group thought about positive (33%) as well as negative (35%) consequences of tax
abolition, and pointed out some disadvantages for the government and for the whole
nation (59%). These explanations were found among 37% of the older children.
Forty-three per cent of the 14-year-old subjects mentioned positive consequences,
but saw short-term consequences such as the abolition of tax for people.
Roland-Levy (1990) compared the responses of comparable groups of 8- to
11-year-old Algerian and French children (118 in total) and found the French
children better understood the purpose of taxes and that they had a more mature
economic reasoning.
Furnham (2005) interviewed 60 children aged 10/11, 12/13 and 14/15 divided
by both sex and socioeconomic status about their knowledge of taxation. The
results demonstrated clear age-related trends but fewer gender or social class trends.
At the age of 14 to 15 years old adolescents still do not all fully comprehend the
nature and purpose of taxation. Indeed, it is in this area of economic understanding
that young people seem most ignorant. Knowledge of tax grows with age yet even
the majority of the 15-year-olds did not have a full understanding of the question
with respect to age. This raises two further central questions: (1) by what age are
children/adolescents able to fully grasp the principle of tax? and (2) what experiential
factors (i.e. schooling, shopping) are likely to facilitate that understanding?
Furnham (2005, p. 711) considered:
What are the substantive economic implications of this research? First that
attitudes to taxation (and subsequently votes about tax-related issues) are
probably related to the understanding of the principles of taxation which are
acquired relatively late by adolescents. Tax avoidance and evasion are serious
economic issues and no doubt relate to many factors including a full
understanding of the history and function of taxation. For many young
people the experience of being taxed comes as a nasty shock for which many
are very unprepared. Further understanding of tax results not only from
cognitive maturation and general understanding of how social institutions
work but also primary and secondary socialisation (at the home and the
school) but also exposure to tax in the local economy. Thus, having sales tax
or VAT added on to advertised shop prices no doubt makes young people
more aware at least of the presence of the tax which they maybe motivated
to investigate. Equally to educate young people in the economic as well as
ethical and moral function of taxation seems an important step in their grasp
of socio-political realities.
In another study Furnham and Rawles (2004) asked 240 university applicants
to a premier British university (mean age 18.83 years) to complete an anonymous
14-item open-response questionnaire concerning knowledge of, and attitudes to,
taxation. Responses suggested considerable ignorance of facts (such as different
types of taxation and the amount paid on fixed incomes) but general acceptance
of taxation systems. Most knew about the government’s role in taxation and
what taxation revenue was spent on. They were in favour of income tax but few
could list other taxes or knew precisely the percentage of taxation people at
different income levels paid. Various direct quotes from the free-response items
are listed below to illustrate the range and richness of response. Results suggest
that university students remain fundamentally ignorant about the purpose,
functions and legislation concerning taxation. Implications for both education
and politics are considered:
1. What does the word taxation mean to you?

There were many very varied answers to the question. Some participants (60%)
attempted to answer the questions in terms of the purpose and function of
taxation while others offered a personal (mainly negative) view on taxation.
Overall the answers to the first question showed that the respondents certainly
understood the basic premise of the concept of taxation. Some attempted to
answer the question by providing a technical definition while others injected a
certain amount of levity.
2. Do people in other countries pay tax?

The response was 91.7% “yes” (correctly), 1.3% “no”, 3.9% “don’t know”. Around
a quarter attempted to qualify their answer by pointing out the circumstance
where people are not required to pay (i.e. insufficient income; country superstructure
too weak).
3. Who decides how much tax people have to pay?

The vast majority gave the correct answer, i.e. “The Government” (91.6%). The
remainder were either wrong (i.e. “The Treasury”) or did not know the correct
answer (8.4%).
4. What does the government mainly spend our tax money on?
Table 6.2 shows examples of the tabulated results for this question. What is perhaps
most interesting is that fewer than a quarter of the participants nominated such
things as defence. In all, 19.8% listed four or more answers, 29.4% three, 19.7%
two, 18.5% one and 12.6% none. Around a quarter of the sample expressed various
cynical beliefs about government spending.
5. Apart from income tax can you list other taxes people have to pay?
In all, only 12% of the respondents were able to list four or more taxes, 19.3% listed
three, 31.1% two, 28.6% one and 8.0% were unable to list any tax at all.
6. Do you think tax is a good thing or a bad thing?

The results were 75.8% “good”, 6.4% “bad”, 14.8% “both”, and 3.0% “don’t know”.
7. When do you think people have to start paying tax?

The correct answer was given by 45% of the respondents and 21% gave a partially
correct answer. Thus 34% either did not or could not answer, or got it wrong.
Table 6.2 Percentage of participants nominating the 11 ‘issues’ on which government spends
taxation money
Government spends taxation on: Participants’ responses (%)
1 Health 61.2
2 Education 54.0
3 Defence (arms/military) 24.5
4 Public works 24.3
5 Transport (roads) 23.3
6 Social security 20.7
7 Emergency services (ambulance) 10.5
8 Civil Service (government salaries) 10.1
9 Criminal justice system 3.0
10 Asylum seekers 1.7
11 Implementing legislation 1.3
Source: Furnham and Rawles (2004).
Table 6.3 Percentage of participants specifying taxes (other than income tax) that (British)
people have to pay
Other taxes people have to pay Participants’ responses (%)
1 VAT 58.6
2 Council tax (rates/poll tax) 41.4
3 Car/Road tax 38.1
4 National Insurance 20.3
5 Inheritance tax (death duties) 19.4
6 Import/Excise tax 7.2
7 Stamp duty 6.8
8 Corporation tax 5.1
9 Airport tax 2.5
10 Capital gains tax 2.1
11 London congestion charge 2.1
12 Windfall tax 1.3
Source: Furnham and Rawles (2004).
8. Is it against the law to avoid paying tax?

In all 77.3% said “yes”, 10.3% “yes” but specifying particular exceptions, 11.2%
said they did not know and 1.3% said “no”.
9. If a person has a job with an annual salary of £12,000 (or £1,000 per
month) what percentage income tax do they have to pay?
The mean answer was 8.80% (SD = 9.5%), with 36.3% of the respondents putting
“don’t know”, 16.5% putting “10%”, 11.4% putting “20%” and the remainder
everything from 1% to 45%.
10. If a person has a job with an annual salary of £24,000 (or £2,000
per month) what percentage income tax do they have to pay?
The mean answer to this question was 12.15% (SD = 11.97). Again around a third
(37.3%) said they did not know while 8.5% of the respondents said “10% of
income”; 14% said “20%” and 5.1% said “30%”.
11. If a person has a job with annual salary of £36,000 (or £3,000 per
month) what percentage income tax do they have to pay?
Just under 40% (39.4%) said they did not know. The spread of the guesses was
wider in this question: 5.1% of participants said “10%”, 7.2% said “20%”, 4.2% said
“25%”, 5.5% said “30%” and 13.1% said “40% of their income”. The lowest
estimate was 2% and the highest 60%.
12. What is VAT?

There were essentially three responses to the question. First, 27.8% gave a simple
definition of the term VAT, while 38.4% gave a full explanation of the term. In all
33.3% gave either a wrong explanation or none at all.
13. What is inheritance tax?

Only 14.3% of the participants gave a good explanation, while 42.7% were judged
to be basically right. In all, 42.2% either had answers missing or were wrong.
14. What is stamp duty?

Only 9.1% of the participants got this correct, while 73% noted that they did not
know or left the question blank.
Children and young people clearly remain ignorant about many aspects of taxation,
until they receive their first pay cheque with tax deducted.
Poverty and wealth

Why are some people rich and others poor? There have been over 20 studies on
the young (Baguma & Furnham, 2012). They tend to show that there are typically
three types of explanations for poverty: (1) voluntaristic/individualistic, suggesting
it is people’s choice; (2) structural/societal, suggesting that it is caused by social
factors; and (3) fatalistic/chance, suggesting that fate is the main cause. This, of
course, raises the question as to what is the definition of poverty. The results
showed that all sorts of factors, like a young person’s age, education, gender and
culture, influenced their beliefs.
Leahy (1981) asked 720 children and adolescents of four age groups (5/7, 9/11,
13/15, 16/18 years) and four social classes to describe rich and poor people and to
point out the differences and similarities between them. Adolescents perceived rich
and poor as different kinds of people who not only differ in observable qualities but
also in personality traits. Lower-class subjects tended to refer more to the thoughts
and life chances of the poor, taking their perspective, and upper-middle-class
subjects tended to describe the traits of the poor, perceiving them as “others”.
Stacey and Singer (1985) had 325 teenagers of 14½ and 17 years from a working-
class background complete a questionnaire, probing their perceptions of the
attributes and consequences of poverty and wealth, following Furnham (1982).
Regardless of age and sex, all respondent groups rated familial circumstances as
most important and luck as least important in explaining poverty and wealth. With
internal and external attributions for poverty and wealth rating moderately
important, these findings differ slightly compared to Leahy’s (1981) results, as here
adolescents clearly thought sociocentric categories to be more important than the
other two.
Wosinski and Pietras (1990) discovered in a study with 87 Polish subjects of ages
8, 11 and 14 that the youngest had in some aspects (e.g. the definition of salary, the
possibility of getting the same salary for everybody, the possibility of starting a
factory) better economic knowledge than the other groups. They attributed this to
the fact that these children were born and had been living under conditions of an
economic crisis in Poland. They had experienced conditions of shortage, increases in
prices and inflation, and heard their family and TV programmes discuss these matters.
Again it seems that socioeconomic concepts shape the speed of acquisition of
economic concepts. This is particularly the case of wealth and poverty that is often
featured in children’s storybooks.
Saving
Parents are often very eager to encourage their children to save (see section on
pocket money below). Sonuga-Barke and Webley (1993) argued that children’s
behaviour and understanding of saving, like all economic behaviour, are
constructed within the social group and are fulfilled by particular individuals
aided by institutional (particularly school) and other social factors and facilities.
Researchers need a child-centred view of economic activity, examining children

as economic agents in their own right, solving typical economic problems such
as resource allocation.
There have been comparatively few studies on children’s saving (Ward,
Wackman & Wartella, 1977). Webley and colleagues have done pioneering
research in this area (Webley et al., 1991). Sonuga-Barke and Webley (1993)
believe that saving is defined in terms of a set of actions (going to the counter and
depositing money) made in relation to one or other institution (bank or building
society), but is also a problem-solving exercise; more specifically it is an adaptive
response to the income constraint problem. Children have to learn that there are
constraints on spending and that money spent cannot be re-spent until more is
acquired. Thus, all purchases are decisions against different types of goods; different
goods within the same category; and even between spending and not spending.
In a series of methodologically diverse and highly imaginative experimental
studies, Sonuga-Barke and Webley (1993) found that children recognise that saving
is an effective form of money management. They realise that putting money in the
bank can form both defensive and productive functions. However, parents/banks/
building societies don’t seem very interested in teaching children about the
functional significance of money. Yet young children valued saving because it
seemed socially approved and rewarded. Saving is seen and understood as a
legitimate and valuable behaviour not an economic function. However, as they get
older they appear to see the practical advantage in saving.
Some countries, like Japan, show a high rate of personal saving compared to
others. The welfare state, the inter-generational transfer of money and the inability
to postpone gratification have all been suggested as reasons for poor saving in
Britain. There remains a good deal of research to be done to establish when, how
and why adult saving habits are established in childhood and adolescence.
Furnham (1999b) examined the saving and spending habits of young British
people aged 11 to 16 years. Nearly 90% of the respondents claimed to have a
regular source of income, the vast majority of which (70%) came from pocket
money (around £2.50, or $3.75, per week). Most respondents (80%) noted that
their parents would not give them more money if they spent it all, confirming their
middle-class status. Just less than three quarters (72.5%) claimed that they lent
money to friends, but just over half (54.25%) claimed that they borrowed money
from friends. The most commonly cited reason for saving (71.1%) was to buy
something special. About two thirds (66.5%) said they had a bank account (though
it may well be in their parent’s name), and most of those that did not simply
reported that they had not got around to opening one. A quarter, in fact, reported
that they intended to open a new bank account in the forthcoming year, though
there is no way of checking that. Of those who already had a bank account, just
over a third (37.9%) reported having it for more than four years.
When asked why they had opened a bank account, five reasons seemed most
important: (1) to keep money safe; (2) to earn interest on money; (3) because their
parents opened it for them; (4) because their parents advised them to open it; and
(5) because there were special offers for young people opening bank accounts.
Nearly 80% of the respondents held accounts at one of the big four banks in Great
Britain. About a fifth of the respondents had changed banks for a variety of reasons.
Visits to banks were relatively infrequent (once or twice a month). Curiously, the
respondents reported withdrawing money more frequently than depositing it,
presumably because they deposited comparatively large amounts and withdrew
small amounts.
In an interesting experimental study Otto, Schots, Westerman and Webley
(2006) were able to show saving strategies in 9- and 12-year-olds. Between the
ages of 9 and 12 years (British) children learn to deal with bank accounts and bank
facilities in a functional way. Indeed, they found that 12-year-olds frequently made
use of a deposit facility in a bank to avoid temptation.
Commercial communications
One of the most politicised of all the academic questions in economic socialisation
concerns the understanding of advertising. Most of this debate inevitably concerns
television advertising. The central question is simply at what age are children able
to: (a) understand the difference between a commercial and the programme; (b)
understand the aim or purpose of that commercial. The issue is couched in terms
around gullibility and exploitation.
Smith and Sweeney (1984) set out what they consider to be the seven principal
concerns of extreme consumerists regarding children and television advertising:
1. Children under the age of seven years do not understand the per-
suasive intent of television advertising and are therefore vulnerable to
this medium;
2. Advertising to children creates unrealistic purchasing requests and leads
to family tensions;
3. If the product is advertised, then the child must be paying more for it in
order to offset advertising costs;
4. Television creates a demand for “junk” food, and so teaches the child
poor nutritional standards;
5. Products advertised to children are by nature bad or harmful;
6. The advertising industry fails to control its own practices through
responsible self-regulation;
7. Nothing positive is gained by advertising to children and nothing would
be lost if further constraints or bans were introduced.
For all children the family models, sanctions and approves television watching. As
a consequence, the effects of advertising (and all programmes) differ depending
upon whether and how the family discusses economic issues.
The effects of advertising are a function of what the child brings to the
advertising, not only what it brings to the child. In order to examine the efficacy
of advertising to children it is important to establish a number of elementary,
obvious, but clinically important facts:
• Do children pay attention to commercials?

• Can and do children distinguish between commercials and other programmes?
• Do children understand the purpose of the commercial or the intention of
the advertiser?
• Do children correctly interpret the content of the commercial?
• Can children remember commercials?
• Do children’s viewing/reading habits more than their knowledge, values or
attitudes predict purchasing preference?
Research appears to indicate that:
• Although there are no clear figures about it, children are exposed to thousands
of commercials a year.
• Attention to commercials is not simply a matter of watching or not; there can
be various degrees of attention to the commercial.
• The degree of attention has an important influence on the other factor of the
information processing in advertising and the effects of TV advertising.
• If children’s attention to an ad is low, the effects of the ad will be low.
• The opposite is by no means true: if attention to an ad is high, the effects of
the ad can vary from high to low. Attention is a necessary but not sufficient
requirement for having an effect.
• Children’s degrees of attention to commercials will actually depend on various
characteristics related to the message, the child and the viewing environment.
• Younger children (i.e. until approx age 7) usually like commercials and pay
much attention to them; older children show a greater loss of attention when
ads are coming on.
De Bens and Vanderbruaene (1992, p. 68) summarising their exhaustive review

noted:
Younger children like commercials very much; older children, on the contrary,
showed a greater loss of attention when commercials came on. A majority of
six- to eight-year-old children were found to distinguish commercials from
programmes, and by age ten nearly all children could do so. Most children
of age eight had a medium understanding of advertising intent. Younger
children as well can understand the intent of commercials, but this will
largely depend on influences exercised by their parents, peers, school, and

by their cumulative exposure to advertisements. Understanding commercial
intent proved to be important for developing “cognitive defences” against
commercials, due to an increase in the child’s scepticism towards the
commercial messages.
The child’s memory for a certain commercials is influenced by child-
related factors such as age, cognitive development, advertising-related
factors (content, usual features, slogans, music …) and external factors (such
as the viewing environment). The influence of TV commercials on children’s
consumption behaviour is not greater than that of other factors.
Chan and McNeal (2006) looked at 1,758 Chinese children aged 6 to 14 years.
They essentially tested two models: the cognitive development model, which
simply states that understanding of commercial communication develops as
children age, vs. the social learning model, which suggests that learning from
parents and television itself are the primary determinants of advertising literacy.
The former was more important though results did indicate that in the case of
girls, household income and exposure to television all impacted in a significant
way on advertising literacy.
Pensions
Do young people understand the benefits of, and need for, pensions? Do they
think it is an unimportant issue or one only worth considering when one is
older? There is very little in the social science literature on pensions. Piachaud
(1974) studied pension attitudes of 1,200 people in order to discover people’s
opinions on the adequacy of pensions, how much they believed pensions should
be and whether they would be willing to pay for higher pensions. Over 90% of
the respondents thought that pensions were inadequate (35% actually labelling
them “very inadequate”) and 80% of all those questioned were willing to be
worse off so that pensions could be increased. Also, the people questioned as to
how much they thought the state pensions should be gave an answer that was
almost double the pension at the time, with the 18- to 24-year-old age group
wanting the highest pension. The study showed that although people wanted
larger pensions, they were not fully willing to pay for them. Currently the basic
state pension provides less than 14% of earnings of pension-age Britons (Webley
et al., 2001).
Furnham and Goletto-Tankel (2002) studied the beliefs of 452 16- to 29-year-
old Britons. They asked various open-ended questions like:
• At what age are people entitled to receive the state (old age) pension?
• How much do you think they receive per week for a full basic state retire-
ment pension?
• Imagine a person wants to receive £300 per week (today’s money) when they
retire in 20 years. How much do you think they would have to put into a
private scheme per month to receive this?
The students believed in the need for a private pension, agreeing that the state
pension was not at all adequate, which is exactly what Piachaud (1974) found over
25 years ago. Such trends in attitudes appear to be ingrained in the British populace.
The youths found the topics of pensions and life assurance boring and not worthy
of considering at this point in their lives, owing to the fact that they were not
considering taking out either a pension scheme or life assurance.
Of particular interest were the results that showed that those that wish to save
money believe that private pensions are quite confusing and that state pensions are a
legal right and something that may be necessary in old age. These young people all
believed that state pensions were unsatisfactory at present (the same results as found
by Piachaud, 1974) and likely to get worse, and all agreed that they would need
occupational and private pensions if they were to live comfortable lives when retired.
Clearly this is an under researched issue. A central question is whether students
understand the meaning as well as the mechanisms of private and state pensions.
Currently many seem ignorant, weary and fatalistic about the whole issue.
Life assurance
When do young people understand the concept and, indeed, the practice of life
assurance? There appears to be almost no published literature to date on people’s
understanding of, or attitudes towards, life assurance. An exception is the paper by
Economidou (2000), who looked at 203 British adults’ decisions on whether to
insure or not to purchase insurance. Those who were positive about insurance
tended to be more future-orientated and believed in the necessity of it, while those
with negative views tended to be more present-orientated and non-attached to
possession. Older, richer respondents with children tended inevitably to be more
positive to all types of insurance (health, life, flight, home contents).
In Britain, but not the USA, there is a distinction between life assurance and
insurance. The difference is that for assurance the idea is that one insures against a
certain fact (death) although the timing is uncertain, while for insurance one insures
against an event that might happen but which one wants covered by a policy.
Furnham and Goletto-Tankel (2002) questioned over 450 British 16- to
21-year-olds on the topic. They asked questions like:
• What does life assurance mean to you?

• What happens at the end of a life assurance policy?
• What is an endowment policy?
• What is an annuity? When does it pay out?
They were also asked to fill out an attitude questionnaire. Higher scores indicated
higher agreement. The analysis showed that the items seemed to factor into
five themes.
The researchers found that understandings of savings, pensions and life assurance
were significant predictors concerning the attitudes towards the three economic
issues. Understanding of life assurance best predicted positive attitudes towards
saving, whereas understanding of pensions predicted negative attitudes towards
saving behaviour. This suggests that those with a greater understanding of life
assurance both save money more regularly and think of saving as being positive.
This may be because those with such understanding think more about long-term
benefits of saving, and see it as a rewarding and socially acceptable goal (Sonuga-
Barke & Webley, 1993).
Overall the findings seem to suggest that young people were ignorant about and
not interested in life insurance, which they saw as an issue they only needed to deal
with later in life.
Other issues
Children’s understanding of various other issues has been examined. Thus Diez-
Martinez, Sanchez, and Miramontes (2001) looked at Mexican adolescents’ (12
to 17 years) understanding of unemployment. They were interested in how they
responded to parents, relatives and friends being unemployed. They examined
particularly the adolescents’ individual and social explanations for the cause of
unemployment. They found, as predicted, comprehension of the phenomena of
unemployment to be related to age, cognitive ability and social origin of the
young people.
Two studies on Black and White South African children soon after the end of
Apartheid are of particular interest (Bonn, Earle, Lea & Webley, 1999; Bonn &
Webley, 2000). The researchers’ interest was in studying a particular society,
choosing rural, urban and semi-urban groups that had seen big race differences in
wealth and very different opportunities for social mobility. Some of their answers
as to the origin of money were unique: Whites, God, the bank, Nelson Mandela,
factories or gold mines. The poorest rural children had the weakest understanding
of money or banking. Yet the researchers showed that as children got older their
ability to integrate and understand economic concepts grew, irrespective of their
particular social background.
It seems easier for young people to identify individual causes than social
causes. Older children identified poor training/experience, conflicts with boss/
colleagues, punctuality and absenteeism. They also understood better that people
become unemployed because their companies go broke, their products don’t sell,
there are not enough working opportunities, or because of government economic
policies, currency devaluation and the introduction of new technology. As
children get older they begin to appreciate how social forces influence individuals’
economic behaviour.
Learning about money

The importance of how and when children and adolescents begin to understand
money and the working of the economy cannot be underestimated. Research on
what young people (children and adolescents) know about and do with money is
clearly important not least because of their increasing purchasing power. Their
ideas and understanding are affected by motivation and social experience. Whilst
the former is not easy to influence, the latter is. Various groups are interested in
increasing the monetary literacy and sensible behaviour of young people.
Studies have shown how economic understanding is acquired gradually and
often goes through recognisable stages. However, personal experiences are shaped
by gender, social class, and ethical and national culture, and these often powerfully
modify how, and when, young people acquire monetary understanding. Thus,
whereas in many aspects of cognitive development children from the First
(developed, Western) World seem to be more advanced than comparably aged
children from the Third (developing) World, the reverse is often true of economic
and monetary understanding. This is primarily due to children from the developing
world having to be much more involved in day-to-day economic activity. Five-
year-olds may sell fruit while their parents are away and soon acquire knowledge
of change.
Social and economic understanding seems to lag behind understanding of the
physical world. Similarly, there seems to be less research on the former than the
latter. There are jobs in the public understanding of science: perhaps we need to
do as much research on the scientific understanding of the public!
7
ECONOMIC SOCIALISATION AND
GOOD PARENTING
Children are rarely in the position to lend one a truly interesting

sum of money. There are, however, exceptions, and such children
are an excellent addition to any party.
Fran Lebowitz
In bringing up children, spend on them half as much money and

twice as much time.
Anon
No matter how bad a child is, he is still good for a tax deduction.
American proverb
Introduction
This chapter concerns how young people come to acquire their money beliefs and
behaviours at home, school and work. It concerns how parents try to educate and
socialise their children into becoming economically responsible citizens and how
that can go badly wrong. Certainly the growth in books for researchers, practitioners
and parents suggests that there is considerable interest in how, why and when
young people acquire a working knowledge of the economic world. One obvious
other factor that must account for this rise in interest is the increasing spending
power of young people. Many questions remain about young people from rich,
First World countries. For instance, are they becoming more or less materialistic
(Rinaldi & Bonanomi, 2011)?
How, when, and where do young people acquire their economic knowledge
and money beliefs and behaviours? The role of parents is self-evidently important.
Parents’ lifestyle, values, parenting style and child-rearing attitudes are important.
They model delay of gratification, future orientation, conscientiousness and the

value of saving. They not only model behaviour but also discuss, guide and try to
induce certain good habits as they see them.
To do this research requires having large longitudinal samples representative of
the population traced over time. Some has been done, such as the work of Webley
and Nyhus (2006), who used Dutch data and found, indeed, that parental behaviour,
like discussing financial matters, as well as their own values, did have a predictable
but weak impact on their children’s later behaviour. Clearly many factors impact
on a person’s money beliefs and behaviours.
Children are economic agents and do have an autonomous economic world,
sometimes called the playground economy. They swap and trade “goods” of value
to them, a practice sometimes discouraged by schools and parents. Webley and
Nyhus (2006) believe that by adolescence, children’s understanding of economic
situations is “broadly comparable” to that of adults.
Studies have examined and found evidence of sex differences in how young
people are socialised with respect to money and their resultant attitudes (Rinaldi &
Giromini, 2002). Even in gender-sensitive countries like Norway, researchers have
found that girls and boys have divergent preferences and spending patterns. Brusdal
and Berg (2010) found the role of parents crucial in the understanding and
consumption patterns of their children. They conclude:
How family members keep, use, and discuss money is not a minor issue.
Money is a tool for well-being, for it enables the purchasing of commodities
to satisfy individual needs. It is up to the adults of the family to choose the
best practice in managing their income and expenditures. This is a matter of
financial capability: there is no single model of behaviour, but each family has
to find the way that is the most appropriate for it.
Careful money management is certainly a good way to avoid quarrels. It
is therefore extremely important, especially in blended families, to pay
attention to money management. That requires various capabilities of the
family members. Well-informed and financially capable adults are able to
make good decisions for their families and to thereby increase their economic
security and well-being. (p. 5–6)
Parental involvement and motivation

Inevitably parents have a big impact on their children’s monetary behaviour.
This depends on how either parent controls the family budget (Kenney, 2008);
how much parents are happy to spend on their children’s primary and secondary
education (Mauldin, Mirmura & Uni, 2001); parental divorce, stability and
conflict (Eldar-Avidan, Haj-Yahia & Greenbaum, 2008); and the amount of time
Economic socialisation and good parenting 141
fathers spent with their children (Medvedovski, 2006). One study showed a
direct link from maternal and paternal job insecurity to the money anxiety and
management of their children (Lim & Sng, 2006). This was seen as evidence of
spilt-over theory.
Parental modelling and direct teaching about money can have both positive and
negative consequences. Solheim, Zuiker and Levchenko (2011) showed parental
style was important. They found in some families that it was an openly discussed
issue whereas in others things were kept secret, while in others still it was very
clearly a course of conflict and stress. They found three “socialisation pathways”
leading to different money management outcomes:
One outcome could be characterised as positive and effective; students who

observed that their parents saved and managed their money taught them
the importance of saving and money management. Another ultimately
effective pathway could be characterised as negative; students observed
negative ramifications of their parents’ inability to save or manage their
money. Contrary to what we might expect, this negative model resulted in
students’ resolve to not repeat their parents’ mistakes. A third pathway also
started out with negative saving or management modelling, but the outcome
was also negative; like their parents, students were currently neither saving
or managing well. (p. 107)
Many studies have looked at the intergenerational transmission of consumer

attitudes, behaviours and values. Family structure and climate impact directly on
children’s consumerism. That is, the quality of a child/adolescent’s relationship
with their parent is primarily related to their money management practices.
Clinical studies on compulsive buyers have pointed to conflicted families that
could be over protective, indifferent and emotion denying, rejecting or
perpetually in a state of power play. It has been shown that some parents use gifts
and money as inadequate substitutes for encouragement and affection, which in
turn leads to unhealthy “pathological” consumption in children (Fabian &
Jolicoeur, 1993).
Developmentalists have shown for a long time that parental involvement during
childhood is a good predictor of a child’s adjustment and well-being as well as their
educational and occupational mobility. But does it lead to better financial
management? This question was addressed by Flouri (2001) in a study of over
2,500 14- to 18-year-old British adolescents. It examined their family structure,
socioeconomic status and parental involvement as well as their money management.
Results confirmed the hypothesis: low parental involvement was significantly associated
with poor money management. However, that association was weaker if the young
person experienced family disruption. It is concluded that familial climate appears
to be uniquely important in a wide range of adolescent behaviours.
Webley and Nyhus (2006) used Dutch data to compare the future orientation,
conscientiousness and saving of 16- to 21-year-olds with that of their parents. They
found, as predicted, that parental behaviour and values did systematically impact on
those of their children. They suggest that the mechanisms for this intergenerational
transmission of beliefs and behaviours are modelling of behaviour, frequent
discussions and guidance about money-related issues, attempts to instil good money
habit formation and independence training. At the heart of the issue is thinking
about the future and planning for it.
What sort of parents teach their children the economic values of thrift and
saving? Indeed, it has been suggested that parents care less about teaching thrift
than teaching various other virtues. In fact there is longitudinal literature in support
of the well known post-modernist view that materialist values are being replaced
by post-materialistic values like a need for belonging and self-esteem.
Anderson and Nevitte (2006) quote various sources of evidence that support the
idea that virtues like thrift and saving are on the decline: that people no longer
identify saving with morality and that the stigma attached to bankruptcy has
significantly reduced. People thought it much more important to teach tolerance
than thrift. The authors note that thrift implies wise money and resource
management, which leads to savings behaviours, which in turn is linked to debt.
Some see rising debt being caused by economic factors. On the supply side there
is increasing access to capital from credit suppliers and relaxation in credit laws
leading to lower interest rates, more competition for borrowers and many deferred
payment schemes. On the demand side there are economic changes in recessions
with high unemployment leading to bankruptcy. There have also been changes in
the law – with regard to insurance and social security – which it is argued reduce
moral hazard and encourage more risk.
But psychologists and sociologists talk of the culture of thrift, frugality and
saving, which is the result of parents’ schooling and general social pressure. In their
study Anderson and Nevitte (2006) found three things. First, they found that those
who cannot do, teach. That is, those parents who did not save or were in debt were
more likely to choose thrift as something they believed they should teach their
children. Second, education is a strong predictor of the priority parents place on the
value of teaching thrift. Therefore more educated parents educate their children
more. Third as parents get older they stress this thrift education more. The results
seem to concur with many other studies, which suggest that money beliefs and
behaviours are passed on by parents to children.
What motivates parents to give money to their children? In a typical economic
analysis Barnet-Verzat and Wolff (2002) considered three theoretically based
hypotheses for this intergenerational transfer of money: altruism, exchange and
preference shaping. We know that parents who emphasise prosocial and general
altruistic values tend to give more money and try more often to meet the perceived
needs of their children. But this can also been seen as a salary in exchange for the
completion of household tasks. It is also used to shape behaviour such as when
money is given for school grades attained.
In their study of over 3,000 French families, Barnet-Verzat and Wolff (2002)
attempted to test the various hypotheses. However, they did recognise two
problems. The first was that parents often have multiple motives – not just one
single, primary motive. The second is that the exchange hypothesis may equally be
difficult to test because reciprocities both immediate and delayed are often rather
difficult to detect. They argued that one could simply ask the question of parents
themselves but that motivational data is best seen in actual behaviour.
Their careful econometric analysis showed that everything depends not on the
size of the transfer but its regularity. Regular payments look more like exchange
(the buying of children’s services) while irregular payments are more like altruistic
gifts. Family size as well as age, education and income of the family were
systematically and logically related to pocket money motives. Richer parents gave
more one-off gifts. Parents with more education and more professional jobs were
more punctual and regular in their giving. Parents are more likely to buy their
children’s help/labour as the size of their family increases. Richer parents with
fewer children are more likely to use pocket money to reward school results.
Clearly, family size is an important variable because it directly affects parents’
costs, but there are also issues around fairness and ensuring children all get treated
equally. What is particularly interesting about studies such as this is that they
examine what parents actually do as opposed to what they say they do. Some
parents feel pressured to start pocket money systems; others seize it as an excellent
educational opportunity. Clearly their ideas and motives are complex. Further,
they are inevitably constrained by various economic and social factors from doing
what they might like to do.
Many have observed that children who have, and get, everything they want
neither understand money nor respect those who gave it to them. Parents, it is
argued, can set up for themselves potential time bombs in the way they socialise
their children.
Allowances, pocket money and family rules

Parents attempt to educate their children about money by providing a good
example and instruction. But most of all they develop allowance or pocket-money
systems that they believe will teach their children important lessons with regard to
pocket money. It is a well-researched topic and there are many books for parents
that provide suggestions and rules that are supposedly beneficial. Parents have
many motives when setting up and putting into practice their pocket-money
allowance system. They use it as an incentive to do things, to demonstrate their
altruism, and also to try to shape their children’s preferences (Barnet-Verzat &
Wolff, 2002, 2008).
Furnham (2001) showed that parents’ education, income and political beliefs, as
well as their own attitudes to money, affected their pocket money beliefs and
behaviours. Those parents who were “money smart” and believed in the socialising
power of pocket money were most strict, showing “tough love” with respect to
money and how it was spent. Pocket-money studies done in different countries have
obviously shown different results but there are clear trends. For instance, it seems to
be the case that (perhaps paradoxically) children from lower socioeconomic status
families get more pocket money than those in higher social class families (Scragg,
Laugesen, & Robinson, 2002). There remain consistent differences in how children
are treated with respect to money and the “lessons” they learn (Ruspini, 2012).
Until recently there has been little academic research in this area and most of the
information comes from marketing studies. In Britain, for example, a regular
survey of pocket money has been carried out by Bird’s Eye Walls (Table 7.1). This
reveals that the average pocket money per week in 2,000 was £3.10, that it
increases with age, that boys get on average slightly more than girls and that the
highest rates of payment are in Scotland, where average payments are almost half as
much again as in the south-west of England. Though in some years pocket money
has gone up by less than the rate of inflation and in other years by more, overall it
was 25% higher in 1989 than it would be if it had simply kept pace with inflation
since 1975.
In 2009 the average 10-year-old received £2.70 and the average 15 year old
£5.66 per week. However, when you add pocket money, presents of money, and
money earned, this goes up to £7.50. Nevertheless, young people claimed to save
£4.25 for specific goods and experiences (Children’s Mutual, 2010). By the end
Table 7.1 Children have a large disposable income: consider the British data from the Walls’
annual survey, in the last century
Year TOT Boys Girls Age:5–7 Age: 8–10 Age:11–13 Age: 14–16
1982 £1.75 £1.72 £1.77 £1.14 £1.40 £2.09 £2.42

1983 £1.51 £1.66 £1.43 £0.78 £1.16 £1.68 £2.60
1984 Unknown Unknown Unknown Unknown Unknown Unknown Unknown
1985 £1.85 £1.94 £1.74 £0.96 £1.07 £1.91 £3.51
1986 £1.94 £2.02 £1.86 £0.91 £1.24 £2.23 £3.41
1987 £2.20 £2.19 £2.20 £0.84 £1.21 £2.28 £4.58
1988 £2.08 £2.13 £2.01 £1.00 £1.54 £2.36 £3.51
1989 £2.71 £2.73 £2.69 £1.24 £1.61 £2.80 £6.05
1990 £3.54 £3.23 £3.85 £1.29 £1.90 £3.53 £9.16
1991 £3.96 £4.11 £3.81 £1.48 £2.35 £4.01 £9.20
1992 £3.86 £4.11 £3.59 £1.27 £2.49 £4.28 £8.51
1993 £4.15 £4.28 £4.03 £1.67 £2.72 £4.04 £9.77
1994 £4.30 £4.52 £4.08 £1.98 £2.63 £3.95 £9.60
1995 £4.18 £4.08 £4.28 £2.14 £2.34 £4.30 £8.90
1996 £4.85 £4.51 £5.26 £2.41 £2.81 £4.32 £10.57
1997 £4.49 £4.31 £4.67 £2.07 £2.59 £4.41 £10.25
1998 £5.73 £6.65 £4.66 £2.41 £3.13 £5.46 £13.06
1999 £5.48 £5.47 £5.49 £2.53 £3.62 £5.25 £11.55
2000 £6.09 £6.08 £6.09 £3.12 £4.04 £6.27 £12.10
Source: Adapted from Walls (2000).

of 2011 the average 15-year-old received £8.35 per week. A press release from the
Halifax Pocket Money Survey of 2011 noted the following:
• Young people spend more than they claim to receive (£110 vs. £83).
• In all 60% said that they did not need more money to be happy.
• They still live in a cash society: 85% get paid in cash, 6% online.
• In all, 90% said that they wanted to learn more about money.
• In 2011 only 12% thought that they would have no debt at age 25.
• Around a third saved for their long-term future.
• Around a quarter earned their own money through a part-time job.
• Around two thirds keep a good track of their money.
• 33% of girls and only 24% of boys said that money worried them.
• 58% of girls compared to 43% of boys said they worried about not
having enough money for the future.
• Girls were more likely to say that they would get into future debt.
• They preferred to learn about money from experts.
Another British study of over 7,500 children and adolescents under 18 hit the head-
lines because it was claimed that average pocket money had hit £1,000 per year.
In a report called MoneySense, the British-based RBS Group reported on a
research panel of 50,000 12- to 19-year-olds who were followed over five years
(2007–2011). Their report makes interesting reading.
Lewis and Scott (2003) used a polling company to look at what British parents
did themselves to encourage financial literacy in their children and what role they
believed schools should play in economic socialisation. All the children were
younger than 16 with 50% below 10 years. They were also interested in parental
determinants of those beliefs. That is, to what extent did factors like parental sex,
age, income, social class and education impact on their attitudes and behaviours?
The researchers found the parents engaged in a wide range of activities. Some
parents even taught their children about shares. The two factors that related most
closely to their behaviours were the social class of the parents and the age of the
children. In short, middle-class parents (I & II) did most while white working-class
parents (III & IV) did least finance-related educational activities in the home. Table
7.2 reflects the data.
They were also asked what role they believed schools should play. Clearly the
parents were very enthusiastic that schools should play a role in encouraging
economic literacy. Examination of the various parental and child factors showed
that only one factor played a consistent part; this was the social class. Fewer
working-class parents (unskilled or semi-skilled) compared to other occupations
felt the need for schools to teach economic competency.
To a large extent one could see these results as depressing and in part accounting
for the (non-genetic) transfer of money attitudes and behaviours across generations.
Table 7.2 The proportion of respondents who believe schools should teach 11 finance-
related topics at secondary school, and levels of significance for the logistic
regression analyses with the seven background variables
Finance-related activities Yes (%) Significant predictors
Careers/getting a job 84 Social class

Managing personal finances 71 Social class
Lessons about how a bank operates 67 Social class
Practical lessons (i.e. opening a bank account) 62 Social class
Understanding the use of credit and debit cards 61 Social class
Understanding borrowing and interest rates 60 Social class
Economics/about the economy 57 Social class
Managing the household finances 56 Social class
Banking over the Internet 35 Social class
Purchasing products or services over the Internet 27 Social class
Borrowing over the Internet, via banks and loan companies 24 Age of respondent
Source: Lewis and Scott (2003).
Middle-class parents believe in, practice and prefer schools to get involved in
economic socialisation or what they no doubt call something like sensible money
attitudes and practice.
Lewis and Scott (2003) noted that what they called personal finance education
in schools needs to be “sensitive” to the social backgrounds and financial
experiences of the pupils lest children from an “excluded” background feel
further separated.
Certainly, children in both primary and secondary schools arrive with a set of
beliefs and practices part determined by their and their parents’ abilities but also
their direct and deliberate socialisation. Just as working-class parents read to their
children less than middle-class parents so they try to instil economic knowledge less
consistently. It is surprising that they do not even abrogate that responsibility to
schools more than middle-class parents. One obvious question is who best to target
if one hopes to improve the financial literacy of young people: parents, schools or
the young people themselves. Inevitably the answer is all three but the first and
most probably most important target must be parents.
American studies show that around three quarters of ninth graders (15-year-
olds) received an allowance (Mortimer et al., 1994). They also show that the
allowance is a form of salary, as American parents demand some work performance
for the receipt of allowance money. French surveys paint a similar picture but also
reveal that parents report giving much lower amounts than children report
receiving, essentially because parents focus only on pocket money whereas children
count all money they receive (Micromegas, 1993). This gives an idea of when
pocket money may be an important socialising agent since it constitutes 100% of
the income of French 4- to 7-year-olds but only 14.5% of the income of 13- to
14-year-olds (half of French 14-year-olds work regularly).
Studies on pocket money/allowances

Over fifty years ago, Prevey (1945) studied 100 American families’ practices in
training their adolescents about money. They concluded that boys were provided
with experiences that are more valuable in training children in the use of money
than girls. They found parent practices in training children in the use of money
tended to be positively related to later ability to utilise financial resources in early
adulthood. Later money habits were clearly related to parental practice of
encouraging earning experiences and discussing family financial problems and
expenses with high-school-age children.
Marshall and Magruder (1960) found that children’s knowledge of money is
directly related to the extensiveness of their experience of money – whether they
are given money to spend; if they are given opportunities to earn and save money
– and their parents’ attitudes to, and habits of, money spending. However, they did
not find that children had a greater knowledge of money if parents gave an
allowance; neither will children given opportunities to earn money, have more
knowledge of money use than children lacking this experience.
In a later study Marshall (1964) found that there was no difference in financial
knowledge and responsibility between children given an allowance and those not
given an allowance (allowance and non-allowance children did not differ in mean
scores on any of the ten measures of financial knowledge and responsibility).
Parents who gave their children allowances differed in other practices and in
attitudes about money from parents who handle the problem of providing spending
money for their children in other ways.
Abramovitch et al. (1991) investigated how spending in an experimental store was
affected by children’s experience of money. Their participants (aged 6, 8 and 10)
were given $4 either in the form of a credit card or in cash to spend in an experimental
toy store that offered a variety of items priced from 50 cents to $5. They were
allowed to take home any unspent money. Children who received an allowance
spent roughly the same amount in the cash and credit card condition ($2.32 vs.
$2.42), but those who did not receive an allowance spent much more with a credit
card ($2.82) than when they only had cash ($1.76). After they had finished in the
store the children were given a pricing test in which they had to say how much
familiar items (e.g. running shoes, television) cost; children who received an allowance
scored higher on this test, as did the older children. These results suggest that receiving
an allowance may facilitate the development of monetary competence.
Though the limited evidence does suggest that allowances are effective, it seems
as if parents make only limited use of their potential as a vehicle for economic
socialisation. Sonuga-Barke and Webley (1993) focused specifically on whether
parents used pocket money to teach children about saving. They found that, for
most parents, pocket money was seen as money to be spent, not money to be
saved. Though there were some half-hearted attempts to foster saving (e.g. by
parents offering to match any money saved by the child) this opportunity was
rarely taken up.
Newson and Newson (1976) carried out an extensive study of over 700 7-year-
olds. They found that most of their sample could count on a basic sum of pocket
money, sometimes calculated on a complicated incentive system. Some children
appeared to have been given money that was instituted for the express purpose of
allowing the possibility of fining (confiscating); others were given money as a
substitute for wages; while some had to “work” for it. Over 50% of the sample
earned money from their parents beyond their regular income but there were no
sex or social differences in this practice. The authors did, however, find social-class
differences in children’s unearned income and savings.
Furnham and Thomas (1984a) found that older British children received more
money and took part in more “economic activities” such as saving, borrowing and
lending. Class differences were also apparent: working-class children received
more money but saved less than middle-class children. Middle-class children also
reported more than working-class children that they had to work around the house
for their pocket money and tended to let their parents look after the pocket money
that they had saved.
Furnham and Thomas (1984b) investigated adults’ perceptions of the economic
socialisation of children through pocket money. Mothers turned out to be more in
favour of agreeing with children in advance on the kinds of items pocket money
should cover, more in favour of giving older children pocket money monthly, and
also more in favour of an annual review of a child’s pocket money than fathers. It
is possible that this is due to the tendency for women, both at work and in the
home, to have greater contact with children and therefore a better understanding
of their capabilities.
Miller and Yung (1990) found, contrary to adult conceptions, no evidence that
American adolescents understand pocket money to be an educational opportunity
promoting self-reliance in financial decision making and money management.
Most adolescents saw pocket money as either an entitlement for basic support or
earned income. The authors argue that the significance of allowances for adolescents
is not the receipt of money per se but how the conditions of receipt are evaluated,
the extent of work obligations, and monetary constraints on the amount, use, and
withholding of income. In families pocket money and allowances are systematically
related to all other areas of socialisation.
Feather (1991) in Australia found the amount of pocket money provided was
related quite naturally to the child’s age, but also with the parents’ belief about the
need to foster a strong and harmonious family unit. For the older children, parents
saw independence training and meeting the child’s needs as more important factors
and there was some evidence of the difference between mothers and fathers. The
parents’ work ethic did not affect the amount they gave yet there was evidence that
pocket money is bound up with other parental values and practices.
In Canada, Pliner, Freedman, Abramovitch and Darke (1996) were concerned
with the allowance system of household allocation. They conducted a number of
experiments comparing children who received an allowance with those who did
not. The children who received an allowance were found to be better able to
make use of credit and to price goods. These skills also increase with age and it
appears that the allowance system brings forward the acquisition of consumer
skills. Pliner et al. suggest that the allowance system works because it engenders
a relationship of trust and expectation that requires the child to become financially
“literate” and experienced.
Another Canadian study looked at 81 white, middle-class, two-parent intact
families and the family practices associated with allowances (Kerr & Cheadle,
1997). The parents believed that the allowance system taught money management,
saving and independence, and that one has to work hard for rewards. Their system
meant 80% agreed that children could get extra money for extra work but that
money was not for school grades or good conduct. Allowances were chore-related.
Around two thirds of parents said they would stop allowances once their children
were working. They also imposed some restrictions on what could be done with
allowances (required to save, and not purchase certain goods).
In France, Lassarres (1996) found that the best allocation strategy is the giving of
allowances paired with discussions of the family budget. The mechanism that makes
the allowance system so effective is the possibility it affords for discussions about
financial matters within the family. Lassarres suggested various reasons why parents’
allowances change as the child develops. The allowance is an attempt to control the
increasing demands made by the child. Thus, a straightforward pocket money system
is often the first thing to be introduced, which then gradually evolves into a full
allowance system that includes a variety of obligations on both parties.
Three British studies examined the issue of pocket money and allowances.
Furnham (1999a) found that most British parents (91%) were in favour of starting
some weekly based system for 6-year-olds, with the amount of money increasing
linearly over time. The greatest increase was found to occur between 7 and 10
years, and the least between 15 and 18 years. Around three quarters of the sample
believed allowances should be given weekly, and that children should be encouraged
to save and take on a part-time job. Parents had consistent ideas about rules and
responsibilities associated with the allowance system they established, and how it
educated their children in to the world of money.
Furnham and Kirkaldy (2000) replicated the above study on 238 German adults
and compared their results to those of Furnham (1999a). The results were overall
similar. In all 91% of British and 99% of Germans believed in the early introduction
of pocket money: the British favoured starting at 6.73 years, the Germans at 6.40
years. Identical numbers (62% from both groups) thought they knew the “market
rate” for their children’s pocket money: that is the average amount given to
children of that age.
Furnham (2001) reflected more specifically on individual difference factors
associated with parental allowance beliefs. Previous studies have concentrated on
demographic and national differences. This study focused on three types of parental
individual difference variables in addition to demographic differences. Many of the
attitudinal questions asked in the studies by Furnham (1999a, 1999b) and Furnham
and Kirkaldy (2000) served as the dependent variables.
The following results (Table 7.3) are taken from a recent British survey of over
500 parents (Milner & Furnham, 2013).
TABLE 7.3 British parents’ beliefs
Part 1: Recommendation Yes (%) No (%)
Provide children with tools to save money (e.g. transparent piggy 97.4 2.6
banks)
Play with real or fake money: count, stack, guess the cost/value of 94.4 5.6
things
Describe the difference between needs and wants (food vs. ice-cream; 97.2 2.8
medicine vs. a CD player)
Encourage coin identification and change calculations at home and in 97.4 2.6
shops
Start pocket money as early as 3 to 4 years old 38.2 61.8
Make pocket money related to behaviour (i.e. specific chores 84.5 15.5
completed appropriately and on time – gardening, cleaning, tidying)
with the aim of them eventually becoming responsible for their
own jobs and job charts
Explain why they cannot have certain items they ask for (e.g. it costs 98.2 1.8
too much, the money ran out)
Use coins to rehearse arithmetic problems 89.5 10.5
Try to help them divide money into spend and save piles regularly and 88.0 12.0
wisely
Take them shopping and explain the decision making behind your 81.5 18.5
purchasing behaviour
Discuss contents, values, options of different goods when shopping 84.0 16.0
particularly in supermarkets
Let them watch your money transactions, i.e. how to receive, calculate, 85.6 14.4
query change
Explain and set up a budget for childhood money (lunch, bus fare, 75.7 24.3
school trips, breakages)
Introduce the concept of “citizen of the household” and what 75.8 24.2
responsibilities this entails (e.g. sharing, giving, honesty)
Get them into banking; formal savings. Explain how banks work. Go to 92.6 7.4
the bank, read leaflets and open an account (s) with them
Let them read about their investments, e.g. bank statements/share 81.2 18.8
certificates if they have any
Encourage them to have a (big) long-term savings goal 84.5 15.5
Show them family bills (food, rent, insurance) and explain them fully 68.3 31.7
Explain and model charity giving and encourage your child to do 82.5 17.5
likewise
Establish rules for what happens to “gift money” from others at 68.2 31.8
Christmas, birthdays, etc.
Explain issues like tipping, tolls, tokens, consumer rights, value-for- 78.0 22.0
money, comparative shopping
Part 1: Recommendation Yes (%) No (%)
Buy and explain consumer magazines and how they work 28.9 71.1
Watch and/or read television commercials together and analyse them 50.8 49.2
for motive, product value and technique
Explain tax (income and VAT) and tax your children’s pocket money 35.5 64.5
(say 10%) to have a family tax where the whole family both
contributes and decides how to spend it. Family meetings should be
called to discuss this
Lay down rules (with explanations) for borrowing, lending and trading 64.7 35.3
both within and outside the family
Explain the use of verbal and written contracts about money related 71.0 29.0
issues (e.g. payback after loans)
Establish rules/policies about breakages, money found on the street, 88.5 11.5
mistaken over/under payments, shoplifting
Encourage, model and educate the use of debit and credit cards 78.7 21.3
Encourage personal and internet banking. Discuss and calculate interest 71.7 28.3
with them
Direct debit pocket money into their accounts, perhaps as a standing 53.3 46.7
order
Make them personally and totally responsible for their own bills – 66.0 34.0
especially clothes, mobile phones, computers
If you loan them money agree and stick to reasonable repayment terms 73.7 26.7
(period, interest)
Charge them board if they have an income from part-time work 41.9 58.1
Help them save wisely, i.e. discuss where best saving conditions are 94.5 5.5
likely to be found
Encourage regular, sensible, thoughtful budgeting 94.0 6.0
Explain the stock-market and together play with a set amount (e.g. 37.1 62.9
£100) by starting a portfolio, even at 13 or 14 years old
Show and explain family insurance policies, schemes and payments 51.9 48.1
Explain the concept of a will and the details of yours specifically with 65.6 34.4
respect to financial implications
Discuss your income and how you spend it honestly 61.3 38.7
Encourage smart consumerism: keeping receipts, knowing rights, 89.1 10.9
understanding shop sales, knowing store return policies, reading the
labels
Discuss entrepreneurship and opportunities to supplement income 78.1 21.9
Encourage your child to do part time (Saturday) jobs 88.9 11.1
Ask for evidence of their budgeting plans and decision making 47.7 52.3
Source: Milner and Furnham (2013)
Quizzing your children

This was a multiple choice “situational test” that required respondents to indicate
how they would behave in a range of money-related situations with their children.
The test had clearly been devised as a self-assessment quiz but the results from this
study showed both a normal distribution and a satisfactory internal reliability. In

essence the test measured how “sensible” parents were with regard to their children
and came at the beginning of a book that attempted to teach children to be better
informed about money.
The results showed that the higher participants scored on this test the more
they approved of parental involvement in the economic socialisation of their
children; they believed more in stressing regularity but were less “liberal”.
“Money-smart” parents clearly believed that it was their responsibility to model
monetary behaviour and to discuss with their children such things as
advertisements, buying decisions, and family budgeting. On the other hand they
did not endorse the views that pocket money should not be based on chores or
that it should never be withheld. This may be seen as an example of what the
book called “tough love”.
These are the first six items:
1. Your 7-year-old daughter loses the $5 she got for her birthday from her
Aunty Mary. You:
a. Ask Aunt Mary to send another $5.
b. Tell your child she should have put the money in the bank.
c. Let her do chores to make up the $5.
d. Tell your child she should have been more careful.
2. Your 14-year-old son has been saving half of his allowance and money
earned from neighbourhood jobs. Now he wants to use the money to
buy a $200 compact disc player. You:
a. Allow him to buy it.
b. Offer him your old turntable instead.
c. Tell him there’s no way he can touch his savings.
d Buy it for him.
3. You usually pay $40 for your son’s sneakers. Now he wants a pair of
$200 inflatable high-tops. You:
a. Chip in the $40, and let your child come up with the balance.
b. Say “I’ll buy a $40 pair, or you can still wear your old ones.”
c. Buy them, because “everyone else has them.”
d. Buy yourself a pair, too (everyone else has them!).
4. Your daughter has mowed your lawn since she was 12. Now 14, she
wants to make money by mowing neighbours’ lawns. She also wants to
be paid to do your lawn. You:
a. Say “Okay, and go ahead and use our mower and gas.”
b. Hire a neighbour’s kid to do your lawn.
c. Tell her to forget it because mowing your lawn is her job.
d. Say “Use our mower and pay for the gas you use. We’ll pay you half
of what you charge neighbours.”
5. You’re trying to teach your 16-year-old about the stock market. She
invests her own money in a stock you selected. It loses money. You:
a. Make up the loss.
b. Hire a neighbour’s kid to make future stock picks.
c. Say “That’s how the market works. Too bad.”
d. Share the loss with her, and help her figure out what to do with the
remaining stock.
6. Your 15-year-old daughter gets an allowance for which she is expected

to help out around the house. She has ceased to help. You:
a. Hire a neighbour’s kid to help clean the house.
b. Stop the allowance altogether.
c. Continue to pay until the child turns 18.
d. Tie the amount and payment of the allowance more closely to
chores accomplished.
Advice for parents

Educationalists have been interested in economic understanding in children for a
very long time (Bas, 1996, 1998; Goodnow, 1996, 1998; Goodnow & Warton,
1991; Gunter & Furnham, 1998). Indeed, there are a stream of papers going back
to the turn of the century that concern themselves with children and money
(Dismorr, 1902; Kohler, 1897). There has been a vigorous research interest in such
things as children’s knowledge of money and work experience since then (Mortimer
& Shanahan, 1994; Witryol & Wentworth, 1983). Because of the perceived
importance of children and adolescents understanding the economic world, there
are a number of books and articles aimed at both young people and their parents
(Estes & Barocas, 1994; Gruenberg & Gruenberg, 1993).
For instance, in a book subtitled “A smart kid’s guide to savvy saving and
spending”, Wyatt and Hinden (1991) claim to provide a perfect “hands on
introduction to managing money”. Rendon and Krantz (1992) aimed their book
specifically at teenagers. It explains such things as: the difference between capitalist
and socialist economies; the nature of inflation and recession; how the stock market
works (what causes highs and lows); and the government’s role in the economy.
They believe various factors affect young people’s attitudes toward money. These
include: whether they have more, less, or the same amount of money as other
people in their community; how close they live to people who have either a lot less
or a lot more money than they do; how much they hear about people who have
either a lot less or a lot more money than they do; whether their parents’ current
money situation is very different from the one they (their parents) grew up with;
and how they – and their family – feel their situation compares with the situations
of many people they see on television, the movies, or in their textbooks.
There are also a number of interesting books on money specifically for parents.
Davis and Taylor (1979) wrote Kids and Cash for “parents who … want answers
about allowances … want their kids to earn and save money … believe a job
teaches responsibility … are interested in preparing their children for the realities
of the adult world”. They believe all children need to learn money skills like:
Spending Money (understanding concepts like scarcity, price differentials and the
necessity of choices); Budgeting (planning and keeping to money plans); Saving (the
importance and benefits of postponement of gratification); Borrowing (the concepts
and costs of borrowing); Earning Money (by such things as selling ability, learning
to take risks, understanding the competition).
They stress the importance of the allowance/pocket money system to teach
children about the value of money and the basis of responsibility. They argue that
parents use five systems that do not work:
1. Money is given when needed: irregular, unplanned, capricious.

2. Commission system: effectively a pay for work done system.
3. Allowances tied to responsibility: money conditional upon chores done.
4. Allowance with no strings: paid regularly without responsibilities.
5. Allowance with no strings: but supervised spending.
They also attempt to give good advice to parents about how to educate their
children through allowances by following quite specific rules.
Godfrey (1994, 1996) sets out to help parents teach their children the value and
uses of money. The author, a banker who founded a children’s bank, suggests that
a school-aged child should be told that they are a “Citizen of the Household” and
15% of his/her allowance should go into tax. They also need to give 10% to
charity. Further, if they save they should be given interest on savings. Family
meetings should discuss, openly and honestly, economic affairs. A written agenda
and a log should be kept. Issues might include product testing the purchases of
major items, vacation planning, charity and gift giving. It is also recommended that
there is a pool of family money, called the family bank, and the family as a whole
should discuss how it is administered and the money spent. Further, the family
bank should have an explicitly stated credit policy: hence if a child borrows product
money ahead of time they have, say, three weeks to pay it back … with interest.
As children get older their household jobs become harder and they should be
taught that they have to be responsible for these jobs. The message to be given is
that children, as citizens of the household, should volunteer to do chores and odd
jobs. As children get older and they borrow, lend and trade, they can be taught the
importance of verbal contracts, negotiation and the general rules of trading. Also,
the family and community values on breakages, shoplifting, etc., need to be
discussed along with consumer affairs. For instance, it is proposed that pre-
adolescents are taught the following simple, but important, consumer concepts: get
the best buy for the best price; make sure you know the store’s policy; don’t forget
to keep receipts; shop during sales; know your rights. In the teenage years, the
Citizens of the Household concept can be extended to other concepts, such as
curfew. Further, they need to be taught good practice about credit cards, and
budgeting, as well as starting a financial portfolio.
There are many books giving parents advice. There is overall agreement but some
important differences. They are clear about what you should and should not do.
Bodnar (1997), whose book is subtitled “Teach your kids sound values for wiser
savings, earning, spending and investing”, suggests 10 things not to teach your children:
1. Ignoring the whole topic: because of embarrassment, fear or ignorance

not discussing money openly and honestly;
2. Indulging your children: for guilt or shame or any other problem;
3. Sending mixed messages: about saving and spending, waste and
profligacy, research and impulsivity;
4. Being inconsistent: setting money rules and then breaking them;
5. Not setting up a system at all: instituting early rules;
6. Using verbal platitudes instead of practices: being cynical and sarcastic
rather than giving good advice;
7. Failing to educate and listen: answering their questions, giving good
answers;
8. Reliving your childhood: not understanding about the changes in the
current cost of things;
9. Informational overload: the opposite of 1, by not understanding when,
why and what to say;
10. Complaining about your job: making the world of work seem unpleasant
or slavery.
Gallo and Gallo (2002) have written various books to help middle-class to
millionaire parents raise financially responsible children. They note that most
parents feel they want their children to be better financially educated than
themselves but they are not sure precisely what to do. Their messages about how
to become a financially intelligent parent are neither new nor counterintuitive but
they are eminently sensible. Thus, they argue that parents need to be able to say
No and Enough as important parts of money education. They note that financially
clueless parents argue about or don’t ever talk about finance generally. They
recommend eight things to do:
1. Encourage the work ethic so that children become industrious and

feel competent. The message should be do your best, rather than
being best.
2. Be clear, open and consistent in your money stories and messages. Be
sure not to make money issues a source of anxiety, argument or silence.
Talk about how you acquired, use and manage money.
3. Encourage reflective thinking about money, which is concerned with
thinking about alternatives, good choices and avoiding impulsivity. It
can be modelled by talking about good and bad purchases; about
alternative options in spending money; and whether those decisions
should be made alone or after consultation.
4. Model gifting by becoming a charitable family. This helps children think
about less fortunate others and one’s need to help. It must involved
overcoming inertia and developing a reward and recognition prog-
ramme for others.
5. Teach financial literacy, which is about modelling and education through
pocket money and allowance to make decisions, and saving, spending
and general day-to-day money management. Teaching about jobs,
investments and entrepreneurship is also encouraged.
6. Use money to support and reward your values. This involves distin-
guishing between money for self-worth vs. money for self-fulfilment. It
should warn against excess, bragging and waste.
7. Moderate your extreme money tendencies, such as the usual money
pathologies: shop till you drop; pay cash for everything; agonise over
unbalanced accounts; fret about going to the “poorhouse”; rack up big
debts and act as if money can buy love. If others say they find your money
beliefs and behaviours irksome it may be time to do something.
8. Engage in difficult financial discussions by discussing with children how
much money people in the family make, what things are worth, and
what money is owed. It is suggested parents “share their struggles” and
each tell their own money stories.
The idea is to integrate financial issues with all other aspects of parenting – to use
everyday “money moments” to educate about money and life skills.
Bodnar (1997) in a long, practical, self-help book, with the subtitle “Teach your
kids sound values for wiser saving, earning, spending and investing”, offers simple
but important tips. She specifies golden rules for fending off fights:
For richer or poorer, in good times and bad, it’s possible for spouses to avoid,
or at lease defuse many of the most common disputes about money by
adding the following resolutions to your vows:
• Talk about money openly and matter-of-factly: Silence is not golden and
could lead to unpleasant surprises later.
• Settle the issue of joint versus separate checking accounts: Either system
will work if you both accept it. Or both of you could chip in to fund a
third kitty for household expenses.
• Designate which spouse will pay bills, balance the cheque-book and handle
investments. Whether you pool your money or keep separate accounts,
someone has to do the financial housekeeping.
• Know where your money is: Even if your spouse is the numbers whiz,
you can’t afford to tune out. Touch base periodically so you know
how much you owe on your credit cards and how much is in your
retirement accounts.
• Don’t begrudge your spouse small indulgences. Each of you should have
some money to spend with no explanations needed.
• Consult with each other on purchases of, say, $500. That counts as a big
indulgence and your partner deserves a say.
• Don’t criticise your spouse about money in front of others. Talk openly,
but talk privately.
• Coordinate your responses when your kids ask for something, so they
don’t play one parent against the other. If Mum says no, Dad says no.
• Discuss your goals regularly, preferably at a time when you’re not under the
gun to solve a money problem. Even when you keep separate accounts,
you need to coordinate financial plans, if you hope to retire together.
(p. 22)
Clearly the growth of these books is an indication of the importance of this

issue to parents who want advice in how best to instil good monetary habits
and understanding.
Just as there are numerous books for parents on how to bring up financially
literate and educated children, so there are books for young people themselves. Self
(2007) has written an engaging and useful book aimed at teenagers. Money he
notes is not boring. There are some “simple but useful” maxims like:
• The only boring thing about money is not having enough of it.
• Having enough money has less to do with how much money you earn, and
more with how you manage your money.
• People who don’t manage their money work longer and harder, live
somewhere “less nice” and have less to spend on things they want.
• The sooner you start managing your money, the richer you will be.
• Think of money as a friend; respect it and look after it.
• Have a long, medium and short-term money plan about earnings, savings,
things to sell.
• Make sure you don’t get ripped off by selling scams and learn about careful
shopping.
• Get to grips with relevant money concepts like percentages, simple and
compound interest, inflation, capital and income as well as gearing.
• Get to grips with banking terminology and issues like standing orders, direct
debits, debit cards, overdraft facilities, online and phone banking.
• Plastic is not fantastic: have a debit card not a credit card. And beware of store
cards that are often not good value.
• Shop around when borrowing and remember: when you borrow you are
giving away.
• Find out how tax works and know the difference between income tax,
national insurance, value added tax, capital gains tax.
• Know your entitlements to state benefits.
• You can’t avoid paying tax, but you can make sure you do not have to pay
more than you have to.
• Borrowing has two costs: interest and lost opportunity to do something else
with the money.
• If lenders believe you might take your loan/debt elsewhere they will often
agree to a better deal.
• Learn about investments: how much to invest, how long to tie up your money.
Teaching economic theory

Parents, governments and educators are interested in teaching economic literacy.
This is more than just teaching economic concepts like opportunity costs, marginal
utility and marginal analysis (Salemi, 2005). It is well established that financial
knowledge relates to how people invest their money (Wang, 2009).
There are many media shows and newspaper sections devoted to money
management. Financial experts offer advice to help people develop better money
habits. This is nearly always a two-stage process. One is about adopting sensible habits
of investing, saving and spending. The second is about recognising the psychological
factors that drive poor money decisions and habits. It is usually a matter of taste and
expertise concerning which is covered most. Some researchers have examined how
one might even teach primary and kindergarten students through the use of stories
and their own literature (Rodgers, Hawthorne, & Wheeler, 2006).
Others have tested college students’ actual literacy. Chen and Volpe (1998)
tested students with the following examples of questions:
Your net worth is

a. the difference between your expenditures and income.
b. the difference between your liabilities and assets.
c. the difference between your cash inflow and outflow.
d. the difference between your bank borrowings and savings.
The returns from a balanced mutual fund include

a. interest earned on cash in the fund.
b. dividends from common stock in the fund.
c. interest earned on the bonds in the fund.
d. capital gains from stocks and bonds in the fund.
e. all of the above.
They found that the participants got just over half (53%) correct. Also non-business
majors, females, those with lower socioeconomic status, those under 30 and those
with little or no work experience did worst.
One Italian study asked whether there were sex differences in financial literacy
and money attitudes. Rinaldi and Todesco (2012) tested 1,635 12- to 14-year-olds
and found no sex differences in financial literacy but there were sex differences in
money attitudes. Compared to girls, boys assigned the role of money in achieving
happiness higher, were more pro-investment oriented and had higher self-
confidence in managing their money.
One recent study of over 100 Korean adolescents attempted to determine which
of various possible factors best predicted their financial literacy: father’s education,
monthly household income, their personal allowance, their main source of financial
knowledge, or whether or not they possessed a bank account (Sohn, Joo, Grable,
Lee & Kim, 2012).
However, the “money smarts” (or money style) test was a logical predictor in
each of the significant regressions (Bodnar, 1997). This was a multiple choice
“situational test” that required respondents to indicate how they would behave in
a range of money related situations with their children. The test had clearly been
devised as a self-assessment quiz but the results from this study showed both a
normal distribution and a satisfactory internal reliability. It is quite clear that
“Money-smart” parents care a lot about their children’s knowledge and use of
money. They seem to feel it is their duty to educate their children into the
economic work and that one of the best ways of doing this is through discussion
and modeling the behaviours that they want their children to follow.
Inevitably these parents are likely to be well educated and financially privileged
though this may not necessarily have always been the case. Indeed there is anecdotal
stories about very rich people who are either very strict or very lax with the
financial education of their children. Some are very clear that it is very easy to spoil
children which teaches them very little about the economic world and provides a
very poor basis for independence and success in life.
Childhood-related money problems

It has been suggested by many therapists that money problems originate in
childhood. Matthews (1991, pp. 227–228) provides a checklist that may help
identify this:
1. Were your parents extremely secretive about money matters? Are you
still in the dark regarding how much money your parents have (or had)?
2. Did your parents argue about money frequently?
3. Do you collude with any other family members to keep certain financial
information from other members?
4. Do you believe you have “absorbed” a fear of poverty from your parents,
though you’ve never been in real financial danger?
5. Do you feel like a fraud when you are in the company of your family,
even if the rest of the world considers you a bona fide success?
6. Do you find yourself frequently complaining about financial mistreatment
by a parent or sibling?
7. Is one of the siblings in your family the designated “success”, while
others seem unable to unwilling to succeed economically?
8. Do you sometimes conceptualise your financial actions (spending,
saving, etc.) in terms of “being good” or “being bad”?
9. Do your parents use money to reward and punish you even now when
you are an adult?
10. Do your parents send you money unexpectedly and expect certain
prescribed gestures of affection in return?
11. Is it difficult for you to image outdoing your parents financially?
12. Do you frequently find yourself acting exactly the opposite way
with money as your parents (e.g. do you spend flagrantly where they
scrimp avidly)?
13. Was there any type of compulsive behaviour in your family of origin, e.g.
alcoholism, drug use, overeating?
14. Was it “understood” in your family that money was a male domain?
15. Do you notice that money is used to communicate the same emotional
messages in your marriage as it did in your family of origin?
The issue about money is that if parents appear to be “conflicted” by money their
children sense it. Children and adolescents are highly sensitive to inconsistency and
hypocrisy. They can see that their parents have unresolved issues or disagreements
about money. They can detect when some issues always lead to heated arguments
and are therefore best avoided. Openness about money is also related to ideology
like religion which can complicate the issue even more.
Psychoanalysts point out that some children respond to parental messages by
doing the precise opposite. One can find this with money: financially over-
cautious parents spawn profligate and imprudent children. Other children
attempt to outdo or exaggerate the financial behaviours of their parents. Some
people appear completely indifferent to money and unworldly. A common
theme running through their money attitudes is that they do not deserve it.
Inevitably, those who believe they do not deserve a fair financial return for their
labours will not receive it.
Yet, as well as early and later childhood experiences, inevitably cultural values
and habits describe and prescribe money-related behaviour. Societal values dictate
what is rich and what is poor; how money should be made; on what one’s disposable
income should be spent; who are monetary heroes and anti-heroes. Schools
formally and informally socialise children into financial attitudes and habits. Equally,
the media tends to reinforce culturally acceptable money values and habits, which
naturally appear a little bizarre to cultured travellers. All societies also have their
messages about money sacrificing, donations and gifts to others.
The following are money messages that adults reported getting from their
parents:
• If I tell somebody how little I earn then they will view me differently.
• My friendships are threatened if I start earning a lot more or a lot less money.
• My father worried, but did not talk, about money the whole time.
• My mother cheered herself up by shopping.
• My parents insisted on having separate bank accounts.
• Nobody told me the real financial status of our family.
• I was often ashamed about how comparatively poor we were.
• Most fights between my parents involved money.
• Our family had lots of money secrets.
• I was shocked to find, later in life, my beliefs about our family’s poverty/
wealth were completely wrong.
• My parents were more concerned about the places I worked rather than the
money I earned.
• My father prided himself on being a “good provider” for his children.
• I was told my pocket money was a privilege not a right.
• My father gave gifts not to symbolize love but to provide substitutes for it.
Healthy, happy, economically knowledgeable parents beget children who (hope-

fully) understand economic reality and act both responsibly and wisely when it
comes to money. All parents make errors, but there are simple rules about bribery,
inconsistency and secrecy that can help matters.
There are well known stages in thinking development when children are able
to understand about specific money concepts (profit, budget, interest) and to
acquire skills. Often they know more about where babies come from than how
bank interest or the free-market work.
Adults, some in therapy for money-related problems, but also those with few
money worries, easily recount messages they got from their parents. These may be
implicit or explicit, but they remain powerful determinants of the adult’s thinking
and emotions around money.
Parents can do sensible things for themselves and their children. These include
buying enough insurance, saving for their retirement and their children’s education,
making (and where appropriate revising) a will and enjoying their money. It is
unwise to think of yourself as or behave as if you are an accountant, a social
worker, a manager or a genie. Your job is simply to educate and model the
behaviour that you want.
Poor little rich kids

There is no shortage of books written by therapists on the psychology of affluence
and the problems it brings. Hausner (1990) proposed a nine-point plan to help
parents raise what she called “The Children of Paradise” – namely children from
prosperous families.
O’Neill (1999) notes that the “monied class” often find themselves in a “golden
ghetto” where this select group are separated from the majority. Children in the
golden ghetto get isolated and marginalised from most people in society. They can
feel discriminated against by envious others with whom they feel uncomfortable.
She argues that the idea that affluence is synonymous with happiness as a “persistent
and pernicious cultural myth” (p. 50).
O’Neill believes that the psychological dysfunctions of affluence are: absentee,
workaholic parents and distrust of others – and these can easily get passed on.
Equally, sudden wealth (acquired through inheritance, lottery wins) can create a
false sense of entitlement, a loss of motivation and increasing intolerance of
frustration. Inheriting money can damage self-esteem, worth and confidence
because the inheritors are not sure if they could have made it on their own or
whether people treat them differently because of their money. They never know
the answers to such questions as: “Did I succeed?” or “Did my money buy
success?”; “Do they love me because of who I am?” or “because I am rich”; “Is he
merely a gigolo after my money?” or “Is this true love?” Indeed, society is often
highly ambivalent towards the wealthy – exhibiting wealthism, hence the idle rich.
There is abundant evidence of anger, envy and resentment of the rich.
O’Neill argues that family wealth founders have a “never enough” mentality
that can reflect addictive or compulsive elements. It is also often driven by a
narcissistic need to be special.
Poor little rich kids – once made popular by the cartoon Richy Rich – often
report “empty childhoods” with missing parents, a sense of lack of love and low self-
esteem. Their special privileges can lead to social and emotional isolation from others
their own age and hence difficulty interacting with them. This can lead to shame.
More interaction with surrogate caretakers (tutors, nannies) means they often have
problems with personal identity. They don’t identify with their parents or pick up
their values and beliefs. They can and do experience a sense of emotional abandonment
or, worse, emotional incest where the parent gratifies their own unmet needs for
emotional intimacy at the expense of the child’s needs and emotional security.
Hence isolated and confused children are easily prone to anxiety and depression
because of the void many feel by being deprived of parental attention, care and love.
Also, according to O’Neill (1999), because affluent children experience so little
“healthy frustration” and so few setbacks, as well as having most experiential and
material desires fulfilled, they develop unrealistic expectations as well as a lack of per-
sonal accountability. This can lead to the “perennial child” syndrome. As a consequence
they seem very poor at forming, maintaining and thriving in intimate relationships.
Financial disparity can lead to many relationship issues. The most well known
and acceptable is rich men having trophy wives. It is more problematic for a
woman who has great wealth. O’Neill argues that rich children feel guilt but
particularly shame when they realise how many poor people there are. Their
coping strategies are either to donate large sums to charity or “shut out” poor
people from their lives who remind them of their wealth. Rich people do not
understand the cause of their discontent and disconnect because of the myths
surrounding money and hence they project or displace their feelings of anger,
resentment and fear onto others, so jeopardising having healthy relationships,
which reduces shame. “Strategies to hide wealth are often unconscious efforts to
keep feelings of shame at bay” (p. 151). Money can be a tool of humiliation to both
those who don’t have it and those that do.
As a consequence O’Neill (1999) has various recommendations to help prevent
rich children from developing full-blown Affluenza:
• Reduce the emphasis on externals (appearance, possessions, achieve-

ments) and make the home environment accepting, supportive and
eager to reward uniqueness.
• Dismantle the false sense of entitlement. Children must not feel special,
deserving and entitled to anything they want.
• Teach gratification delay and the ability to tolerate frustration. Impatience
and demands for instant gratification need to be controlled. Children
need to experience and know how to handle boredom, disappointment
and failure.
• Diffuse affluent cultural and family expectations of getting ever richer,
keeping the dynasty alive.
• Separate money and love. Money should never be a substitute for love
and attention.
She calls it preventative medicine: immunising children from Affluenza and

demystifying the wealth taboo. She offers a simple 12-point plan, including the
following (1999, pp. 169–170):
1. Have close friends who are not wealthy; raise children where they make
friends with a mix of people; encourage contact (e.g. through
volunteering) across class lines.
2. Communicate with young adults about money issues such as resentment,
envy, trust, being open about money or not, making loans and gifts,
power differences, and dependence. Acknowledge that even a small
trust fund makes their financial life quite different from peers who have
no such cushion.
3. Teach children the ways that money and class can create difference
between people (e.g. people will have different expectations of what
their lives will be like) but that having wealth does not make people
better or worse than others. Show them ways they can act out of
concern for injustice, rather than guilt for their advantages.
8
SEX DIFFERENCES, MONEY
AND THE FAMILY
Marriage is like a bank account. You put it in, you take it out, you
lose interest.
Irwin Corey
Millionaires are marrying their secretaries because they are so busy

making money they haven’t time to see other girls.
Doris Lilly
Women prefer men who have something tender about them –

especially legal tender.
Kay Ingram
Money speaks, but it speaks with a male voice.

Andrea Dworkin
Introduction
Are there sex differences in attitudes toward money? What is the role of money in
families? How do spouses and partners “come to an arrangement” about their
money? To what extent could one call some families healthy and adapted with
respect to their money and others troubled and maladaptive?
There are often family issues to resolve like: who makes the money outside the
home and who does the domestic work? Who controls the money and the
expenditure? How is money used on the extended family? How does one make
decisions about inheritance?
This area of research is mainly the work of sociologists, who have taken great
interest in marriage, the family and how things have changed over time.
Psychologists have also been interested in the pathological nature of some money
beliefs and behaviours that originate in family dynamics.
It has been shown that many deep-seated money beliefs and behaviours can be
traced to early socialisation in the family. Families develop explicit and implicit
norms and behaviours with respect to money: who controls it; when and how it is
talked about; how it is distributed and spent. There are all sorts of patterns of
income control and expenditure (Pahl, 1995). Sometimes the husband or wife
manages all family finances, giving the other partner some allowance. In some
families, expenditure decisions about certain issues (finance, transportation,
holidays) are done by one partner though the other has the financial control.
Education, social class, and personal values dictate which system people adopt and
when and how they change over time.
Many families develop a domestic economy where “jobs” are distributed, often
according to gender stereotypes. Partners often develop an equity or exchange
theory concept where they come to agree a fair exchange of money or activities.
Yet, disagreeing over money is a common and chronic source of marital conflict
for many couples (Furnham & Argyle, 1998).
Money and time spent on children has always been an important issue. For
some Third World countries children are seen as an investment, a pension, or a
source of support in old age. The issue of money in the extended family is an
important one. Some people work unpaid on the family business. Grandparents do
childcare and other relatives “help out”. Some expect monetary rewards or to be
left money in a will. Inheritance is a big issue in families. It is now much more
about the transfer of property rather than titles. This chapter will examine how
couples deal with money, money in families and the “hot topic” of sex differences
with respect to money.
Money in couples
Different couples often have very different money beliefs, behaviours and
“arrangements”. Some maintain separate bank accounts, others only have shared
accounts; still others have both. Some argue a great deal over money, others do so
very seldom. Because of the taboo nature of money, couples often experience
surprise at the beliefs and preferences of their partner. While it may be that people
assortatively mate with respect to physical attractiveness, education and occupation,
it does not seem to be the case with respect to money. Thus, misers marry
spendthrifts, and the money carefree marry the money troubled. Indeed it may be
that opposites attract: spenders are attracted to savers (but not necessarily vice
versa). When over-spending spendthrifts marry under-spending tightwads one may
expect sparks. Divorce lawyers say that money differences are often a cause of
marital problems as well as a powerful weapon with which to beat each other up
as part of the divorce settlement.
Vogler, Lyonette and Wiggins (2008) looked at different couple management
systems: where either the male or the female managed all the money; where they
Sex differences, money and the family 167
pool money and jointly manage; where there is a partial pooling (to pay for collective
expenditure); and where there are completely independent management systems.
Interestingly, they found that when either men or women made autonomous
spending decisions, both were less satisfied with family life, indeed life in general.
Some have, to outsiders, very odd arrangements whereby the one “pays” the
other a stipend or allowance. The issues are about whom, how, when, and why
people in couples generate, manage and control money. This is in part a function
of whether people live in a nuclear versus a blended family. Shapiro (2007), a
couple therapist, has argued that discussing money openly is crucially important for
all couples and that it is an indicator of acceptance, adequacy, acknowledgement,
commitment, competence and security.
To some extent money arrangements are a function of whether couples are
“moderns” (both earn to save), “innovators” (wives earn more than husbands) or
“conventionals” (husbands earn more than wives) (Izraeli, 1994).
There are different “explanations” for the way couples do money management
(Yodanis & Lauer, 2007): it depends who generates/makes the money; the
overall family income; the gender ideology in the couple; the relationship
characteristics (co-habiting, married, previously married); the cultural/societal
practices. The control over money is an indication of power as well as hard
work. Usually the more equal the resource contribution, the more shared the
management strategies.
In a study focusing on money, power, praise, and criticism, and what they
called “the economy of gratitude”, Deutsch, Roksa and Meeska (2003) provided
empirical evidence to conclude thus:
Gender certainly still counts when people count their money. First, men and
women feel differently about the money they earn. Second, women are
praised more than men for earning money, although on average they earn
less money than men do. Third, women feel more appreciation from
husbands for earning income than husbands feel from wives. Fourth, men’s
and women’s absolute and relative incomes affect the economy of gratitude
differently. Finally, the relation between income earned and parenting
doesn’t work the same way for men and women.
Men have stronger negative and stronger positive feelings about their
incomes than women do. It is not surprising that men feel more positively
about the money they earn because they do earn more than women.
However, if money were gender neutral, we would expect that women
would be more embarrassed about their incomes, given that they earn less
than men. That’s not the case. The link between masculinity and money
seems to leave men more vulnerable to feelings of embarrassment than
women are. (p. 301)
There is plenty of empirical and anecdotal evidence that money is among the major
sources of marital (and relationship) arguments. People in relationships often have
different financial management strategies and beliefs about how to allocate resources
within the household. Arguments occur over children, chores and money given to
children as well as gift giving. One study found that the wife’s income (resource
availability), followed by children in the home, followed by the differences in age
and income (i.e. power) between husband and wife were the stronger predictors of
money arguments (Britt, Huston & Durband, 2010).
Spouses differ in their gifting preferences as well as appetite for financial risk.
Further, when resources are low, conflict tends to be high. In other words couple
net worth is a powerful correlate of conflict, as is the general financial debt situation.
The higher the constraints on the household finances, the more arguments tend to
occur. The data show that couples who keep records, and discuss and share goals
argue less. One study found that spouses did not rate money as the most frequent
source of marital conflict in the home; however, compared to non-money issues,
marital conflicts about money were more pervasive, problematic, recurrent and
unsolved (Papp, Cummings & Goeke-Morey, 2009). Papp et al. noted:
We found that couples attempting to resolve money conflicts may be

particularly likely to face a self-defeating cycle, in which they explicitly
attempt to problem solve, yet experience greater negativity and use of non-
productive tactics as important and threatening money issues resurface (e.g.
monthly bills) and remain unsolved. Although other relationship issues may
recur (e.g. chores), it may be easier for couples to agree to disagree or avoid
matters that do not incur external consequences such as steeper financial
penalties. Another possibility is that money is more closely tied to underlying
relational processes, such as power, touching many aspects of individual and
couple functioning or feelings of self-worth or self-esteem, perhaps especially
for men. Additional research is needed to disentangle the meaning of money
conflicts for couple relationships and broader family wellbeing. (p. 100)
In a recent economic study Britt et al. (2010) distinguished between the time/
effort spent arguing and the topic of those arguments. They found that being a
money arguing couple is more a function of communication than either the
resources available or the power distribution (who earns the most). It’s more about
communication patterns than money per se. Later they found that while money
arguments in marriage are an important indicator of relationship satisfaction, they
do not predict divorce (Britt & Huston, 2012).
Family dynamics are in part revealed by how finances are dealt with. Child and
adolescent psychiatrists see a family’s financial planning, values and history as a
“window on understanding family myths and dynamics” (Jellinek & Berenson,
2008, p. 250).
Money and families

Many commentators have noted that “children are getting younger”, especially in
the economic sense. They have a lot more money than their parents did at their
age and are hence much more active in the market place. Hence parents are
becoming more concerned about helping their children with their financial
decisions and management.
Lewis (2001) commented on the Nestlé sponsored research into Money in the
Contemporary Family. It was an in-depth study of over 650 British parents carefully
selected to represent all the social classes. The researchers found that 43% taught
their children very little about money but that these were primarily older and
lower social class parents. Yet the data revealed that modern parents are better at
teaching their children than they believe their parents taught them. Thus 35% said
that they were taught a fair amount about money, but 55% said that they taught a
fair amount about money. Inevitably this could be misreporting through memory
distortion, dissimilation or attempts to present themselves in a very positive light.
They were asked, “What, if any, of the following do or did you do for your
children?” The following were in the top ten mentioned:
Piggy bank 62%

Pocket money 58%
Encourage to set up bank account 46%
Money games 46%
Short-term savings 37%
Discuss money matters 37%
Play Monopoly 36%
Encourage shopping around 32%
Pay for chores 29%
Encourage long-term savings 26%
Economic socialisation in the home appears to be much less common among

parents from social grades D&E (semi and unskilled) or with lower household
incomes. Piggy banks are still a particular favourite of those from the A&B
(professional and semi-professional) groups. Involving children in household
accounts was rare (9% of parents overall), but those from the AB social groupings
are more likely to involve their children in this activity (21%).
Only one third (34%) of Ds and Es in this representative sample give their
children pocket money. Interestingly three in ten parents paid their children
regularly for doing household chores, which rises to more than two fifths among
parents from C2 households.
Parents were asked what they thought schools should be teaching children. More
than half of parents stated that eight of the 11 alternatives provided should be taught
to their children at school. Careers (81%); managing personal finances (67%);

managing household finances (59%); understanding the use of credit and debit cards
(58%); and lessons on how a bank operates (57%) proved the most popular. Majorities
also favoured practical lessons, for example, opening a bank account (54%),
understanding borrowing and interest rates (52%) and understanding the economy
as a whole (51%). Also, one fifth or more of parents endorsed the teaching of
banking (31%), purchasing (25%) and borrowing (22%) over the Internet.
The eagerness for schools to become involved in the teaching of financial
matters was generally more likely among ABCs than among C2, Ds and Es.
Schooling in managing finances (73%), lessons about how a bank operates (62%)
and lessons on such things as how to open an account (59%) were found to be
more popular among parents who claimed that they had no credit card debt. Thus,
it seems that those who had been more financially successful were more eager to
have this taught to their children.
Parents were asked when they believed their eldest daughter or son would
become financially independent and when the respondents themselves became
financially independent from their families. The average predicted age of financial
independence for daughters was 19.4 years, rising to 20.7 years for those from an
AB background and to 20.5 years for respondents who had themselves been
through higher education. For sons, the average predicted age for financial
independence was 19.3 years. The predicted age is found to be higher among
ABC1s and for parents who currently have a son in higher education. Parents say
they became financially independent at an earlier age than predicted for their sons
or daughters (18.2).
Ideally it would be most advantageous to have this sort of data collected over
time and across regions and countries so that one could trace changes in parents’
beliefs and practices with respect to their children. Researchers on topics like
childhood health are equally interested in acquiring this longitudinal and
comparative data to try to understand life trajectories.
Money is certainly a hot issue in families. There may be a dark, pathological side
to money in families as well. It is an umbilical cord for young people who struggle
for separation from their parents. Children can learn to use money both to rebel
and to exact retribution. Parents in turn can use money to both reject and hold on
to their children. Families can have money secrets.
Newcomb and Rabow (1999) assessed the familial experiences of 605 students
in relation to money, and considered their current beliefs and attitudes towards
money. The authors concluded that parents have differing practices and expectations
for children of different genders with regard to their future earnings. For instance,
sons more than daughters communicated that their parents expected them to know
how to save their earnings. Sons were found to be engaged in monetary discussions
earlier than females, and highlighted that they received less financial support than
their female counterparts did. Consequently, males and females differed in their
evaluations of money in relation to themselves and others, with males valuing it
more positively than females. Men perceived those who earned money as being
rational and responsible, with money making them feel happy and in control,
whereas women had more conflicting, negative thoughts towards money. Women
were more fearful of finances and did not have a clear awareness of investing
options. Such detailed research confirms the belief that differing socialisation is
experienced in males’ and females’ childhoods. Differing training with regard to
money results in differing beliefs with regard to money in later life, in respect to
aspects such as the self, others, and finances. Danes and Haberman (2007) recently
confirmed such suggestions. The authors found many differences in socialisation
between genders, including that female teens received more money from their
parents than did males, with males spending and saving more money.
Interestingly, it is not only parents who treat male and female children differently
with respect to their monetary education. Hira and Lobil (2006) investigated the
roots of adults’ financial support in their childhoods. The report concluded that
males were the recipients of more assistance and advice from teachers and other
adults regarding their money management and investment decisions. Furthermore,
female children have been found to receive more money management advice from
their mothers, where males’ main source of information was reported as being from
their fathers.
Madares (1994) gave advice as to what parents can do for their children. She
argued that parents reward (and punish) their children with money, power, love
and recognition. At school they can gain recognition, power and love, but not
usually money. “The meaning of money and how to obtain it is taught in the
family … In our families, children learn to save, negotiate for money, work for
money, be stingy and be generous … we can use money to elevate or patronise a
child” (p. 43). Parents’ gifts, she argues, can create artificial needs in children; gifts
given and taken away can become very emotionally charged. Indeed, relationships
can be commoditised by the exchange of money or goods.
An important issue is the quality and quantity of strings attached in the business
of giving. The anxious, over-indulgent parent who abhors the possibility that their
child may in any way be deprived gives everything children need (and want). They
make it difficult for their children to become independent from their parents.
Others do the opposite but this can make children feel neglected, unloved and
insecure with (paradoxically) the same result – difficulty in separating from parents.
This leads to the problem of motivation – the real motivation of giving. The
parent giver and child receiver may have very different interpretations about the
reason for the gift. Parents give money because of their obligations, but also through
love (generosity), guilt, or for favours (companionship, chores). Parents have the
power to give or withhold. Children, argues Madares (1994), need to develop a
power-base. This could be based on achievements, or love.
There is often a quid pro quo or tit for tat subtext with regard to money in families.
If a child believes parents give out of guilt not generosity they may feel resentful.
Some children learn the dark arts of extortion from guilt-ridden parents. Part of the
problem lies in what is, and is not, negotiable. What is given by right, by obligation,
and what as part of exchange? Is pocket money a right or a privilege?
Children, argues Madares (1994), correctly need to be clear about:
• What belongs to the whole family and thus cannot be withheld as

punishment.
• What really belongs to the parents but can be used and enjoyed by
everyone if they follow certain rules or achieve certain targets.
• What belongs to the child and cannot be taken away for punishment.
So the television belongs to the whole family, though toys belong to the child.
Doing badly at school many mean less or no television viewing but it does
not mean removals of prizes, toys or expulsion from one’s room or indeed the
whole family.
Next there is the issue of family accounting: that is, the implicit rules of fairness of
giving and receiving in families. The problem of family accounting is that accounts
are never really audited and never really closed. Indeed, they can be passed on from
one generation to the next. There is no open, tangible, book keeping in most
families. So it is probably healthy to make explicit the rules by which money is
distributed. Is money given out of entitlement, or love, or obedience, or respect, or
sporting/academic success? Families might have an annual finance day where all
financial issues are discussed and plans are made. It must be made clear who has
decision power in financial matters. There must be time lines. At a certain time
accounts are closed and not revisited. The whole matter is at an end.
Certainly, studies of “money troubled” adults show clearly that the heart rules
them more than the head when it comes to their money. Indeed, many of their
troubles originated from “lessons” learnt as a child about money. The family is the
primary socialisation unit. Teaching economic literacy, good money management
and sensible saving and spending should be a parental priority.
Wealth in families
Collier (2006) also wrote a book called Wealth in Families to help families talk and
think about their wealth and its effects. He suggests asking a few questions such as:
• What are your family’s true assets?

• How wealthy do you want your children to be?
• Do you feel you have responsibility to society?
• Can your family make just decisions around money, philanthropy and legacy?
Substantial wealth, whether it is inherited or made, often transforms wealth holders.

It can give a sense of empowerment and freedom but it also brings burdens. For
wealthy parents the question is always how to provide financial security for all their
children while ensuring that they achieve their potential: how to use money to
help rather than hinder. The issue is how much they should receive not how
much they could receive.
There is no simple answer to the question of how much is an appropriate
financial inheritance. A round million or more? A percentage of one’s wealth?
Should it be left in complex, legally binding networks of trusts and foundations to
attempt to ensure that the wealth is passed to succeeding generations? Then the
question is when to transfer a substantial inheritance to one’s heirs: sooner versus
later; at some birthday; or with strings attached?
There is also the issue of what form the inheritance should take: a trust with
careful strings attached? That will restrict their freedom to take risks, to make
mistakes and actually to learn about money.
Last, there is the issue of how much to tell children. Should the issue be a secret
or discussed openly and honestly with all family stakeholders?
Collier (2006) introduces the idea of financial parenting. It is financial
education to preserve family wealth. There are some simple principles: set a good
example; provide consistent guidance; allow children to make mistakes; use
mentors. Further, he provides “age-appropriate” recommendations of what to do.
Rich and poor fathers

The whole area of economic socialisation was electrified by a book published
a decade ago. Kiyosaki (1997), who likes to be known as a person “who
teaches people to become millionaires”, wrote a best seller called Rich Dad, Poor
Dad. It pushes the message of teaching financial literacy very heavily. It is also
heavily autobiographic.
The Poor Dad in the story is based on Kiyosaki’s highly educated real father,
who was the head of the education department in the state of Hawaii. Late in his
career the father took a stand on principle against the governor of Hawaii. This led
directly to this Poor Dad losing his job, and his inability to find comparable work
ever again. Because he had never learned to handle money, he fell into debt.
In contrast to this character is Rich Dad, who is the father of Kiyosaki’s
best friend. He dropped out of school but became a self-made multi-millionaire
regardless of his poor start in life. The Rich Dad insisted that the boys learn
to make money work for them to avoid spending their whole lives working
for money.
The author argues that the rich think differently in how they define simple
words like assets and wealth, and how they fund their luxuries. He defines an asset
as any item which produces income (such as rental property, stocks or bonds) and
a liability as anything that produces expense (such as one’s own home, new
widescreen TV, exercise machine, new garden tractor, motorcycle, computers,
processed foods, swing sets, barbeque grill, tools, letting your property run down
and a new car every two years).
He further argues that the poor buy worthless items that they think are assets,
which do not earn anything and may have no market value. He notes that wealth
is measured as the number of days the income from your assets will sustain you, and
financial independence is achieved when your monthly income from assets exceeds
your monthly expenses. He gives various tips (i.e. choose friends carefully, pay
yourself first, etc.).
The book makes various interesting and challengeable assumptions. It defines
things as assets only if they generate cash flow. The rich acquire them. It argues that
rich people work to learn things that make money over and over again. It is an
argument for knowledge – working not labouring. There are strong arguments to
create intellectual property and then market it. It also has a puritan streak because
it argues that rich people are more likely to be frugal than spendthrift.
Kiyosaki (1997) argues that rich people pay off their debts and then start
investing in assets that generate revenue. Like all successful and popular books,
Kiyosaki’s has its critics and detractors. What is important, however, is the interest
caused in economic socialisation. The idea is that the “financial philosophies” of
parents have a direct and dramatic impact on the economic behaviour and success
of their children. Inevitably this has fuelled an interest in the teaching of sound
economic principles in both the school and the home.
Because of the massive popularity of the book, a whole series of spin-offs
occurred. Naturally it attracted attention and criticism. Criticisms include that the
book is full of exaggerations and fabrications. Some point out that it gives almost
no useful concrete advice while others lament the quality of advice that it gives as
well as the fact that it seems to downplay the importance of formal education.
Critics have argued that the tax dodges are little more than tax delays and that
Kiyosaki misrepresents the (American) tax system.
Nevertheless, the central message has been heard very clearly. The book has
sold in its millions all over the world, probably more to those who want to
become rich themselves rather than to those who want to educate their children
more successfully.
Parental socialisation
There is also an empirical literature on this topic. Parents are known to shape the
money or saving attitudes of their children (Clarke, Heaton, Israelsen, & Eggett,
2005; Hilgert, Hogarth & Beverley, 2003), attitudes toward credit (Norvilitis et al.,
2006) and gathering of financial information (Lyons, Scherpf & Roberts, 2006).
Lyons et al. (2006) confirm the influence of parents on their children’s monetary
behaviour and attitude, with a study finding that 77% of high school and college
students had requested financial information from their parents. Pinto, Parente and
Mansfield (2005) demonstrate how influential parents are on their children’s monetary
behaviours, finding a significant negative relationship between amount of information
learned from parents and credit use; the more information provided by parents
regarding credit, the lower outstanding balance carried by students with credit cards.
The impact of the family on knowledge regarding money and views towards
money seem to decline with age (Churchill & Moschis, 1979). The authors found
that family communication regarding purchasing behaviours declines with age,

whereas discussion with friends increases over time. Thus, parental influence with
regard to spending decreases through life and peer influence increases.
Despite how influential parents have been found to be in shaping their children’s
money attitudes, contradictory research has found those in Western cultures to be
reluctant to discuss finances with their children due to how taboo the topic is. For
instance, Danes (1994) found that parents considered the discussion of some
financial issues off limits regardless of the child’s age – including revealing family
income, and disclosing family debt. Despite how reluctant many parents are toward
discussing financial matters with their children, they have a large influence over the
ways their children are socialised into society (Bandura, 1989).
Financial socialisation refers to the learning of knowledge about money and
managing finances, as well as developing skills including banking, budgeting and
saving (Bowen, 2002). Parents have been found to be a key source of children’s
monetary socialisation, through observation of their parents’ practices and by
including children in financial practices (Beutler & Dickson, 2008; Pinto et al.,
2005). So, although parents may not explicitly discuss financial issues, children
learn from their parents through observation. Beutler and Dickson (2008) highlight
the importance of financial socialisation, proposing that the failure to adequately
socialise young people for later financial roles is costly to both society and the
individual personally.
Despite the proposition that many families are uncomfortable about discussing
monetary matters, opposing research suggests that parents have a direct influence
on their children’s financial values through direct teaching, reinforcement and
purposive modelling (Moschis, 1985). A recent study by Solheim et al. (2011)
concluded that there are multiple pathways through which families influence a
child’s financial attitudes and behaviours, including parental “coaching” –
“emphasising the importance of sound money practices as well as instilling a sense
of responsibility for effectively managing financial resources” (p. 108) – as well as
observations of parents’ saving and management of money. This suggests that
children’s money habits are in fact influenced by both the discussion of monetary
behaviours (despite the highlighted stigma attached to this) and through observing
parents’ actions and choices.
Sex differences in money grams

The idea of money grams is the idea that parents give frequent, short and urgent
messages to their children about money. These are not always intentional. Children
notice how and when their parents talk about money, discussions about how much
to spend on certain goods, as well as their approval and disapproval about how
others spend money. They are particularly sensitive to conflicting messages sent by
different parents: the strict mother and the indulgent father; the saver and the
spender; the parent happy to discuss any aspect of money and the parent who finds
the whole issue difficult and embarrassing.
Table 8.1 Money grams
Statement Yes (%) No (%)
20. Do you think about your finances all the time? 23 77

4. Do you lie awake at night trying to figure out a way to spend less 18 82
money and save more, even though you are already saving
money?
1. Do you find yourself worrying about the spending, using, or 38 62
giving money at all times?
16. Are you increasingly anxious about whether you can pay your 15 85
bills each month?
9. Are you constantly puzzled about where your money goes or why 27 73
there is none left at the end of each month?
17. Do you spend money on others but have problems spending it on 36 64
yourself?
15. When you ask for money, are you flooded with guilt or anxiety? 32 69
2. Are you inhibited about talking to others about money, 35 65
particularly about your income?
14. Do you spend a large proportion of your free time shopping? 14 86
3. Do you buy things you don’t really need because they are great 43 57
bargains?
18. Do you buy things when you feel anxious, bored, upset, 27 73
depressed, or angry?
19. Are you reluctant to learn about practical money matters? 11 89
11. Do you refuse to take money seriously? 14 86
13. Do you often gamble and spend large sums on bets? 3 97
10. Do you use money to control or manipulate others? 5 95
6. Do you regularly exceed the spending limit on your credit cards? 9 91
7. Does gambling make you feel a burst of excitement? 16 84
8. Would you walk blocks out of your way to save a bus fare you 38 62
could easily afford?
5. Do you hold on to or hoard your money? 24 76
12. Do you resent having to pay the full price for any item when you 37 63
shop?
Source: Forman (1987)
In most cultures women have had much less opportunity than men to handle
significant sums of money. Pocket money and allowances are negotiated with the
father by boys, though girls may be encouraged to charm their fathers into opening
their wallets. Hence some girls come to believe that financial wheeling and dealing is
a masculine activity and shun all money matters for fear that it renders them somehow
less feminine. On the other hand, if boys equate having, spending and “flashing”
money with masculinity they can feel very inadequate in the company of others with
money, or overspend that which they don’t have as a means of making a statement
about their “male assets”. These sex differences, however, may be on the decline.
Gresham and Fontenot (1989) found sex differences in: (1) using money to
influence and impress; (2) nervousness about spending money; and (3) purchasing
quality products as a predominant behaviour. The study suggests that women are
more anxious about money than are males, and tend to be more interested in the
quality of the products they are purchasing than their male counterparts, supporting
much previous literature. Yet, interestingly, females were found to use money as a
tool in power struggles more so than males, contradicting previous research.
Gender differences have been established in boys’ and girls’ spending habits, and in
what they choose to spend their money on (Brusdal, 2004; Wilska, 2005). Studies
looking into these differences suggest that males consume products related to
physical activities, such as sports, whereas girls consume products related to using
their bodies for fashion and style (Drotner, 1991).
There is evidence that some parental economic training “backfires” as the
psychoanalysts would predict. That is, that parental training designed to bring
about a very specific outcome (being a cautious saver) leads the child to react to
parental concerns and forcefulness by doing the exact opposite.
There is also the conundrum of different children in the same family having
very different attitudes to money. This may be due to the different personalities of
the children, parental changes in childrearing or that children are highly influenced
by their peers. Thus, it is possible to have spenders and savers in the same family as
well as those who are very concerned about money while others appear strikingly
carefree about how they deal with their money.
Money pathology in men and women

Do men place more importance on money than women? Furnham (1998)
considered the differing attitudes that males and females have toward money and
concluded that females regarded money as being of less importance than did males.
Sabri, Hayhoe, and Goh (2006) researched the area further, again discovering
differing monetary attitudes between males and females. The authors concluded
that males and females differ in their attitudes towards money with regard to
obsession and power. Males were more likely to demonstrate obsessive and power
attitudes towards money than females. These findings are supported by Lim and
Teo (1997), who also found that men are more likely than women to associate
money with being a source of power, and felt more anxiously about their finances.
The differing importance that the genders place on their money can be
demonstrated, with Zuo (1997) finding that males prefer to earn more than their
wives, and not to rely on their wives’ incomes.
Despite men being found to place greater emphasis on money, women have
been shown to have more of an emotional relationship with money (Gresham &
Fontenot, 1989). Money pathologies can result from emotional attachment to
money, leading to impulsive buying, compulsive spending and inability to
demonstrate financial self-control (Verplanken & Herabadi, 2001). Women have
been shown to be more associated with money pathologies than are men, with
Furnham and Okamura (1999) finding that females are more prone to compulsive
spending, for instance.
There are varying explanations for women’s propensity towards money pathologies
– a current suggestion being the influence of the menstrual cycle. Much research
highlights the fact that females are found to be more rational post-ovulation, and to
act more impulsively, demonstrating anxiety and irritability, during pre-menstrual
phases (Baca García, Díaz Sastre, de Leon, & Saiz Ruiz, 2000).
Interestingly, Hanashiro, Masuo, Kim and Malroutu (2004) found that women
spend more money when they are frustrated. Pine and Fletcher (2011) investigated
the relationship between the menstrual cycle and spending, concluding that
impulsive spending was significantly different across menstrual phases. Spending
was found to be less controlled and more excessive for women further through
their cycle in the urethral phase. The authors associate this finding with women
also reporting mood swings, increased irritability, impaired memory and
concentration at this time in their menstrual cycle. Such experiences led to women
spending more money than intended, as well as more regularly spending money
that was unplanned and on impulse. Almost two thirds of women in the sample in
the luteal phase had made a purchase on impulse.
It may be suggested that such impulsive spending is not detrimental (Wood,
2005), and does in fact form part of normal behaviour. However, when considering
the women in Pine and Fletcher’s (2011) study, 57% had spent over £25 more than
they had needed to, with 28% of these buyers later feeling remorseful about this.
Studies investigating spending habits have suggested that males choose to spend
their money on different items. Drotner (1991) investigated differences in purchases
between the sexes, and concluded that males are more likely to consume products
related to physical activities and sport, whereas girls prefer to purchase items used
to enhance their image.
Women are generally considered to enjoy shopping more than males. This
stereotype has been empirically tested and proven by Dittmar and Drury (2000)
who found that women attach more significance to shopping than males do. One
reasoning behind this is that females are found to relate their sense of self more
closely with shopping than males do.
Do women have a special, unique and particularly problematic relationship with
money? Ealy and Lesh (1998) believe they do and started running workshops for
women to look at their money issues. Their aim was to confront two fundamental
fallacies: money defines you and is part of your self-worth; and money earned
should and does powerfully affect relationships.
They quoted various studies and surveys, which, for instance, showed:
• Young (American) women fear money more than learning about handling it
later, they work less and receive more financial support from their parents than
their male counterparts.
• Only 11% of women vs. 25% of men in a nationwide poll were rated as “very
knowledgeable” concerning their investments.
• Women worry more (29% vs. 17%) about money and differently – men worry
more about losing face, and paying the mortgage, while women worry about
day-to-day issues.
• Women work fewer years and are less well paid than men. Hence they
accumulate less and have less retirement provision.
Ealy and Lesh begin their workshop in the familiar money messages way, asking
about parental beliefs and behaviours with respect to money. They also enquire
into the cultural, religious and education-based messages the participants received.
They believe that (Western) society sends two strong and contradictory messages
to women:
1. Women don’t have to bother learning about how to manage money

because their/a man will gladly and competently take care of all that.
This leads women into never asking for a fair salary, never learning about
investments and being uncomfortable talking about money.
2. Possession of wealth comes only at a very high price: true happiness
does not come from money, and interest in money will exact a painfully
high price in terms of relationships and personal security.
They believe that women assume a dependent relationship with money when they
approach all money dealings from one or all three basic beliefs: I should not have
to; I do not want to; I cannot. All lead to a sense of helplessness and powerlessness.
Further, beliefs about dependency become self-fulfilling, hence the importance of
education and empowerment to reduce the feelings of anxiety. Related to this is
the fear of success; the “meek is better” message that it is unfeminine and unladylike
to be powerful and economically successful. This leads to a failure to achieve
potential, and lowered self-esteem and self-confidence.
Ealy and Lesh (1998) also talk about sneaky but persuasive fears such as “money
= security”. This, they argue, leads to the belief that any relationship is better than
no relationship. This belief may be rooted in family history. They also may stay in
unhealthy, poorly paid and deeply unsatisfying working situations for the same
reason. It is the fear of dependency, homelessness, and being a burden that leads
some women to stay in bad relationships, bad jobs, and bad families because they
believe their only security comes from the money they receive by staying where
they are.
For women, money can also be an addiction or a treadmill to nowhere. It has a
drug-like quality for various reasons: people spend an inordinate amount of time
thinking about how to obtain it, so much so that we neglect ourselves and our
relationships in the process. Further, we compromise ourselves in getting it.
Women may be particularly prone to compulsive or emotional spending
that is used to comfort, vent feelings, even “feel more alive”. Shopping sprees may
be a way to get back at an unresponsive partner or parent. It may be an

unacknowledged manifestation of anger, fear or hurt. Say it with spending not
flowers. For some women compulsive spending is very simply a substitute for a
direct, honest, explicit expression of anger. Yet it keeps the spender unbalanced
and diverts the focus of energy from even greater unhealthy behaviour.
The opposite of compulsive spending is guilty spending, which is rooted in
the mentality of scarcity. It is “not enough theory”, where women can spend
money (quite happily) on others but not themselves. It is based on faulty assumptions
like, “I only have value when I give to others or put myself last”.
Money can also facilitate the avoidance of intimacy. People are never ready for
a relationship until they have made enough money, or else they substitute money
for intimacy but believe it is a bad bargain.
Ealy and Lesh (1998) argue that women also get unhelpful messages about
money from financial institutions. Women do not take sufficient control of their
finances. Ignorance leads to fear which leads to paralysis. Avoidance behaviours are
aimed to spare women from making scary decisions and taking risks. The
recommendations are clear and self-evident:
• Rewrite the “can’t, don’t, shouldn’t” money message

• Redefine your relationship with money by
t Taking the (negative) emotion out of the issue
t Working to understand money
• Resolve to take charge of your money life now.
After becoming more self-aware and empowered with respect to money it is

easier to make better decisions: how and when to save it or give it away; how to
charge for work; and how much to pay others. “Staying clear with yourself about
your motivations for charitable giving, about pricing your work, and honouring
other women’s work will move you toward a more positive relationship with
money” (p. 132).
The workplace is often a source of money issues. Women may prefer a better
work–life balance than men; women may trade off extrinsic for intrinsic rewards
more than men. Finding “joyful” work and co-workers they like and respect are
important, as is work that bolsters self-esteem.
Finally, Ealy and Lesh (1998) point out how important it is for women to
teach their daughters about money to ensure they get messages about
empowerment, courage and capability as opposed to fear, inability and
disempowerment. The idea is to give girls the tools (early on) to make money
knowledge (and comfort) an integral part of their lives; to encourage saving
wisely, awareness of career options and understanding of how money can and
should operate healthily in relationships.
Conclusions
Tolstoy famously noted that, “All happy families are alike; each unhappy family is
unhappy in its own way”. He may have been right with regard to money. Children
can grow up in a money healthy and happy home where money is not a taboo
topic or a source of argument and tension among parents or children. People from
all cultures and with very different amounts of money “have issues” with their and
their family’s money. Cultural, religious and value differences often influence how
boys and girls are treated differently with regard to how they are expected to
acquire, store, and share their money.
9
MONEY MADNESS
Money and mental health
We can tell our values by looking at out chequebook stubs.

Gloria Steinem
Money, like vodka, turns one into an eccentric.

Anton Chekhov
Where money talks, there are few interruptions.

Herbert Prochnow
When you’ve got them by their wallets, their hearts and minds will
soon follow.
Fern Naito
Introduction
Many philosophers, journalists and playwrights have written about the irrational,
immoral and bizarre things that people do with, and for, money. Newspapers,
magazines and television programmes frequently focus on compulsive savers and
hoarders (who live in poverty but die with literally millions in the bank) or impulsive
spenders (who utterly recklessly “get rid of” fortunes often obtained unexpectedly).
The former are compelled to save money with the same urgency and vengeance that
the latter seem driven to gamble with it (see Chapter 2 on millionaires).
Robbery, forgery, embezzlement, kidnapping, smuggling and product-faking
are all quite simply money motivated. Money, indeed, does make the world go
round. There is no obvious biological drive to amass wealth and get rich, yet the
“purposeless drive” appears to be one of the most powerful known to man.
Money is both intoxicating and inflaming, and the fairy-tale dream of acquiring
great riches appears to have affected all cultures for all time (see the tool and
drug theory).
Journalists, like clinicians, are fascinated by fairly regularly occurring cases where
otherwise normal people behave completely irrationally with respect to money.
Typical cases are people who spend money they know they don’t actually have; or
those who scrimp and save, leading chronically deprived lifestyles when they do not
have to. Incredible arguments and acrimony over money can strain and break
friendships and marriages, and cause very long-lasting family feuds. Money clearly
represents different things to different people, and it can have tremendous
psychological power.
Money is frequently discussed socially – tax rates, cost of living, price of property
– but remains a taboo topic. Celebrities and even “ordinary mortals” seem happier
to talk about their sex lives and mental illnesses long before their monetary status,
salary or frequent financial transactions. Secrets about money matters are not
surprising in our society but this is not so in all cultures. In the openly materialistic
cultures of South East Asia, enquiries into others’ and open discussion of one’s own
financial affairs seems quite acceptable. It is often denied, overlooked or ignored in
courtship and argued about constantly during marriage, and is the focus of many
divorce proceedings. Contested wills between different claimants can turn mild-
mannered, reasonable human beings into irrational bigots.
There are all sorts of reasons why money remains a taboo subject. Various
theories have been put forward to explain this:
• Rich people, who dictate etiquette, eschew discussing their money lest the
poor figure out how to get it for themselves. Or because friends and relatives
might want it or become envious of it.
• It is superstitious to talk of money: it means it could be taken away.
• Boasting about money could encourage envious others to inform tax
authorities.
• If money is associated with food, avoiding discussing it reduces hunger, need,
greed and vulnerability.
• If money is associated with filth in the eyes of the people, shunning discussing
it can be a way of fending off feelings of shame.
• On some levels we know our attitudes to money reveal a lot about us which
we would rather keep private.
In a recent study of over 100,000 Britons, Furnham, Fenton O’Creevy and von
Stumm (2013) found the following responses (Table 9.1) to a number of questions
considered to be possible indicators of money pathology (Forman, 1987).
Nearly half of the items showed that 30% or more of the respondents did say
“yes”, an indication of the how widespread money fears and anxieties are.
This chapter is particularly focused on the pathological meaning and use of
money. It is, curiously, an area of research with a plethora of interesting and
unusual case studies but a paucity of theory or indeed good empirical research.
Money madness 185
Table 9.1 Money pathology of the British people
Items Yes(%) 1 2 3 4
Do you resent having to pay full price for any 51.5 .67
item when you shop?
Do you use money to control and manipulate 4.5
others?
Would you walk out of your way to save a bus 35.3
fare you could easily afford?
Do you hold onto, or hoard your money? 35.2
Do you buy things when you feel anxious, bored, 33.7
upset, depressed or angry?
Do you buy things you don’t really need because 33.1
they are great bargains?
Do you spend a large proportion of your free 12.1
time shopping?
Are you reluctant to learn about practical money 9.4
matters?
Do you refuse to take money seriously? 9.1
Do you regularly exceed the spending limit on 4.7
your credit card?
Are you constantly puzzled about where your 23.0
money goes or why there is none left at the
end of each month?
Do you find yourself worrying about the spending, 4.8
using or giving of money all the time?
Are you increasingly anxious about whether you 18.5
can pay your bills each month?
Source: Furnham, Wilson and Telford (2012)
Anthropologists, social psychologists, sociologists and theologians have all suggested

possible explanations for money pathology. They have tended to stress three factors
as playing a major role in pathology:
1. Early learned experience: Growing up in poverty, economic recession

or clear economic comparative difficulty has been suggested as a motive
for some individuals to be driven to secure, in both senses of the word,
large sums of money.
2. Intergroup rivalry: The concept of pity by the rich for the poor and
the envy and hatred of the rich by the poor provide plenty of
opportunity for intergroup conflict. Threats to security, status,
reputation and ego can act as powerful forces as well as a psychological
threat to attempt to control money.
3. Ethics and religion: Feeling guilt about money and being personally
responsible for the poor is at the heart of many religions. The self-denial,
self-depreciation and guilt associated with certain puritan sects has often
been invoked for the strange behaviour of individuals taught that too
much money acquired “too easily” or displayed too ostentatiously is sinful.
However, there exists no well-formulated articulate theory of individual differences

with respect to money. That is with the exception of psychoanalysis.
The psychoanalysis of money

The psychoanalysts have been writing about money for over 100 years. Borneman
(1973) collected and assessed this disparate literature. It is a literature peppered with
expressions like anal, eroticism and sadism.
Biographers have speculated about how Freud’s personal life influenced his
views on the topic (Warner, 1989). Freud’s obsession with “sliding back into
poverty” and his obsessive compulsive behaviour have been cited as influential in
his theory. Some case studies consider issues such as how patients use money in
therapy to express unconscious desires. An example is Rothstein’s (1986) work
on a banker who used money as an expression of transference love and attempts
at seduction.
In an essay entitled “Character and Anal Eroticism”, Freud (1908) argued that
character traits originate in the warding off of certain primitive biological impulses.
In this essay he first drew attention to the possible relationship of adult attitudes to
money as a product of eroticism. In fact he later wrote, “Happiness is the deferred
fulfilment of a pre-historic wish. That is why wealth brings so little happiness;
money is not an infantile wish.”
Many psychoanalytic thinkers, such as Fenichel (1947) and Ferenczi (1926),
have developed these notions. The latter described the ontogenic stages through
which the original pleasure in dirt and excreta develops into a love of money.
Freud (1908) identified three main traits associated with people who had fixated at
the anal stage: orderliness, parsimony and obstinacy with associated qualities of
cleanliness, conscientiousness, trustworthiness, defiance and revengefulness.
Parental behaviour, it is argued, in this phase can cause obsessive-compulsive
behaviour. Further, children will parent as they were parented. Hence rigid vs.
permissive, premature vs. delayed “potty training” can have long-lasting effects.
The anal character retains childhood ambivalence and inhibitions towards money.
O’Neill, Greenberg, and Fisher (1992) found evidence that those with anal
personalities characterised by obstinacy, orderliness and parsimony enjoyed toilet
humour more than non-anal types, so providing modest evidence for the theory.
According to the theory, all children experience pleasure in the elimination of
Money madness 187
faeces. At an early age (around 2 years) parents in the West toilet-train their
children, some showing enthusiasm and praise (positive reinforcement) for
defecation, others threatening and punishing a child when it refuses to do so
(negative reinforcement). Potty- or toilet-training occurs at the same stage that the
child is striving to achieve autonomy and a sense of worth.
Often toilet-training becomes a source of conflict between parents and
children over whether the child is in control of its sphincter or whether the
parental rewards and coercion compel submission to their will. Furthermore, the
child is fascinated by and fantasises over its faeces, which are, after all, a creation
of its own body. The child’s confusion is made all the worse by the ambiguous
reactions of parents who, on the one hand, treat the faeces as gifts and highly
valued, and then, on the other hand, behave as if they are dirty, untouchable and
in need of immediate disposal. Yet the children who revel in praise over their
successful deposits come to regard them as gifts to their beloved parents to whom
they feel indebted, and may grow up to use gifts and money freely. Conversely,
those who refuse to empty their bowels except when they must later have
“financial constipation”.
Thus, the theory states quite explicitly that if the child is traumatised by the
experience of toilet-training, it tends to retain ways of coping and behaving during
this phase. The way in which a miser hoards money is seen as symbolic of the
child’s refusal to eliminate faeces in the face of parental demands. The spendthrift,
on the other hand, recalls the approval and affection that resulted from submission
to parental authority to defecate. Thus, some people equate elimination/spending
with receiving affection and hence feel more inclined to spend when feeling
insecure, unloved or in need of affection. Attitudes to money, then, are bimodal;
they are either extremely positive or extremely negative.
Evidence for the psychoanalytic position comes from the usual sources: patients’
free associations and dreams. Freudians have also attempted to find evidence for
their theory in idioms, myths, folklore and legends. There is also quite a lot of
evidence from language, particularly from idiomatic expressions. Money is often
called “filthy lucre”, and the wealthy are often called “stinking rich”. Gambling for
money is also associated with dirt and toilet-training: a poker player puts money in
a “pot”; dice players shoot “craps”; card players play “dirty-Girty”; a gambler who
loses everything is “cleaned-out”.
Psychoanalytic ideas have inspired a good deal of empirical work (Beloff,
1957; Grygier, 1961; Kline, 1967). Although there are a number of measures that
have been constructed to measure dynamic features, Kline (1971) developed his
own test of the anal character. This scale has been used in Ghana as well as
Britain and has attracted a good deal of research. For instance, Howarth (1980,
1982) found the anal scale quite separate from measures of neuroticism or
psychoticism. However, O’Neill (1984) found anality related to various Type A
characteristics like time consciousness and obstinacy, which suggests they may be
difficult to treat.
Table 9.2 A test of the anal character
1. Do you keep careful accounts of the money you spend? (Yes/No)

2. When eating out, do you wonder what the kitchens are like? (Yes/No)
3. Do you insist on paying back even small trivial debts? (Yes/No)
4. Do you like to think out your own methods rather than use other (Yes/No)
people’s?
5. Do you find more pleasure in doing things than in planning them? (Yes/No)
6. Do you think there should be strong laws against spending? (Yes/No)
7. There is nothing more infuriating than people who do not keep (Yes/No)
appointments?
8. Do you feel you want to stop people and do the job yourself? (Yes/No)
9. Do you think most people do not have high enough standards in what (Yes/No)
they do?
10. Do you make up your mind quickly rather than turn things over for a (Yes/No)
long time?
11. Do you think envy is at the root of most egalitarian ideals? (Yes/No)
12. Do you like to see something solid and substantial for your money? (Yes/No)
13. Do you easily change your mind once you have made a decision? (Yes/No)
14. Do you disagree with corporal punishment? (Yes/No)
15. Do you regard smoking as a dirty habit? (Yes/No)
Source: Kline (1971).
Borneman (1973) notes how various money issues are related to childhood eating
and defecating behaviour:
• Ingesting: this is about acquiring and buying. This partly explains the monetary
associations with food. People take enormous pleasure in the acquisition (money,
property, possessions), which is the faecal aspect of the enterprise.
• Digesting: food is an investment that leads to profit.
• Withholding of excrement: this is linked to saving, parsimony and
collecting. Fixation at the retentive phase leads to irrational collecting.
• Expelling the faeces: this is linked to spending, selling and producing. This
is the psychology of loss, squandering and surrender, but also of fun.
Most interestingly, Borneman (1973) is deeply critical of Kaufman (1956), whose

essay he chooses to include in his anthology. He accuses Kaufman of trying to
help patients by adapting to their society’s culture. He is deeply critical of the
assumption that money can be used as a means to encourage both socially
desirable and socially undesirable behaviour because of the socio-political
association of desirability.
Psychoanalysis is at its best in the observation of contradictions and patterns, in
providing a plausible if non-commonsensical explanation for odd, irrational
behaviour that brings people pain and distress. It is at its worst when it pathologises
and tries to explain everything.
Money madness 189
Compulsive buying
Television programmes have made the whole issue of compulsive buying better
understood. There are a number of popular terms for pathological compulsive
buying: shopaholism, consuming passions, retail therapy, acquisitive desire,
overspending, and affluenza. The very early literature referred to oniomania or
buying mania, considered an impulse pathology characterised by excessive,
impulsive, uncontrollable consumption. It has been linked (genetically) to other
impulse disorders like gambling, alcoholism and binge eating.
There is recent evidence of biological disorders of neurotransmitters that may in
part account for the behaviour (the “highs” and “rushes” felt). The psychological
factors identified concern the gaining of approval and recognition, the bolstering
of self-esteem and escaping into a fantasy where people feel important and
respected. There are also sociological and cultural forces that actually encourage
the behaviour.
Most compulsive shoppers are middle- or lower middle-class females. There are
many forms of this “odd behaviour pattern”. Some buy every day; others in
response to negative life events. Some buy for themselves; others for family and
friends. Many buy things they don’t need or ever use, which seem to lose their
meaning after the purchase is made. Most purchases are clothes, jewels, electronic
equipment, or collectables.
It has been argued that compulsive spending is a serious and growing problem
because of increasing production of goods around the world linked to increased
wealth and the ease of credit. Next, people compare themselves to a much wider
circle than they did in the past. Previously “keeping up with the Joneses” just
meant the neighbours, but television and other media have made reference point
groups bigger and richer.
Benson (2008) noted that compulsive buying has now been recognised as a
common, and serious, social problem. She noted that many overshoppers feel they
have to keep their compulsion secret, lest they are condemned as narcissistic,
superficial and weak willed.
People overshop to feel better about themselves or more secure. It may be a
distraction helping them avoid other important issues. It can be a weapon to express
anger or seek revenge. It may be a vain attempt to hold on to the love of another.
It may be a balm used to soothe oneself or repair one’s mood. It may be an attempt
to project an image of wealth and power. It may be a way of trying to fit into an
appearance-obsessed society. Equally, it may be a response to loss, trauma or stress.
It could be the lesser evil compared to being addicted to alcohol, drugs or food. It
could also be a way of trying to feel more in control or finding meaning in life.
Benson (2008) asked the obvious question: What are you shopping for? She
poses the following hypotheses. Do you overshop to:
• Feel better about yourself or more secure – blocking pain, feelings of failure?
• Avoid dealing with something important – delaying, repressing actions?
• Express anger or seek revenge – punishing spouse, parents, friends, children?

• Hold on to love – to prevent abandonment, hold on to people?
• Soothe yourself or repair moods – to “drug” yourself with uppers and downers?
• Project an image of wealth and power – to boost self-esteem, self-worth?
• Fit into an appearance-obsessed society – to project youth, success, etc.?
• Reduce stress, loss and trauma – a relief valve, a compensating balm?
• Be a lesser evil – preventing something even more “destructive”?
• Feel more in control – where you can best “self-manage” your life?
• Finding meaning in life and deny death – solve existential dilemmas?
As usual parental socialisation is implicated:
• Parents who themselves were abused/neglected give gifts to compensate.

• Parents who “earn” their love through particular achievements often have
children who feel emotionally undernourished.
• Parents who don’t give time, energy or love to indicate the child is secure,
valued, loved and important leave them feeling neglected and empty – a void
which they seek to fill by shopping.
• Families that suffer financial reversal experience lowered self-esteem believing
the latter to be exclusively associated with the quality and quantity of
possessions that can be bought.
• Families that have a feeling of both or either emotional and financial
impoverishment seek to alleviate this feeling with objects.
• Families that give no financial guidance to their children.
Benson (2008) sets out to describe typical “triggers” which she divides into
five categories:
1. Situational: sales signs, magazine ads, bad weather.

2. Cognitive: feeling guilty, deserving a reward, rationalisation.
3. Interpersonal: buying after a fight, attempting to impress peers, nice
salesperson.
4. Emotional: feeling excited, sad, lonely, stressed, or even euphoric.
5. Physical: as a substitute for eating, after drinking alcohol.
She then lists typical aftershocks, which can be financial (calls from creditors; poor
credit rating; massive overdrafts), relationship-based (secretiveness; fights; clutter),
emotional (depressed; ashamed; angry), work-based (lowered performance; long
hours; stealing), physical (headaches; sleeping problems), to do with personal
development (wasted time; fewer holidays), or spiritual (lost community spirit;
mismatch of values and lifestyle).
Money madness 191
Benson (2008) recommends keeping a journal and developing a shopping

autobiography to understand how, when and why one shops, as well as “conducting
a motivational interview” with oneself. The six shopping questions are: Why am I
here? How do I feel? Do I need this? What if I wait? How will I pay for this?
Where will I put it? This should include a “matrix”, which is a simple short-term/
long-term, if I shop/if I don’t shop audit. She suggests people develop a shopping
pattern checklist that covers things like when you shop; where you shop; with whom
you shop; for whom you shop; how you acquire something you want; what kinds of
goods/services/experiences you buy/acquire; what is your shopping signature/style
is; how you give permission to yourself to overshop.
It is partly an attempt to get to a person’s “scripts”: to make them more self-aware
about their behaviour so that they can change it. It is also about finding alternative
behaviours for “self-fondness, self-care and self-respect” as well as fulfilling funda-
mental needs. The underlying message is: before you go shopping, understand what
you are shopping for and attempt to counteract the pressure to consume.
Next there is the issue of becoming financially fit. This includes learning how
to save, buying much less using credit cards, learning how to budget and checking
on spending by categories. Benson recommends shopaholics look carefully at what
precisely they are shopping for. Is it self-kindness, self-care or self-respect? If so
are there useful, better alternatives that do not involve shopping? This also involves
countering, demagnetising or resisting the pull and pressure to consume. This
means avoiding danger zones, reducing exposure, resisting social pressure and
creating better alternatives. It also involves mindful shopping: shopping with a
plan. Also, getting used to returning, reselling and recycling. She also recommends
a form of cognitive behavioural therapy to challenge distorted thinking.
Family dynamics can influence compulsive shopping where, for instance,
parents attempt to control, placate, or dominate others with gifts. Equally some
give little financial guidance.
Therapists like Benson (2008) attempt to “demagnetise” people and help
them resist the need to buy, consume and spend. She advises people to avoid
their danger zones (places they are likely to overspend), reduce their exposure to
advertisements and choose a creative, smarter alternative for meeting material
needs. Part of the strategy is to learn to resist social pressure from; salespeople,
neighbours/comparison groups, significant others (family and friends), and
children. The aim is to make people mindful about shopping. It encourages them
to shop with a plan that includes reviewing purchases as well as plans for returning,
reselling and recycling.
Cognitive behaviour therapy can be used to discourage overspending. Thus,
people are warned about all-or-nothing (black/white) thinking; overgeneralisation
(all/never); dwelling on single negative thoughts; jumping to (too hasty)
conclusions; catastrophisation; denial; emotional vs. rational reasoning; labelling;
having inappropriate “should” statements; and personalisation. The idea is to
challenge then change distorted thinking, to adopt the language of spirituality
rather than materialism and to count your blessings.
The emotional underpinning of money pathology

The Freudians have suggested that many money-linked attitudes disguise other
powerful emotions. Many Freudians rejoice in the paradox whereby some outward,
visible behaviour disguises or masks the opposite motive or desire. Thus, pity
towards the poor may in fact disguise hatred, racial prejudice, and feelings of threat.
Threat of physical violence or political clout with attempts to legally or illegally
remove the wealth and concomital status, reputation or ego of the well-to-do is a
powerful motive. The poor are a psychological and economic threat to the latter
because they may be prepared to work for very low wages, and can easily be
stigmatised and victimised as dirty, dishonest, and worthy of their fate.
One emotion frequently associated with money is guilt. This has been associated
with Puritan values of asceticism, denial and anhedonia (Furnham, 1990).
Puritanism preaches the sinfulness of self-indulgence, waste and ostentatious
consumption. Values such as conscientiousness, punctuality, thrift and sobriety
made people with these beliefs or this socialization guilty not about the acquisition,
but more the spending of money. It is not antagonistic to the concept of money or
receiving equitable rewards for hard work, but Puritanism opposes money gained
too easily (i.e. gambling, inheritance) or dishonestly or sinfully, and, particularly
money that is frivolously spent.
Guilt about money (or indeed anything) can cause a sense of discomfort,
dishonesty, unhappiness, even self-loathing. This guilt may be consciously felt
and steps made to reduce it. Goldberg and Lewis (1978) believe that money guilt
may result in psychosomatic complaints, transferred to feelings of depression.
Psychoanalysts have documented cases of the fear of affluence in those schooled
in the Puritan ethic. The basis of this fear is apparently loss of control. Money
controls the individual: it dictates how and where one lives; it can prescribe and
proscribe who are friends and associates; and it can limit as much as liberate one’s
social activities. The Puritan ethic focuses on limits and the conservation of such
things as time, money, resources, even emotions. If money were in super
abundance there would seem little, certainly less, reason to exercise any control
over it. In this sense one could lose the need for control. Maintaining control –
over physical factors and emotions – provides a person with the illusion of a sense
of security.
Psychoanalysts believe that one reason for those who suddenly become rich
being unable to deal with their wealth is because they lack the self-discipline and,
of course, actual experience to handle it. “Where controls have not been internalized
and realistic self-discipline has not evolved, the individual is dependent upon
external controls to provide a sense of security” (Goldberg & Lewis, 1978, p. 75).
Large amounts of money seem to imply for many individuals that one can use it
irrespective of the consequences, and this uncontrolled behaviour creates anxiety.
Paradoxically if the money dries up or disappears, order and security are restored to
life. Further, if people have made sudden and dramatic changes to their life, getting
rid of the money and all it bought may mean a return to normality.
Money madness 193
As well as arousing guilt money can represent security. Studies of the self-made,
very rich in America have shown a much greater than chance incidence of these
rich people experiencing early parental death, divorce, or other major deprivation
(Cox & Cooper, 1990). Psychoanalysts believe that they, in adulthood, set out to
amass so much money that they will never be stranded again. Having had to assume
adult responsibilities at an early age, they may have felt the need to prove to
themselves and others their lack of need for dependence on parents. The desire to
amass wealth, therefore, may be nothing more than a quest for emotional, rather
than physical security.
Money-greed for psychoanalysts may relate more to orality than anality
(Goldberg & Lewis, 1978). They point here to terms like “bread” and “dough”
referring to money. The money-hungry person who seeks and devours money
with little regard to social etiquette reacts to money as a starving person does to
food. This behaviour, it is said, derives from a deprived infancy.
As we shall see, psychoanalytic writers have tried hard to categorise people in
terms of the underlying dynamics of their money pathology. To psychoanalysts and
other clinicians from diverse backgrounds money has psychological meanings: the
most common and powerful of which are security, power, love, and freedom
(Goldberg & Lewis, 1978).
Security
Emotional security is represented by financial security and the relationship is
believed to be linear – more money, more security. Money is an emotional life-
jacket, a security blanket, a method to stave off anxiety. Evidence for this is, as
always, in clinical reports, archival research and the biographies of wealthy people.
Yet turning to money for security can alienate people because significant others are
seen as a less powerful source of security. Building the emotional wall around
themselves can lead to fear and paranoia about being hurt, rejected or deprived by
others. A fear of financial loss becomes paramount because the security collector
supposedly depends more and more on money for ego-satisfaction: money bolsters
feelings of safety and self-esteem.
Goldberg and Lewis (1978) specify several “money-types” that all, consciously
or not, see money as a symbol of security. They provide typical “case history” data
for the existence of these various types though they offer little quantitative rather
than qualitative research findings.
a. Compulsive savers: for them saving is its own reward. They tax themselves
and no amount of money saved is sufficient to provide enough security. Some
even become vulnerable to physical illness because they may deny themselves
sufficient heat, lighting, or healthy food.
b. Self-deniers: self-deniers tend to be savers but enjoy the self-sacrificial nature
of self-imposed poverty. They may spend money on others however (though
not much) to emphasise their martyrdom. Psychoanalysts point out that their
behaviour is often a disguise for envy, hostility, and resentment towards those
who are better off.
c. The compulsive bargain hunter: money is fanatically retained until the
situation is “ideal” and then joyfully given over. The thrill is in out-smarting
others – both those selling and those paying the full price. The feeling of
triumph often has to validate the irrationality of the purchase which may
not really be wanted. But they get short changed because they focus on price
not quality.
d. The fanatical collector: obsessed collectors accumulate all sorts of things,
some without much intrinsic value. They turn to material possessions rather
than humans as potential sources of affection and security. They acquire
more and more but are reticent to let any go. Collecting can give life a sense
of purpose and help to avoid feelings of loneliness and isolation. Objects are
undemanding and well-known collections can bring a sense of superiority
and power.
Power
Because money can buy goods, services and loyalty it can be used to acquire
importance, domination and control. Money can be used to buy out or compromise
enemies and clear the path for oneself. Money and the power it brings can be seen
as a search to regress to infantile fantasies of omnipotence. Three money-types who
are essentially power-grabbers, according to the psychoanalytically oriented
Goldberg and Lewis (1978), are:
a. The manipulator: These people use money to exploit others’ vanity and
greed. Manipulating others makes this type feel less helpless and frustrated, and
they feel no qualms about taking advantage of others. Many lead exciting lives
but their relationships present problems as they fail or fade due to insult,
repeated indignities or neglect. Their greatest long-time loss is integrity.
b. The empire builder: They have (or appear to have) an overriding sense of
independence and self-reliance. Repressing or denying their own dependency
needs, they may try to make others dependent on them. Many inevitably
become isolated and alienated particularly in their declining years.
c. The godfather: They have more money to bribe and control so as to feel
dominant. They often hide an anger and a great over-sensitivity to being
humiliated – hence the importance of public respect. But because they buy
loyalty and devotion they tend to attract the weak and insecure. They
destroy initiative and independence in others and are left surrounded by
second-rate sycophants.
As Goldberg and Lewis (1978) note, the power-grabber felt rage rather than fear as
a child, and expresses anger as an adult. Security collectors withdraw with fear,
power-grabbers attack. Victims of power-grabbers feel ineffectual and insecure,
Money madness 195
and get a pay-off by attaching themselves to someone they see as strong and capable.
They may therefore follow “winners” particularly if they have enough money.
Love
For some, money is given as a substitute for emotion and affection. Money is used
to buy affection, loyalty and self-worth. Further, because of the reciprocity
principle inherent in gift giving, many assume that reciprocated gifts are a token of
love and caring.
a. The love buyer: many attempt to buy love and respect: those who visit
prostitutes; those who ostentatiously give to charity; those who spoil their
children. They feel unloved not unlovable and avoid feelings of rejection and
worthlessness by pleasing others with their generosity. However, they may
have difficulty reciprocating love, or their generosity may disguise true feelings
of hostility towards those they depend on.
b. The love seller: they promise affection, devotion, and endearment for
inflating others’ egos. They can feign all sorts of responses and are quite
naturally particularly attracted to love buyers. Some have argued that forms of
psychotherapy are a love buyer–seller business transaction open to the laws of
supply and demand. The buyers purchase friendships sold happily by the
therapist. Love sellers gravitate to the caring professions.
c. The love stealer: the kleptomaniac is not an indiscriminate thief but one
who seeks out objects of symbolic value to them. They are hungry for love
but don’t feel they deserve it. They attempt to take the risk out of loving,
and being generous, are very much liked but tend only to have very
superficial relationships.
Overall, then, it seems that whereas parents provide money for their children
because they love them, parents of potential love dealers give money instead of
love. Because they have never learnt to give or accept love freely they feel
compelled to buy, sell, or steal it. The buying, selling, trading and stealing of love
is for Freudians a defence against true emotional commitment, which must be the
only cure.
Freedom
This is the more acceptable, and hence more frequently admitted, meaning
attached to money. It buys time to pursue one’s whims and interests, and frees
one from the daily routine and restrictions of a paid job. There are two sorts of
autonomy worshippers:
a. The freedom buyers: for them money buys escaping from orders, commands,
even suggestions that appear to restrict autonomy and limit independence.
They want independence not love – in fact they repress and hence have a
strong fear of dependency urges. They fantasise that it may be possible to have
a relationship with another “free spirit” in which both can experience freedom
and togetherness simultaneously. They are frequently seen as undependable
and irresponsible, and can make those in any sort of relationship frustrated,
hurt and angry.
b. The freedom fighters: they reject money and materialism as the cause of
the enslavement of many. Frequently political radicals, drop-outs or
technocrats, they are often passive-aggressive and attempt to resolve internal
conflicts and confused values. Camaraderie and companionship are the main
rewards for joining the anti-money forces. Again idealism is seen as a
defence against feeling. There may be a large cost if the person gets involved
with cults.
An underlying theme is that dependency on other people and on the world early
in life was perceived as a threatening rather than a rewarding experience. This
typology is based on clinical observations and interpreted through the terminology
of a particular theory. For some, this may lead to interesting hypotheses that
require further proof either by experiment, or at least evidence from a much
wider normal population.
Marketing people have used this typology to suggest that salespeople could both
listen for and use words that trigger or prime people so as to reveal their particular
associations with money. Thus:
• Security: Anxiety. Consistent. Consolidate. Deadlock. Fear. Foundation.

Get what you pay for. Guarantee. Impact. Insurance. Life cover. Loss.
Protected. Reassurance. Reliable. Risk-averse. Rooted. Saving. Safety net.
Sturdy. Trust. Volvo.
• Power: Action. Aggressive. Appetite. Caddy. Champagne. Double-digit.
Eagle. Empire. Envy. Gold standard. Growth. High-octane. Investment.
Outperform. Porsche-performance. Proud. Risk. Status. Secret weapon.
Serve. Thirst. Top of the class.
• Love: Bereavement. Child. Chocolates. Cradle. Diamonds. Disney. Divorce.
Education. Family. Happiness. Home. Honeymoon. Inheritance. Joy. Love
Bug. Marriage. Nest egg. Nurture. Partner. Provide. Red. Roses. Soulmate.
Teddy bear. VW Beetle.
• Freedom: Adventurous. Around the world. Break free. Dream. Emerging
markets. Exploring. Flexible. Free as a bird. Free-thinking. Gamble. Hunting.
Impulsive. Independence. Maverick. Multinational. Off-road. Off the beaten
track. Opportunity. Passport. Retirement. Roulette. Shackles. Trailblazer.
Travel. Virgin sands. Visa.
Money madness 197
Researchers at Mountainview Learning in London attempted to help bankers

understand how to understand their clients attitudes to money using the fourfold
classification system.
Psychotherapists believe that money beliefs and behaviours are not isolated psychic
phenomena but are integral to the person as a whole. People who withhold money
may have tendencies to withhold praise, affection or information from others. People
who are anxious about their financial state may have something to learn about a fear
of dependency or envy. Therapists attempt to help people understand their money
madness. Money can become the focus of fantasies, fears and wishes, and is closely
related to denials, distortions, impulses and defences against impulses.
Money can thus be associated with:
Armour, ardour, admiration, freedom, power and authority, excitement and

elation, insulation survival and security, sexual potency, victory and reward.
Thus, money may be perceived as a weapon or shield, a sedative or a

stimulant, a talisman or an aphrodisiac, a satisfying morsel of food or a warm
fuzzy blanket … so having money in our pockets, to save or to spend, may
provide us with feelings of fullness, warmth, pride, sexual attractiveness,
invulnerability, perhaps even immortality. Similarly, experiencing a dearth of
money may bring on feelings of emptiness, abandonment, diminishment,
vulnerability, inferiority, impotency, anxiety, anger and envy. (Matthews,
1991, p. 24)
For psychoanalytically inclined clinicians the money personality is part pleasure-

seeking, frustration-avoiding id, part reasonable and rational ego, part overseeing,
moral, super ego. This accounts for the oft-reported but curious paradox of seeing
people lethargic and depressed after a major win and elated, even virtuous, after
financial depletion.
Rather than typologies of money madness, Matthews (1991) sees attitudes to
money on a continuum from mild eccentricities with subtle symptoms through
moderate money neurosis to full-blown money madness. Again, her data is
obtained from treating patients and running workshops with all the limitations that
that implies. Further, she believes that money attitudes and behaviours are
influenced by the emotional dynamics of early childhood; interaction with families,
friends, teachers and neighbours; cultural and religious traditions; and, more, by
modern technology and by the messages in the mass media.
Matthews (1991) has observed that many money disorders are learned from
“family disorders”. The message families send about money are, however,
simultaneously overt and covert, and often paradoxical, inconsistent and confusing.
Parents can, and do, express their feelings toward their children through money,
for example by reinforcing good habits or success at school.
Check verbal and body language used by the client during their narrative
Establish/confirm/play back how the client was feeling at the time
Content Helpless Loved Lonely Free Frustrated Proud Frustrated

Happy Afraid Happy Sad Excited Disgust Confident Ashamed
Secure Anxious Content Depressed In control Bored Assured Envious
Calm Desperate Valued Unvalued Overjoyed Lethargic Respected Alienated
Reassured Panic Accepted Unloved Anticipation Depressed Admired Unhappy
Go back over the evidence to check what emotional

attitude to money your client has
1. Is your client the 1. Is your client the 1. Does your client 1. Is your client the
type of person type of person who use money to type of person
who has a terrible spends money ensure his/her who spends
fear of losing when he feels independence? money when he
funds and of depressed, 2. Is your client the wants to gain
being taken worthless, or afraid type of person other people’s
advantage of of being hurt, being who dreams respect?
financially? alone or being about breaking 2. Is your client the
2. Is your client the rejected? free from shackles type of person
type of person 2. Is your client the and starting their who worries that
who saves money type of person who own business he is so absorbed
as a way to uses money to win venture but feels with making
reduce his the affection of financially unable money, but then
discomfort and others? to do so? stops thinking of it
anxiety? when he realises
how well he
blends in with
others who do the
same things?
Positive feelings
Negative feelings
FIGURE 9.1 A strategy to understand typologies

Source: Reproduced with permission from Mountainview Learning, London.
Money madness 199
“I need to know a bit about you. Can I ask you to just tell me about what has been
going on in your world the last year. Tell me your story”
SECURITY LOVE FREEDOM POWER
“We’ve had to start “It’s our wedding “I’ve finally quite the “Work, work, work.
thinking about anniversary next job I have been in But it has been
somwhere bigger to month and I for the last twenty good. We turned
live, we’ve just had desperately want to years to do my own over $2 million last
our second child.” buy my wife this thing.” year. Next year will
diamond ring that be about expansion,
“I need to start she has seen.” “We’ve never had better offices, more
putting some money the chance to travel, staff.”
away for my “I took the family to but now we can, so
children’s Disney, they loved it” I’m planning a “I need a new car
education” Caribbean cruise” for work. Now that I
am meeting top
clients, I have to
have the right car.”
FIGURE 9.2 Questions to determine type

Source: Reproduced with permission from Mountainview Learning, London.
Matthews (1991) believes there are a host of reasons why people run so easily
into debt. People may buy too many things to boost their capacity for self-esteem
or to try and fulfil a fantasy they have about themselves. Some may overdebt out
of an unconscious desire to impoverish themselves, or to get rid of their money
because on some level they find it loathsome. Alternatively they may overdebt
because they feel unfulfilled and frustrated in some significant aspect of their lives
and because spending temporarily takes their mind off their sense of emptiness and
unhappy circumstances. People may overdebt because compulsive behaviour of
one sort or another runs in their family or as a reaction against a family of origin
where thriftiness was excessively prized. People may overdebt to try to keep up
with their peers, or because they are unable to resist media messages which instruct
them to “shop till we drop.”
Matthews (1991) also speculates about the “pack-thinking” (conformity of views)
of investors who play stock markets and whose greed and belief in eccentric experts
can lead to spectacular monetary successes and failures. For these economic
shamans, the stars and superstitions appear to play a major role in a highly capricious
and unpredictable world. Many behave quite irrationally to allay feelings of
uncertainty and insecurity about financial matters.
Forman (1987) argued that of all the neuroses, the money neurosis is most
widespread. Like all neurotic processes it involves unresolved conflict associated
with fear and anxiety that may relate directly to maladaptive, self-defeating,
irrational behaviour. Money cannot buy love and affection, personal states of mind
like inner peace, self-esteem or contentment, or particular social attributes like

power, status or security. Forman believes too many people have a simple equation
like money equals love or self-worth, or freedom, power or security.
In his book Forman (1987) describes five classic neurotic types:
1. The miser who hoards money. They tend not to admit being niggardly,
have a terrible fear of losing funds, and tend to be distrustful, yet have
trouble enjoying the benefits of money.
2. The spendthrift who tends to be compulsive and uncontrolled in their
spending and does so particularly when depressed, feeling worthless
and rejected. Spending is an instant but short-lived gratification that
frequently leads to guilt.
3. The tycoon who is totally absorbed with money making, which is seen
as the best way to gain power status and approval. They argue that the
more money they have, the better control they have over their worlds
and the happier they are likely to be.
4. The bargain hunter who compulsively hunts bargains even if they are
not wanted because getting things for less makes them feel superior.
They feel angry and depressed if they have to pay the asking price or
cannot bring the price down significantly.
5. The gambler feels exhilarated and optimistic taking chances. They tend
to find it difficult to stop even when losing because of the sense of
power they achieve when wining.
Forman considers in some detail some of the more fascinating neuroses associated
with everyday financial and economic affairs like saving, paying insurance and
taxes, making a will, using credit cards. He does not speculate directly on the
relationship between those various money complexes, appearing to suggest
that they are all related to the same basic pathology. He developed a forced-
choice (ipsative) questionnaire and a way for people to self-diagnose. The idea is
that if one agrees with the majority of items in any one section one may have
that pathology.
The literature on the emotional underpinning of money problems is certainly
fascinating. Written by therapists mainly from a psychoanalytic background it also
has severe limitations. There is clearly overlap between various different systems or
descriptions and there is no agreement on typologies or processes. More importantly,
there is little collaborative empirical evidence for many of the points made. While
it is possible that many of these concepts and processes are correctly described, we
need disinterested, empirical evidence demonstrating the validity of these writings.
We do not need to know how widespread these pathologies are in the general
population. Indeed, it is striking from the (scant) sociological and epidemiological
research on money how common money pathology is, not the reverse. There is
Money madness 201
also no evidence on the incidence of these pathologies in the population as a

whole, nor whether therapy (of any sort) cures these problems. Long on speculation
and short on evidence, this area of research warrants good empirical studies to
examine these ideas.
Treating pathology
Goldberg and Lewis (1978) argue that psychotherapists see money madness as of
secondary importance. They also note that the different money types, not
unnaturally, seek out therapists that fulfil their particular needs. Thus, those
concerned with authority will seek out a less conventional therapist, while the
security collector will be attracted to the least expensive therapist in the local
market. Because (nearly) all therapists charge money for their services (though
there is not necessarily any relationship between cost and quality of treatment),
entering psychotherapy means spending money on oneself. Yet money remains a
relatively taboo subject between therapist and client. Clearly all therapists need to
understand the shared meaning attached to payment and non-payment for services
throughout the course of therapy. Also, paying shows commitment.
Psychotherapists believe that money beliefs and behaviours are not isolated psychic
phenomena but integral to the person as a whole. People who withhold money may
have tendencies to withhold praise, affection or information from others. People
who are anxious about their financial state may have something to learn about a fear
of dependency or envy. Therapists attempt to help people understand their money
madness. Money can become the focus of fantasies, fears and wishes, and is closely
related to denials, distortions, impulses and defences against impulses.
Forman (1987) considered a range of therapies that he believes may be
successfully used to help those with money neurosis, though of course the therapies
may be applied to many other psychological problems. First, he notes how
cognitive behaviour therapy may address negative attitudes. Self-defeating
thoughts are characterised by self-blame, guilt, unresolved anger, and low self-
esteem. They are riddled with distortions, including overgeneralisations (in which a
single negative event is seen as a never-ending pattern of defeat), arbitrary conclusions
(in which one thought does not follow from another), and black and white thinking
(in which everything is all or nothing).
The first step is developing a contract for how the patient will behave – the
rewards and penalties for compliance and non-compliance with objectives. Next is
the task of uncovering automatic, money-related thoughts and attitudes. The third
step is to recognise the harmful effects of these thoughts, and then to replace them
by healthy thoughts on the subject. The final step is to change behaviour in line
with the new healthy thoughts.
Another recommended therapy is de-stressing or systematic relaxation,
which is an attempt at stress inoculation. The idea, somewhat tenuous, is that
money neurosis is exacerbated by stress. Next psychoanalysis is recommended
which also has set steps.
Assertiveness training is also recommended to help some people turn down

unreasonable money requests in a way that does not let them or the requester feel
uncomfortable. Various other therapies are considered including “thought-
stopping therapy” and role playing. Alas this eclectic approach to therapy has little
or no evidence to support it, nor a full explanation of the processes at work.
Paying for psychotherapy

It has been observed that, since Freud, many psychoanalysts have argued that
patients do not get well unless they pay for their treatment. Robertiello (1994)
firmly rejects this thesis, noting that not only has he given free treatment but that
he lent patients large sums of money and even paid a patient “to come to sessions
to get him past a resistance in which he projected his own problems with money
onto me” (p. 36).
Therapists have written about money in analysis: how they “charge” their
patients. Unlike sex and death, money does seem to remain a taboo subject. Haynes
and Wiener (1996) have pointed out that the analyst’s complexes and practices
about money can clash badly with those of the client, causing particular problems.
The agreement about fees, the presentation of bills, charging for cancellation, the
increases of fees, can all present problems. Do higher fees mean better work? Yet
payment is received for work in progress which cannot guarantee results. Therapists’
fees confirm their self-esteem, professional status and belief in efficacy. Thus, when
this is challenged by patients, therapists have to confront their own attitudes to
money and then negotiate that meaning with the patient. Again it is asserted that
self-knowledge and insight is the best cure.
Indeed, a whole book has been dedicated to the topic of fees in psychotherapy
and psychoanalysis (Herron & Welt, 1992). The idea is that conflicts about money
can be a serious source of tension, misunderstanding and ill will. Of course, the
Freudians see money as a vehicle for favourite concepts like transference and
counter-transference. Other issues include therapists’ unhealthy, pathological
greed, where they use the defence mechanism of reaction formation to deny their
entitlement to an adequate fee, and “healthy” greed, where the fee is a normal
entitlement to the position, role and task performed. Money it is argued can help
therapist and patient understand the therapeutic boundaries of treatment.
Herron and Welt (1992) note that the patient’s fee restricts both the entrance
to and continuance of therapy. They talk of getting the “dosage” right given the
economic situation of the client and the type of therapy they are receiving. They
argue that there are emotional and financial issues regarding the fees that both
client and therapist need to confront honestly. Issues need to be discusses early
and frankly so that expectations are made clear. There is conflict but it needs to
be discussed.
The psychoanalysts have also looked at the heads and tails of money: its good
and bright side vs. its bad and dark side (de Mause, 1988). Hence the interest in
how the word gold (in German) is related to guilt in English and how gift and
Money madness 203
poison are related. The psychoanalysts are interested in how people manipulate
their bad feelings by “injecting” (projective identification) into objects. Feelings of
despair, rage, guilt, need for love, are too dangerous to experience consciously and
are injected into money, which becomes a poison container. Thus, groups have
poison-cleaning acts like sacrifices to purify people of bad feelings. The argument
is that banks often look like temples and bankers become sacrificial priests who
have to handle poison money.
Therapists “lease their time”. Freud argued that charging a fee for therapy was
much better than giving it for free for three reasons (Dimen, 1994):
1. Free treatment stirs up resistance: erotic transference in young women,

pattern transference in young men, both of whom rebel against the
obligation to feel grateful.
2. It pre-empts counter-transference of the therapist who may come to
resent the patients’ selfishness and exploitativeness.
3. It is more respectable and less ethically objectionable to the pretence of
philanthropy. It acknowledges openly the therapist’s interests and needs.
It is interesting to note that Freud wrote about and worried about the adequacy
and unevenness of his income from therapy. He had a “pervasive, if intermittent,
focus on money” (Dimen, 1994, p. 77). He felt greed and cynicism toward
some rich patients and benevolent and paternalistic condescension to poorer
patients. Yet he argued therapy was a bargain because it restored health and
economic efficiency.
Many professionals charge for their time (doctors, lawyers). Their mental labour
fee is a sign of their professional status and an index of authority, privilege and
power. It is important that psychotherapy is bought and sold under conditions that
heal and not ones of “dis-ease”.
In a reflective and self-critical piece Dimen (1994) notes how analysts are so
uncomfortable with their own feelings of need and greed that they treat it
exclusively as a problem for the patient. “Indeed, analysts’ dystonic relation to their
own dependence may constitute the biggest single counter-resistance in regard to
money” (p. 76). She wonders whether, if financial uncertainty unsettles analysts,
financial security may render them smug. Do money worries make analysts feel
unsafe, and thence less confident and competent?
Analysts want to see themselves as beneficent purveyors of good rather than
involved in commerce. They sell their services to make a living. Dimen (1994) asks
the reasonable question of how an analyst might feel and react if they learnt that a
patient had lost their job or come into a great deal of money.
Like others before her Dimen makes the distinction between sacred and profane
money or between special purpose money and general purpose money. The one
can be a sign of love, the other of hate. The idea is that the very powerful, close,
intense relationship between analyst and client is paid in cold, hard, general-
purpose cash and this threatens to change that relationship.
Therapists have written about money issues with interesting case studies. Barth
(2001) discussed four case studies where she used “money-talk” to discuss and
negotiate separateness and connectedness in therapeutic relationships:
In matters of money, questions about fees, insurance arrangements and

payment style, for example, can lead to significant information about issues
of dependency, deprivation, envy, longing, connecting, and other aspects of
relationship – both within and outside of the therapeutic interaction. (p. 84)
She notes that in many relationships money is about power. It can lead to feelings
of deprivation and vulnerability. She also notes the two issues that money issues
raise: managed care (our attitudes to medical providers) and gender issues.
Three positions on paying for therapy
1. It is beneficial to therapeutic outcomes

Seeing a therapist involves an explicit or implicit contract. You “buy” expertise,
help, advice. But are therapy patients buying love or friendship and how does that
influence the relationship?
Many people argue that psychotherapy should be available for those in need of
treatment for their mental disorder, funded by the NHS. However, Herron and
Sitkowski (1986) propose that some fee is necessary in order for psychotherapy to
be effective. Paying increases a sense of worth and commitment. Things given free
are often seen as worthless. They note that therapists have conflict over fees. The
two interesting questions in this area are (1) how, when and why does the fee affect
the outcome (if at all), and (2) how can or should we interpret patients’ payment
style and methods (timing, cash vs. cheque). Research by Menninger and Holzman
(1973) concludes that there is a connection between successful psychotherapy and
a client making a sacrifice (being the fee paid to the therapist).
Langs (1982) agrees that paying a fee has a beneficial impact on the outcome of
therapy, but suggests that this is due to a fee providing a stable boundary for
the patient and therapist, as opposed to it being beneficial due to money’s sacri-
ficial effect.
Davis (1964) proposed a further explanation for the benefits recorded as a
consequence of paying for therapy, incorporating cognitive dissonance theory
(Festinger, 1957). Davis suggests that paying a fee for therapy adds to the dissonance
created by the effort required to engage in psychotherapy. This leads to increased
motivation for the patient to achieve the goals set in therapy in order to remove
the dissonance.
Money madness 205
2. It is detrimental to therapeutic outcomes

Despite such propositions, Schofield (1971) takes a contrasting view, stating that “I
have been unable to observe any systematic difference in my approach, in how
hard I work, or how responsive my clients are as a function of whether they are
receiving ‘free’ or expensive therapy” (p. 10).
Yoken and Berman (1984) conducted a study confirming this view, with volunteers
being randomly assigned to either a fee or no-fee counselling session. After the
treatment session all participants reported reduced levels of symptoms and distress. Yet
interestingly, the no-fee treatment group were found to benefit from greater symptom
reduction than the fee-paying individuals, completely contradicting research
suggesting paying for therapy enhances the outcomes. Interestingly, those paying for
treatment had greater expectations of its results, but these did not materialise. Pope,
Geller and Wilkinson (1975) support this finding in a study of 434 patients assigned
to one of five fee-assessment categories (no payment, welfare, insurance, scaled
payments, full fee) based on the individual’s ability to pay. The study concluded that
fees had no significant effects on outcome, appointments or attendance.
Reasonings behind the beneficial effects recorded as a result of free treatment
have been offered by numerous authors. Yoken and Berman (1984) suggest that in
a no-fee environment a patient’s therapist is regarded as more caring, which is
received positively by clients and facilitates positive changes. Alternatively, it may
be that those paying fees have higher expectations of treatment (as found in Yoken
& Berman’s 1984 study), which results in them underestimating the beneficial
effects of therapy in self-reports following treatment.
However, in Pope et al.’s (1975) study the therapists were not directly affected
by fee payment, as the centre employed them and paid them regardless of each
client’s payment. Similarly, in Yoken and Berman’s (1984) study therapists were
unaware of what clients were paying. Pope et al. (1975) proposed that fee payment
has been found to improve outcomes in past research due to service providers’
needs being met, as opposed to the patient benefiting from sacrifice or cognitive
dissonance. Mayer and Norton (1981) considered this, and reached the conclusion
that therapists involved in billing and collecting fees improve clinical practice. Such
findings suggest that fees have an impact on the clinical relationship through
impacting the therapist as opposed to the patient.
3. It does not impact the outcome of therapy

Shipton and Spain (1981) reviewed research in the area in the hope of coming to a
sound solution to this debate, yet their review was inconclusive, suggesting that there
was limited evidence that fees did or did not impact on the outcome of therapy.
Neither therapists nor patients often talk about their personal income or financial
resources. On the other hand therapists often report how many patients dream and
fantasise about money. Some, like Freud, note associations with dirt and faeces,
others with semen and love. Feuerstein (1971) noted that some therapists say
patients lie about their money (underestimate their income) in the hope of having
their fee reduced. He notes “in a profession devoted to uncovering the truth and
to making conscious what is unconscious, the frequent lack of openness or
awareness in this area is disturbing” (p. 100).
Clearly therapists who work in institutions as opposed to those who work
privately have different attitudes and behaviours with respect to fees. It has been
noted that some corporate therapists do not report sessions and invoice clients or
departments, expressing their rebellion against and resentment toward authority.
One issue is the sensitivity and compassion of therapists and their identification
with the economic plight of patients. Somehow fees seem to go against the whole
humanitarian ideals of therapists and the enterprise of healing.
There are all sorts of issues for the therapist. First, they know that there is a
strong subjective belief that worth and price are linked. If you charge little you are
seen to be of less skill, efficacy, and helpfulness. Next, there is the issue of charging
patients not according to their needs but their income. Some ponder on the fact
that if they know some patients are paying much less than others that they treat
them differently.
Moore (1965) noted that some patients deliberately go into debt and thus
assume a regressive, dependent and masochistic relationship.
Self-help books
There is no shortage of books that purport to help you “discover your Midas
Touch” (Teplitsky, 2004). They differ less in tone and promise than context. The
idea is that one needs to confront a few issues, and follow a few steps to acquire
(lots of) money. Some offer to teach the “secrets” of acquiring wealth/prosperity.
Many ignore socio-political and economic impediments to wealth acquisition.
Many of these books attempt to explain how one’s money beliefs and behaviours
are unhelpful. They suggest faulty financial strategies – often blamed on family –
need to be very directly confronted. They are the result of the psychological residue
of early family life and what Marx would call “fake consciousness”. Many dwell on
dependency issues as well as bad habits.
They like to confront cultural myths like money bringing happiness, only the
wicked prospering, there is a secret to making money. Many of these books, as
Teplitsky (2004) observes, offer bits of sensible advice. These include:
1. Positive thinking – a sort of attribution therapy.

2. Affirmation – avoiding words like “no, not, none, never, neither, nor”
and affirming one’s ability and values.
3. Visualisation – coming up with positive mental images of money making.
Money madness 207
4. Recording dreams – these may unconsciously help or hinder the

acquisition of money.
5. Radiate wealth – visualise, but don’t actually act, dress, speak, spend,
and think like a wealthy person.
6. Self-hypnosis and meditation – which is about relaxing and clearing
your mind of clutter.
Other metaphysical approaches, including prayer, are suggested.

There are money guides for people to help them “overcome” their money
troubles. One such is by Middleton and Langdon (2008) and is simply entitled Sort
Out Your Money. The advice is nearly always sound and straightforward: learn
sensible shopping; avoid impulse buying; shock yourself by using cash.
There are a surprising number of popular books that are essentially self-help
treatises about money. Most are short, non-technical, and non-research-based
books by coaches, consultants and therapists. They fall roughly into three categories.
The first sort are therapeutic as can be seen in the title of the book. Thus, in a book
called Money is Love, Wilder (1999) chose the subtitle Reconnecting to the Sacred
Origins of Money. She talks of “freeing the energy” by talking, writing and praying
about money. Her aim and promise on the cover is that “you can reconnect with
the sacred origins of money, and direct the flow of money through your life and
the world on a current of love, joy, goodwill and abundance”.
DeVor (2011), a “Master Certified Money Coach”, in her self-published book
subtitled A Guide to Changing the Way You Think About Money also offers a mix of
financial advice and therapy. She notes the emotional associations of money, how
important it is to do an honest net financial worth audit and how to move from the
scarcity zone (negative emotions associated with money) to the abundance zone
(positive feelings). This abundance–scarcity dimension is how we think about and
use our money. Her therapy is to keep an “Abundance Journal”, which examines
what, and how much, people spend money on and how they feel about it.
The second sort of book is not about therapy and repair so much as helping
you become rich, which, indeed, other books suggest you shouldn’t aim to achieve.
Price (2000), in a book called Money Magic, chose as a subtitle Unleash Your True
Potential for Prosperity and Fulfilment! Like others she maintains that we all have a
“money biography”, which leads us to being one of several money types:
• The innocent: trusting, indecisive, dependent, apparently happy-go-lucky,

but really fearful and anxious.
• The victim: resentful, unforgiving, addictive, emotional, past-oriented and
seeking to be rescued.
• The warrior: confident, calculating, driven, competitive, disciplined, wise,
discerning and successful.
• The martyr: secretive, manipulative, self-sacrificious, passive-aggressive,

disappointed.
• The fool: restless, impetuous, optimistic, undisciplined, overly generous.
• The creator/artist: detached, non-materialistic, passive, internally motivated.
• The tyrant: oppressive, aggressive, secretive, materialistic, critical and
judgemental.
We have to first identify the type we are, then our “money shadow”, which is the
part of us that is disowned, hidden and secret. Thereafter we are encouraged to
identify our true net worth. This allows us to clean our financial house and see
money as a creative flow. The rewards of self-insight and money health are
abundance and prosperity. This process involves prayer, forgiveness, and
“reconnection with your spiritual self”. You have to change your habits and
consequently are given tips such as: create a gratitude list, create an altar in your
home consisting of anything that represents what you value most in life.
Another book in this genre is subtitled Building Wealth from the Inside Out by
Casserly (2008), who offers financial therapy. The book is summarised essentially
at the beginning, by encouraging what is called “Affirmations for Wealth Building”.
These include: “I choose to recognise my emotions behind money”, “I choose to
face my current financial reality”, and “I choose to follow my desired financial
roadmap and let that guide me out of my current financial reality”. The chapters
explain the strategies such as “3: Breaking away from your inherited beliefs”; and
“7: Facing your financial reality”. The process is familiar: confront your demons,
examine your family, work personal and financial life and break away from your
“inherited beliefs”.
Casserly also lists types, which she calls financial personalities. These are:
Hoarders, Spenders, Saboteurs, Givers, Controllers, Planners, Carefree Butterflies
and Attractors. The therapy is to find your financial blind spots and to choose to
change. The treatment involves eradicating the “crabs in your bucket” – namely
the people who hold you back and keep you off track. You need to face your
financial dark side as well as build and renovate your portfolio.
The third type of book is for those interested in global or regional wealth and
welfare. An example is that by Twist (2003) who notes: “Money is the most
universally motivating, mischievous, miraculous, maligned and misunderstood
part of contemporary life” (p. 7). Later: “Money itself isn’t the problem. Money
itself isn’t bad or good. Money itself doesn’t have power or not have power. It is
our interpretation of money, our interaction with it, where the real mischief is
and where we find the real opportunity ‘for self-discovery and personal
transformation’” (p. 19).
Twist’s (2003) book is full of stories. She suggests that too many of us are made
unhappy by a “scarcity mindset” that has toxic myths: there is not enough, more is
better, that is just the way it is. She believes our “life sentences” or personal truths,
called by others money-grams, can haunt us and render us deeply unhappy and
Money madness 209
unsatisfied. The opposite of the scarcity mindset is the “sufficiency mindset”, which
is the path to happiness. It is the very old philosophy of to have or to be.
Twist argues that money is like water; better when it flows. Also that what you
appreciate appreciates. “If we tend the seeds of sufficiency with our attention, and
use our money like water to nourish them with soulful purpose, then we will enjoy
the bountiful harvest” (p. 142). Also, “Money carries our intentions. If we use it
with integrity, then it carries integrity forward. Know the flow – take responsibility
for the way your money moves into the world” (p. 224).
Popular books on money are remarkably similar despite their rather different
styles. They mix common sense, psychotherapy insights and non-materialist
philosophy. The message is essentially that many of us have deep, unhelpful
emotional associations with respect to money. This, together with poor financial
knowledge and planning, leads to personal misery. Further, for most of us in the
West our materialist culture encourages thinking and behaviour that leads to
unhappiness not happiness. The solution is to be aware of your emotional use of
money, to think about it and use it differently. To a large extent it is cognitive
behaviour therapy supported by the teachings of many of the world’s great religions
on the folly of materialism.
10
MONEY AND MOTIVATION
IN THE WORKPLACE
Most people work just hard enough not to get fired and get paid
enough money not to quit.
George Carlin
If you don’t want to work, you have to work to earn enough money
so that you won’t have to work.
Ogden Nash
The most efficient labour-saving device is still money.

Franklin Jones
He made his money the really old-fashioned way. He inherited it.

A. J. Carothers
Introduction
It comes as a surprise to many people that most psychology textbooks that
deal with work (that is business, occupational, organisational, industrial, work
psychology) are unlikely to refer to money at all. It is not in the index of most
work psychology books. Money, per se, is usually seen as one of many rewards
for work done, and in itself not particularly important. It is classified as an
intrinsic reward.
To the layperson, and especially the supervisor, who finds it difficult to motivate
his/her staff to work harder, it is a crucial and powerful motivational tool: the
ultimate carrot. Yet, psychological research has consistently suggested that where
money has motivational power it is nearly always negative. If you pay people at
market rates and equitably, money, it is argued, has little motivational force.
We know that the relationship between salary and job satisfaction is very weak
(correlations usually around r = .15); that the relationship between pay itself and
pay satisfaction is not much higher (around r = .25); that focusing on money
rewards can act to demotivate people; and that after a salary around twice the
national average (£50,000 or $75,000) there is little or no increase in levels of well-
being and happiness.
There is substantial evidence that, beyond a reasonable level, the absolute
amount of pay is not as important to well-being as the comparative amount. In any
society salary is an index of status and prestige, and there is an obvious disparity in
this relationship. Pay is a form of social approval. Low pay indicates low skills and
less important work to most people. Strikes for more money are often as much
about desire for respect as they are about salaries (Lindgren, 1991). As we can see
in divorce courts, money becomes a symbolic compensation for hurt feelings.
Equally, pay differentials, as we shall see, are imbued with as many psychological
as economic factors.
Psychologists cite support for their relative disregard of money as a motivator
from surveys in which workers were asked which factors were most important in
making a job good or bad; “pay” commonly came sixth or seventh after factors
such as “security”, “co-workers”, “interesting work”, and “welfare arrangements”.
This has been confirmed in more recent surveys, which have found that pensions
and other benefits are valued more than salary alone. In short: Money is important
but not that important relative to other factors.
The central question is how, when, for whom and, most importantly, why
money acts as a motivator or demotivator at work.
Intrinsic and extrinsic motivation

Some jobs and some tasks are intrinsically satisfying. That is, by their very nature
they are interesting and pleasant to do. They can be enjoyable for a wide variety of
reasons and much depends on the preference, predilections, and propensities of
individuals who presumably choose them.
There are those who work without pay. The existence of voluntary work (e.g.
that done by children and home-makers) makes it clear that money is not the only
reason for working. There are also people who do not need to work, but still do
so. Of those who win lotteries, 17% stay in full-time work afterwards (Smith &
Razzell, 1975). For some it is because they enjoy their work, as in the cases of
scientists and other academics, but this is not the only reason. There are also a lot
of people in full-time work who are already so rich that they do not need any more
money, so presumably are working for some other reason.
Intrinsic satisfaction implies that merely doing the job is, in itself, its own
reward. Therefore, for such activities no reward and no management should be
required. The activity is its own reward. But the naive manager might unwillingly
destroy this ideal state of affairs.
Money and motivation in the workplace 213
Take the case of the academic writer scribbling at home on a research report.
The local children had for three days played extremely noisily in a small park
near his study and, like all noise of this sort, it was highly stressful because it
was simultaneously loud, uncontrollable and unpredictable. What should be
done? (1) Ask (politely) them to quieten down or go away. (2) Call the police
or the parents if you know them. (3) Threaten them with force if they do not
comply. (4) All of the above in that order.
The wise don did none of the above. Unworldly maybe, but, as someone
whose job depended on intrinsic motivation, the academic applied another
principle. He went to the children on the fourth morning and said, somewhat
insincerely, that he had very much enjoyed them being there for the sound
of their laughter, and the thrill of their games. In fact, he was so delighted
with them that he was prepared to pay them to continue. He promised to
pay them each £1 a day if they carried on as before.
The youngsters were naturally surprised but delighted. For two days the
don, seeming grateful, dispensed the cash. But on the third day he explained
that because of a “cash flow” problem he could only give them 50p each.
The next day he claimed to be “cash light” and only handed out 10p. True
to prediction the children would have none of this, complained and refused
to continue. They all left in a huff promising never to return to play in the
park. Totally successful in his endeavour, the don retired to his study,
luxuriating in the silence.
This parable illustrates a problem for the manager. If a person is happy (absorbed
in a state of flow) doing a task, for whatever reason, but is also “managed” through
explicit rewards (usually money), the individual will tend to focus on these obvious,
extrinsic rewards, which then inevitably have to be escalated to maintain satisfaction.
This is therefore a paradox: reward an intrinsically motivated person by extrinsic
rewards and he/she is likely to become less motivated because the nature of the
motivation changes. Unless a manager can keep up the increasing demands on the
extrinsic motivator (i.e. constant salary increases) the person usually begins to show
less enthusiasm for the job.
The use of reinforcers – i.e. paying people – is often counterproductive when
the task is intrinsically interesting. That is, intrinsic motivation decreases with
extrinsic rewards. Deci and Ryan (1985) demonstrated 30 years ago that
reinforcement of progressively improved performance produced no loss (or gain)
of intrinsic interest.
Some activities are rewarding because they satisfy curiosity, some because they
produce an increased level of arousal. Deci (1980) proposed that intrinsic motivation
is increased by giving a sense of mastery and competence, through the use of skills,
and also by a sense of control and self-determination by autonomy to choose how
the work is done. Both of these factors have been found to increase motivation. In
addition to the enjoyment of competence, leisure research shows that people often
enjoy the sheer activity, e.g. of dancing, music, or swimming, though they enjoy
these things more if they are good at them (Argyle, 1996).
Experiments with children showed that if they were given external rewards for
doing things that they wanted to do anyway, intrinsic motivation decreased.
However, later research with adult workers has found that pay or other extrinsic
rewards can increase intrinsic motivation, for example if the external rewards also
give evidence of individual competence (Kanfer, 1990).
The most controversial work in this area suggests not only that intrinsic
motivation is far preferable to extrinsic motivation, but also that extrinsic rewards
are actually demotivating. The most powerful and popular advocate of this is Kohn
(1999) who suggested that rewards can only create temporary compliance, not a
fundamental shift in performance.
Kohn offers six reasons why this seemingly backward conclusion is, in fact,
the case:
1. Pay is not a motivator – While the reduction of a salary is a demotivator,

there is little evidence that increasing salary has anything but a transitory
impact on motivation. This was pointed out 50 years ago. Just because
too little money can irritate and demotivate does not mean that more
money will bring about increased satisfaction, much less increased
motivation.
2. Rewards punish – Rewards can have a punitive effect because they, like
outright punishment, are manipulative. Any reward itself may be highly
desired, but by making that bonus contingent on certain behaviours,
managers manipulate their subordinates. This experience of being
controlled is likely to assume a punitive quality over time. Thus, the
withholding of an expected reward feels very much like punishment.
3. Rewards rupture relationships – Incentive programmes tend to pit one
person against another, which can lead to all kinds of negative
repercussions as people undermine each other. This threatens good
teamwork.
4. Rewards ignore reasons – Managers sometimes use incentive systems
as a substitute for giving workers what they need to do a good job, like
useful feedback, social support, and autonomy. Offering a bonus to
employees and waiting for the results requires much less input and
effort.
5. Rewards discourage risk taking – People working for a reward generally
try to minimise challenge and tend to lower their sights when they are
encouraged to think about what they are going to get for their efforts.
6. Rewards undermine interest – Extrinsic motivators are a poor substitute

for genuine interest in one’s job. The more a manager stresses what an
employee can earn for good work, the less interested that employee will
be in the work itself. If people feel they need to be “bribed” to do
something, it is not something they would ordinarily want to do.
This literature essentially says this: one can distinguish between intrinsic motivation
to partake in some activity out of sheer enthusiasm, joy or passion and extrinsic
motivation which involves offering a range of incentives to do an activity rather than
the activity itself. The intrinsically motivated worker is therefore easier to manage,
happier and possibly more productive. More controversially it has been suggested
that extrinsic rewards like money can actually decrease joy and passion and even
productivity in the long run. Of course, all jobs are a combination of both: some are
done “just for the money” because the tasks are so unintrinsically motivating.
Monetary incentives, effort and task performance

It is axiomatic for many people that monetary incentives and rewards motivate
people to work harder and better to achieve better performance. But some
theories actually suggest the opposite because monetary rewards are all extreme,
which often decreases intrinsic motivation and satisfaction leading over time to
decreased effort and performance. Equally, some have argued that money is
associated with negative emotions, which in turn has a negative impact on effort.
Still others suggest that (some) monetary incentives may increase effort and
performance up to a point but after that lead to a decrease. The data, however,
are far from clear partly because of the complexity of the issue and the many
factors involved.
The model in Figure 10.1 is a simplified version of that of Bonner and Sprinkle
(2002), who pointed out some of the many factors involved in this relationship.
One fundamental feature of the theory is the idea that the reason for the highly
equivocal evidence that incentives affect performance in a simple, positive and
linear way is that there are many intervening variables that affect that relationship.
These include person variables (the abilities, personality and motivation of
individuals); task variables (like demands and complexity); environmental factors
(group, organisational factors) and the incentive schemes (individual vs. group,
monetary vs. non-monetary).
Monetary incentives Effort Performance
FIGURE 10.1 Money and performance

Banner and Sprinkle consider each of these relationships in turn:
1. Effort leads to performance.

a. The first issue is the direction of the effort. If the incentive is for quality vs.
quantity or vice versa it will certainly direct the type of effort put in. Often
this leads to the law of unintended consequences where strategies backfire.
b. The second is the duration of the effort. One issue is the time period over
which the incentive contract is established. The longer the period, usually
the higher the sustained effort.
c. The third is the intensity of effort, which measures the amount of attention
(cognitive resource) devoted to a task. Money can increase short-term
intensity though it can also bring about fatigue and stress.
d. The fourth is strategy development, which is concerned with the plan,
strategy or habit developed by the individual given their perception of the
reward situation.
2. Motivation variables. Four theories are relevant here.

a. Expectancy theory. This suggests that people hold theories about pay
for performance levels and the value of the pay. Pay for performance
works if people see the clear, just relationship between their effort and
outcome performance and really value the associated money.
b. Agency theory. This suggests that people are self-interested and
rational and risk averse. The amount of effort is related to the perception
that it leads reasonably to performance that very directly relates to
financial well-being.
c. Goal-setting theory. Here personal goals are the stimulant of effort.
Specific, challenging, self-set goals have most motivational power.
Monetary incentives can shape new goals and get people to be committed
to them.
d. Self-efficacy theory. This posits a self-regulatory mechanism, which is
the belief about one’s ability to perform a specific task. It affects the tasks
that a person chooses to do and their emotional state while doing those
tasks. Incentives increase interest in the task, and thence effort and in turn
skill, which increases self-efficacy beliefs.
One crucial person variable is the skills (including knowledge) of the individual and
where, when and how they have to bring those to the task to achieve an output
that is rewarded by money. Clearly people need the skill to perform a task otherwise
increased effort will have limited results. Often increased effort cannot compensate
for lack of skill.
A fair day’s wage: Equity and relative deprivation

The issue that is consistently debated in this area is that of perceived fairness.
However, fairness is a relative concept: what is fair for the giver (allocator) may not
be fair for the receiver. Questions arise about specific issues: should you pay for the
job or performance on the job; and should you pay for talent or effort?
Equity theory, borrowed by psychologists from economics, views motivation
from the perspective of the social comparisons that people make among themselves.
It proposes that employees are motivated to maintain fair, or “equitable”,
relationships among themselves and to change those relationships that are unfair, or
“inequitable”. Equity theory is concerned with people’s motivation to escape the
negative feelings that result from being treated unfairly in their jobs once they have
engaged in the process of social comparison.
Equity theory suggests that people make social comparisons between themselves
and others with respect to two variables – outcomes (benefits, rewards) and inputs
(effort, ability). Outcomes refer to the things that workers believe they and others
get out of their jobs, including pay, fringe benefits or prestige. Inputs refer to the
contributions that employees believe they and others make to their jobs, including
the amount of time worked, the amount of effort expended, the number of units
produced, or the qualifications brought to the job. Equity theory is concerned with
outcomes and inputs as they are perceived by the people involved, not necessarily as
they actually are, although that in itself is often very difficult to measure. Not
surprisingly, therefore, workers may disagree about what constitutes equity and
inequity on the job. Equity is therefore a subjective, not objective, experience,
which makes it more susceptible to being influenced by personal factors.
Equity theory states that people compare their outcomes and inputs to those of
others in the form of a ratio. Specifically, they compare the ratio of their own
outcomes/inputs to the ratio of other people’s outcomes/inputs, which can result
in any of three states: overpayment, underpayment or equitable payment.
• Overpayment inequity occurs when an individual’s outcome/input ratio is

greater than the corresponding ratio of another person with who that individual
compares himself/herself. People who are overpaid are supposed to feel guilty.
There are relatively few people in this position.
• Underpayment inequity occurs when an individual’s outcome/input ratio
is less than the corresponding ratio of another person with whom that individual
compares himself/herself. People who are underpaid are supposed to feel
angry. Many people feel under-benefited.
• Equitable payment occurs when an individual’s outcome/input ratio is
equal to the corresponding ratio of another person with whom that individual
compares himself/herself. People who are equitably paid are supposed to
feel satisfied.
According to equity theory, people are motivated to escape the negative

emotional states of anger and guilt. Equity theory admits two major ways of
resolving inequitable states (Table 10.1). Behavioural reactions to equity represent
things that people can do to change their existing inputs and outcomes such as
working more or less hard (to increase or decrease inputs), or stealing time and
goods (to increase outputs). In addition to behavioural reactions to underpayment
inequity, there are also some likely psychological reactions. Given that many people
feel uncomfortable stealing from their employers (to increase outputs), or would
be unwilling to restrict their productivity or to ask for a salary increase (to
increase inputs) they may resort to resolving the inequity by changing the way
that they think about their situation. Because equity theory deals with perceptions
of fairness or unfairness, it is reasonable to expect that inequitable states may be
redressed effectively by merely thinking about their circumstances differently. For
example, an underpaid person may attempt to rationalise the fact that another’s
inputs are really higher than his/her own, thereby convincing himself/herself
that the other’s higher outcomes are justified.
How people will react to inequity depends on how they are paid. If they are
paid by the time they are there they can reduce the rate of work, but if they are on
piece work they may reduce the quality of work. Similarly, a salaried employee
who feels overpaid may raise his/her inputs by working harder, or for longer hours
or more productively. Likewise, employees who lower their own outcomes by not
taking advantage of company-provided fringe benefits may be seen as redressing an
overpayment inequity. Overpaid persons (few though they are!) may readily
convince themselves psychologically that they are really worth their higher
outcomes by virtue of their superior inputs. People who receive substantial pay
rises may not feel distressed about it at all because they rationalise that the increase
Table 10.1 Reactions to inequity
Type of inequity Type of reaction

Behavioural Psychological
Overpayment Increase your inputs (work Convince yourself that your outcomes
inequity (guilt): harder), or lower your are deserved based on your inputs
1<O outcomes (work through a (rationalise that you work harder,
paid vacation, take no salary) better, smarter than equivalent others
and so you deserve more pay)
Underpayment Lower your inputs (reduce Convince yourself that others’ inputs
inequity (anger): effort), or raise your are really higher than your own
1>O outcomes (get pay increase, (rationalise that the comparison
steal time by absenteeism) worker is really more qualified or a
better worker and so deserves higher
outcomes)
Source: Furnham and Argyle (1998)

is warranted on the basis of their superior inputs, and therefore does not constitute
an inequity.
Research has generally supported the theory’s claim that people will respond to
overpayment and underpayment inequities in the ways just described. An American
study by Berkowitz, Fraser, Treasure, and Cochrane (1987) found that the strongest
predictor of pay satisfaction was current inequity (- .49). Equity theory says that
people seek fair distribution of rewards in relation to “inputs”, which can include
amount of work done, ability, etc., and will be discontented and leave the situation
if this cannot be achieved, or they may try to increase equity in other ways such as
by more absenteeism or stealing from their employers. What is seen as equitable
depends to a large extent on comparisons. Brown (1978) found that industrial
workers would choose a lower salary if it meant that they would receive more than
a rival group.
As one might expect, equity theory has its problems: how to deal with the
concept of negative inputs; the point at which equity becomes inequity; the belief
that people prefer and value equity over equality. Nevertheless, the theory has
stimulated an enormous literature that partially addresses itself to the issue of
motivation and money’s role in it.
Compensation: Pay satisfaction and job satisfaction

A great deal of research has been dedicated to the question many people think is
self-evident: the relationship between pay and job satisfaction. While people are
happy to acknowledge the fact that pay/salary/money is but one “reward” for work,
it is considered by far the most important. Pay satisfaction is a core component of
job satisfaction but there are a whole host of other factors (relationships at work,
autonomy on the job, physical working conditions) that also play a part.
There are various dimensions to pay satisfaction that are interrelated: pay level,
pay rises, benefit level and pay structure/administration (Williams, McDaniel &
Ford, 2006). Further, various factors are related to pay satisfaction, like worker
money attitudes (Thozhur, Riley & Szivas, 2006), race, gender, income and also
pay equity comparisons (Tang, Tang & Homaifar, 2006).
Most studies have examined pay satisfaction in those of average as well as low
pay. Some have shown self-evident findings such as the idea that personal attitudes
to pay actually influence pay satisfaction (Thozhur et al., 2006).
One important study looked at the evidence for the relationship between seven
factors: age, gender, education, tenure, salary grade, and job classification as well as
actual salary/wage (Williams et al., 2006). There were two particularly interesting
findings from this analysis. The first was how low the correlations were, indicating
little or no relationship between things like gender and tenure and different types
of pay satisfaction over various different samples. The second was that all the higher
correlations were negative: thus older people were less satisfied with pay rises and
structure; education and pay structure; salary grade and pay rise satisfaction. The
authors believe the results suggest that older people may be less satisfied with pay
because their expectations for the reward of service were not met. Similarly, the
higher paid may be less happy because they too had higher expectations of the
things that they received.
There are various dimensions to pay satisfaction that are interrelated: pay
level, pay rises, benefit level and pay structure/administration (Williams et al.,
2006). Further, various factors are related to pay satisfaction, like worker money
attitudes (Thozhur et al., 2006), race, gender, income and also pay equity
comparisons (Tang et al., 2006). Most studies have examined pay satisfaction in
those of average as well as low pay. Some have shown self-evident findings such
as the idea that personal attitudes to pay actually influence pay satisfaction
(Thozhur et al., 2006).
For instance, Dulebohn and Martocchio (1998) showed that pay satisfaction was
related to how fair people saw pay procedures to be, how fairly they thought pay
was distributed, their understanding of the system, their commitment to the
organisation, how effective they thought the pay-plan was, the extent to which
they identified with their group, as well as the actual amount of money they
received. Others have shown that the pay-performance process is mediated by
other factors. Thus, Gardner, Van Dyne and Pierce (2004) showed that pay level
affects self-esteem, which in turn affects performance. That is, pay signals to a
person the extent to which the organisation values him/her and those feeling they
are highly valued become better performers.
Dozens of researchers have done small-scale (relatively few people) studies
correlating pay and satisfaction at any one point in time. It is possible to summarise
this extensive research effort:
• Nearly all studies find a positive relationship between pay and job satisfaction
but it is small (.10 < r < .20). Pay is not a strong factor in job satisfaction:
external rewards are relatively ineffective in driving motivation, performance
and satisfaction.
• Most studies concentrate on pay, not general job satisfaction.
• Other factors like a person’s personality, ability and values appear to influence
(i.e. mediate or moderate) the relationship between pay and satisfaction.
• Pay satisfaction is not primarily determined by simply how much one gets (i.e.
absolute monetary reward).
• There are theories (i.e. self-determination theory) that suggests that over time,
money rewards are demotivating and dissatisfying because they undermine
perceived autonomy and well-being.
In a recent large-scale meta-analysis of 92 different samples, Judge, Piccolo,

Podsakoff, Shaw and Rich (2010) found a correlation of r = .15 between pay level
and job satisfaction, and of r = .23 between pay level and pay satisfaction. They
concluded:
That the jobs which provide these things are little satisfying to individuals
is, at first blush, surprising. Both within and between studies, level of pay
had little relation to either job or pay satisfaction. This indicates that within
an organisation, those who make more money are little more satisfied that
those who make considerably less. Moreover, relatively well paid samples
of individuals are only trivially more satisfied than relatively poorly paid
samples. (p. 162)
One explanation they give relates to adaptation theory – the idea that pay increases
are very quickly “spent” psychologically and therefore lose their satisfying value.
This is not to say that pay is not motivating, but rather it is just one of the factors
that is related to satisfaction.
There is a danger of taking far too great an individualistic perspective on
this issue. That is, the idea that people have considerable latitude to influence their
work-related effect and performance to achieve greater monetary rewards. Those
who look at this issue from an organisational perspective ask the question: which
comes first; pay (and general job) satisfied people or organisational performance?
Schneider, Hanges, Smith and Salvaggio (2003) found, as predicted, a positive
relationship between company/organisation success and employee attitudes
(satisfaction). Most importantly they found that it was organisational performance
that drove employee satisfaction, not the other way around. It is frequently assumed
that satisfaction drives productivity but their data showed the opposite, which led
them to develop a testable model that went thus:
1. High performance work practices (as a function of organisational

structure/management) lead to production efficiency.
2. Production efficiency leads to superior financial performance of the
company.
3. Superior financial performance (often) leads to increased pay and
benefits as well as the enhanced reputation of the organisation, all of
which increases satisfaction with pay and security and overall satisfaction
because of the attractiveness of the organisation.
4. This in turn leads to what is called organisational citizen behaviour, or
people’s general respect and help for one another in the organisation,
which feeds into production efficiency and the virtuous circle.
The results in this area show that pay is weakly related to job satisfaction, which is
determined by many factors. Further, it is clear that the assumption that satisfaction
leads to (causes) productivity is too simple as there is evidence that in certain
circumstances the direction of causality goes the other way.
Reward systems
Every job has an inducement/incentive and hopefully an agreement between
inputs (amount of work) and outputs (e.g. pay). This wage–work bargain is in
fact both a legal and a psychological contract that is often very poorly defined
(Behrend, 1988).
For instance: what about bonuses, currently a highly debated topic. The
concept is derived from the Latin “bonum” meaning a good thing. The idea
of a bonus is not unlike performance related pay. There are two types of pay
– base pay or salary vs. “variable” pay, which may be a one-off and related
very specifically to financial performance over a time period.
Thus it could be argued that bonuses are cheaper and more efficient than
trying to influence pay structures to make pay effective. Thus one can have a
company with the CEO on a £/$100,000 base and a 75% bonus programme
with middle managers on £/$50,000 with 50% and supervisors on £25,000
with 25%. This system can keep internal comparators stable on say a 1:20 ratio,
meaning that the highest paid in any organisation gets 20 times the lowest.
Organisations determine pay by various methods, including: historical precedents,

wage surveys and job evaluations (using points). They have to benchmark themselves
against the competition so as to meet or exceed the market rate (Miner, 1993).
Certainly, it is believed that monetary rewards are better at improving performance
than such things as goal setting (management by objectives) or job-enrichment
strategies.
Should men be paid more than women; doctors more than nurses; newsreaders
more than airplane pilots? What factors are relevant in determining fair pay? The
list may include the following:
• Demographic – sex, age, race;

• Status – education, job experience, job knowledge;
• Work-output – quality and quantity of work;
• Job related – job complexity, impact, responsibility and working conditions.
There is a rich literature on what professionals and lay people think about pay
systems (Hogue, Fox-Cardamone, & Du Bois, 2011). Nearly everyone is paid – in
money – for work. But organisations differ widely in how money is related to
performance. The question of central interest to the organisational psychologists is
the power of money as a motivator. There are several ways of doing this:
1. Piece work: Here workers are paid according to how much they
produce. It can only be judged when workers are doing fairly repetitive
work where the units of work can be counted.
2. Group piece work: Here the work of a whole group is used as the basis
for pay, which is divided between them.
3. Monthly productivity bonus: Here there is a guaranteed weekly wage,
plus a bonus based on the output of the whole department.
4. Measured day work: This is similar except that the bonus depends on
meeting some agreed rate or standard of work.
5. Merit ratings: For managers, clerical workers and others it is not possible
to measure the units of work done. Instead their bonuses or increments
are based on merit ratings made by other managers.
6. Monthly productivity bonus: Managers receive a bonus based on the
productivity of their departments.
7. Profit-sharing and co-partnership: There is a guaranteed weekly wage,
and an annual or twice yearly bonus for all based on the firm’s profits.
8. Other kinds of bonus: There can be a bonus for suggestions that are
made and used, and there can be competitions for making the most
sales, finding the most new customers, not being absent, etc.
9. Use of other benefits: Employees can be offered other rewards, such as
medical insurance or care of dependents.
Pay for performance (PFP)

A topic of considerable interest is the whole issue of performance-related pay: the idea
of linking pay with performance. Piecework and related methods are used most for
skilled manual work. There have been many early studies of rates of work when
there is payment by results.
Wage incentives can also reduce absenteeism, when a bonus is given for regular
attendance. These schemes work better if there is participation over their
introduction (Steers & Rhodes, 1984) and simply increasing the rate of pay can
have dramatic effects in reducing labour turnover, in one case from 370% to 16%
(Scott, Clothier & Spriegel, 1960). Use can be made of non-pay incentives, such as
more free time or recognition, but financial incentives have the most effect (Guzzo,
Jette & Catzell, 1985).
Problems with these plans arise where particular workers have differential opportu-
nities to produce at a higher level – that is some workers may be unfairly disadvantaged
under such a system. Further, wage incentives that reward individual productivity can,
and often do, decrease co-operation among workers. Rewarding team productivity is
an obvious solution but, of necessity, as the size of the team increases so the clear
relationship between any individual’s productivity and his/her pay decreases.
Without wage incentive schemes the productivity in any organisation tends to

be “normally distributed” in a bell-shaped curve, but the introduction of a system
sometimes leads to a restriction of production when workers come to an informal
agreement about the norms of production. That is, there is often a restriction of
range. This may be because workers fear increased productivity will lead to lay-
offs, and/or that rate of payment will be reduced to cut labour costs. Obviously
the restriction of range is in part a function of the history and climate of trust in
any organisation.
The idea of PFP is that by linking pay with performance people are more
inclined to direct and sustain desirable, goal-specified work-related behaviours.
The idea is that money has both instrumental and symbolic motivational properties.
It establishes behavioural criteria by which rewards are allocated and aligns
employee behaviour with organisational values and objectives.
It is recognised that money/pay is one of many rewards at work and that unpaid
or voluntary workers have to be managed and motivated without the “stick of
money” (Van Vuuren, de Jong & Seydel, 2008).
The effectiveness of performance-related pay on measurable organisational inputs
has, as one may expect, attracted considerable interest. Perry, Engbers, and Jun
(2009) were interested in why, particularly in the public sector, performance-related
pay systems were introduced, then abandoned, and then reintroduced. They noted
three things of great interest. First, that there were a number of key variables in
performance-related pay. These can be diagrammatically displayed as in Figure 10.2.
In short the pay system is influenced by environmental factors and employee
characteristics, which have numerous consequences.
Second, they found that the research in this area could be divided into
two periods:
1. 1977–1993 – where expectancy and reinforcement theory dominated

thinking. These simple causal theories – people will work harder/better/
more productively to get more (desired) rewards – never took sufficient
cognisance of other moderator and mediator factors. Various studies
and meta-analyses in this period found very little clear evidence that
merit pay actually impacts on employee motivation and performance.
2. 1993–present – here more and better studies were done but the results
were very much the same. In short there was evidence of limited efficacy
of contingency pay in the public sector. It fails to deliver on its promise.
Third, they drew up a number of lessons from this review. They included:
• PRP may have greater effect at lower organisational levels, where job
responsibilities are less ambiguous.
Employee
Job affect
characteristics
Affective
outcomes
The experience
The pay system
of the pay system
Environmental Organisational Job Performance

conditions characteristics characteristics outcomes
FIGURE 10.2 Key variables in performance-related pay

Source: Perry et al (2009)
• Implementation breakdowns account for failure of PRP systems but are not
the only reason.
• Public institutions are more transparent and there is a closer scrutiny of PRP,
which means they have to be seen as more fair, valid and non-political.
Further, public organisations have more payroll cost containment and therefore
there is less money for bonus pay. They also operate in non-market conditions.
• PRP imposed from the outside can seem to contradict the public service ethos.
• It is important to adapt any PRP to one’s own organisation. Some politicians
see PRP as a mechanism to call bureaucrats to account and conform to both
their and the public’s expectations.
Studies continue in this area; one looked at the role of public sector civil
servants’ love of money in China (Liu & Tang, 2011). The researchers found that
attitudes to money influence both motivation and satisfaction. Another Chinese
study found that PFP had a positive effect on work attitudes if there was a good fit
between the employees and organisational values (Chiang & Birtch, 2010). That is,
just having PFP is not sufficient. To benefit from PFP both employer and employee
need to share the same values. Systems can help align values but are insufficient to
do so on their own.
The idea that PFP does not work in the sense that it improves the quality and
quantity of output is widespread but there is also evidence that it can be dysfunctional
in the sense that it prevents improvements in task performance (Bijleveld et al.,
2011). The issue is whether by concentrating so much on extrinsic motivation one
actually limits intrinsic motivation.
Self-determination theory suggests that PFP systems are imposed by others
(usually bosses) and seen as involving both punishments and rewards. If people
identify with these systems and retain a sense of autonomy they may thrive, but if
not they may become seriously disengaged (van Beek, Hu, Schaufeli, Taris &
Schreurs, 2012).
With the current emphasis on team working (Furnham, 1996) group-level

incentive plans have been popular. Profit sharing is a good example. It is assumed that
the synergistic benefits of greater cooperation (hopefully leading to productivity) can
offset the theoretical benefits of paying for individual performance. Gain-sharing
plans involve a system where bonuses are based on the measurable cost reductions (in
labour, materials, supplies) that are under the control of the work force. These plans
involve all members of the work unit – even support staff and managers.
Trade Unions the world over oppose individual incentive plans, arguing that
they promote unhealthy competition, increase accidents and fatigue, and dis-
advantages older or less healthy workers. Some even oppose group incentive
schemes because they argue that they ultimately lead to a reduction in the quality
of working life. They want people paid for the job they do, not performance on
the job: they thus favour equality not equity.
The major problems with performance-related pay systems are, first, the fact
that ratings of performance tend to drift to the centre. Feeling unable to deal with
conflict or anxiety between people in a team, managers overrate underperformers
and underrate better performers, so undermining the fundamental principles of the
system. Next, as has been pointed out, merit increases are too small to be effective.
Paradoxically in difficult economic times, when higher motivation and effort are
required, the size of merit pay awards tends to be slashed.
The aims of such systems are straightforward: good performers should be pleased
with, satisfied by, and motivated to continue to work hard because they see the
connection between job performance and (merit-pay) reward. Equally, poor
performers should be motivated to “try harder” to achieve some reward.
There are different types of PFP systems depending on who is included (to what
levels), how performance will be measured (objective counts, subjective ratings or
a combination) and which incentives will be used (money, shares, etc.). For some
organisations the experiment with PFP has not been a success. Sold as a panacea for
multiple ills it has backfired to leave a previously dissatisfied staff more embittered
and alienated.
There are various reasons for the failure of PFP systems. First, there is frequently
a poorly perceived connection between pay and performance. Many employees
have inflated ideas about their performance levels, which translate into unrealistic
expectations about rewards. When thwarted, employees complain, and it is they
who want the system thrown out. Often the percentage of performance-based pay
is too low relative to base pay. That is, if a cautious organisation starts off with too
little money in the pot, it may be impossible to discriminate between good and
poor performance, so threatening the credibility of the whole system.
The most common problem lies in the fact that, for many jobs, the lack of
objective, relevant, countable results requires heavy, often exclusive use of
performance ratings. These are very susceptible to systematic bias – leniency, halo,
etc., which render them neither reliable nor valid.
Another major cause is resistance from managers and unions. The former, on
whom the system depends, may resist these changes because they are forced to be
explicit, to confront poor performance and tangibly to reward the behaviourally

more successful. Unions always resist equity- rather than equality-based systems
because the latter render the notion of collective bargaining redundant.
Further, many PFP plans have failed because the performance measure(s) which
are rewarded were not related to the aggregated performance objectives of the
organisation as a whole – that is to those aspects of the performance which were most
important to the organisation. Also, the organisation must ensure that workers are
capable of improving their performance. If higher pay is to drive higher performance,
workers must believe in (and be capable of) performance improvements.
PFP plans can work very well indeed, providing various steps are taken. First, a
bonus system should be used in which merit (PFP) pay is not tied to a percentage
of base salary but is an allocation from the corporate coffers. Next, the band should
be made wide whilst keeping the amount involved the same: say 0–20% for lower
paid employees and 0–40% for higher levels. Performance appraisal must be taken
seriously by making management raters accountable for their appraisals; they need
training, including how to rate behaviour (accurately and fairly) at work.
Information systems and job designs must be compatible with the performance
measurement system. More importantly, if the organisation takes teamwork
seriously, group and section performance must be included in the evaluation. It is
possible and preferable to base part of an individual’s merit pay on team evaluation.
Finally, special awards to recognise major individual accomplishments need to be
considered separately from an annual merit allocation.
In short, Miner (1993) has argued that five conditions need to be met to ensure
that any sort of incentive plan works:
1. The employee must value the extra money they will make under the plan.
2. The employee must not lose important values (health, job security, and
the like) as a result of high performance.
3. The employee must be able to control their own performance so that
they have a chance to strive further.
4. The employee must clearly understand how the plan works.
5. It must be possible to measure performance accurately (using indexes of
performance, cost effectiveness, or ratings).
Similarly, Lawler (1981) has provided an excellent summary of the consequences

of merit-pay systems (Table 10.2).
For many workers, job security is regarded as more important than level of
wages/salary, and this is particularly true of unskilled, lower-paid workers, and
those with a family history of unskilled work. Having a secure job is not only
important for the family; it is also a status symbol. Worry about job insecurity has
increased in the 1990s as a result of many jobs being taken over by computers. This
is a major problem with the contemporary work scene; the big companies in Japan
Table 10.2 Effectiveness of merit-pay and bonus incentive systems in achieving various desired effects
Desired effects
Tying pay to Minimising negative Encouraging Gaining acceptance
Type of compensation plan Performance measure used performance side effects cooperation
Merit-pay systems
For individuals Productivity Good Very good Very poor Good
Cost effectiveness Fair Very good Very poor Good
Ratings by superiors Fair Very good Very poor Fair
For groups Productivity Fair Very good Poor Good
Cost effectiveness Fair Very good Poor Good
Ratings by superiors Poor Very good Poor Fair
For organisation as a whole Productivity Poor Very good Fair Good
Cost effectiveness Poor Very good Poor Good
Bonus systems
For individuals Productivity Very good Fair Very poor Poor
Cost effectiveness Good Good Very poor Poor
Ratings by superiors Good Good Very poor Poor
For groups Productivity Good Very good Fair Fair
Cost effectiveness Fair Very good Fair Fair
Ratings by superiors Fair Very good Fair Fair
For organisation as a whole Productivity Fair Very good Fair Good
Cost effectiveness Fair Very good Fair Fair
Profit Poor Very good Fair Fair
Source: Adapted from Edward E. Lawler (1981). Pay and organisation development, p. 94. Reading, MA: Addison-Wesley.
succeeded for many years in offering job security to their staff, but the subsidiary
firms then took the losses. And wage incentives affect whether or not people will
work at all; in the past this was a choice between work and a life of leisure for
some, today it is choice between work and social security.
However, there are definite limitations to the effects of money on work. Some
people are less interested in earning more money; it depends on how much their
friends and neighbours earn, how large their family is, whether they are trying to
buy a house or a car. On the other hand they may raise their level of financial
aspiration, and want a bigger house or car, or they may find new things to buy, or
they may regard money as an index of success.
But the central question remains: which pay system has most effect on worker
performance and satisfaction? A simple question but one without a simple answer.
As noted above there are many alternatives: profit share, small group incentives,
individual piece-work. According to Bucklin and Dickinson (2001), at the
beginning of the twentieth century relatively simple piece-rates were the norm,
but by the end of the century individualised variable performance pay was more
common. This change was based on many things: such as changes in the law
(employment, tax, social welfare); changes in economic affairs (interest rates,
exchange rates); and the ability to measure and monitor performance. They note
that the pay for performance system has four important characteristics. This is
contrasted with profit sharing, which is based on the performance of the organisation
as a whole.
In their lengthy and comprehensive review, Bucklin and Dickinson (2001)
considered the literature on a number of very important and difficult questions:
1. The ratio of incentive to base rate pay. The question what effect is the
power and efficacy of the ratio has on productivity and satisfaction.
Should people have a very low base rate and a potentially high incentive
pay, as is the case with many salespeople? This could lead to insecurity. Or
do relatively small incentive pay opportunities (i.e. 5%) have a sufficiently
powerful effect on productivity? For a long time the agreed optimal
number was 30% incentive to base rate potential. The conclusion of many
studies was that a much smaller percentage (3–10%) was still very effective.
2. The schedule of reinforcement (fixed or variable ratio). Is it more effective
to pay people for every unit of work (hours worked, things made) or on
a more variable ratio such as giving an occasional and unpredicted
bonus? The researchers noted that studies showed that monetary incentives
improve performance in comparison to hourly wages.
3. Whether incentives should be linear, accelerating or decelerating. The
conclusion was that the slope of the payoff curve does not have an effect
on productivity.
Table 10.3 Advice for managers
Principles Implementation guidelines
1. Define and measure performance • Specify what employees are expected to do, as well as what they should refrain from doing
accurately • Align employees’ performance with the strategic goals of the organisation
• Standardise the methods used to measure employee performance
• Measure both behaviours and results. But the greater the control that employees have over the achievements
of desired outcomes, the greater the emphasis should be on measuring results
2. Make rewards contingent on • Ensure that pay levels vary significantly based on performance levels
performance • Explicitly communicate that differences in pay levels are due to different levels of performance and not
because of other reasons
• Take cultural norms into account. For example, consider individualism–collectivism when deciding how
much emphasis to place on rewarding individual versus team performance
3. Reward employees in a timely • Distribute fake currencies or reward points that can later be traded for cash, goods, or services
manner • Switch from a performance appraisal system to a performance management system, which encourages timely
rewards through ongoing and regular evaluations, feedback, and developmental opportunities
• Provide a specific and accurate explanation regarding why an employee received a particular reward
4. Maintain justice in the reward • Only promise rewards that are available
system • When increasing monetary rewards, increase employees’ variable pay levels instead of their base pay
• Make all employees eligible to earn rewards from any incentive plan
• Communicate reasons for any failure to provide promised rewards, changes in the amounts of payouts, or
changes in the reward system
5. Use monetary and non-monetary • Do not limit the provision of non-monetary rewards to non-economic rewards. Rather, use not only praise
rewards and recognition, but also non-cash awards consisting of various goods and services
• Provide non-monetary rewards that are need-satisfying for the recipient
• Distribute non-monetary rewards based on the other four principles of using monetary rewards effectively
• Use monetary rewards to encourage voluntary participation in non-monetary reward programmes that are
more directly beneficial to employee or organisational performance
Source: Aguinis et al (2013).

Aguinis, Joo and Gottfredson (2013) attempted a helpful, simple but research-based
summary of what is important in performance management and guidelines for the
implementation of these ideas (Table 10.3).
Executive pay
The issue of executive pay continues to invoke hot debate. There is an academic
literature on what people know about pay and what they think is fair pay. It can be
summarised by three points. First, people are pretty well informed about the pay of
different types of professionals as compared to national averages. Second, nearly all
believe that the differentials are too high: the top earners should receive less and the
bottom earners more. Third, if people are asked to start all over again and devise
pay rates for different jobs, there are some surprises: many believe that currently
well-paid jobs, such as TV news reading, should pay well below the national
average, while others, such as nursing, should pay as much as judges.
Essentially there are four issues that inform this debate:
1. The amount of (comparative) pay any/all executives should receive.

It is well know that satisfaction with pay is all about comparatives and
not absolutes: that is, not how much you receive but how much you
receive relative to your comparison group. The question is, what
exactly is that? There are both internal and external comparators. Most
top executives prefer the latter and not the former, but it is the exact
opposite for observers. There have been strident calls for the
implementation of a policy that means the top job is never paid more
than ten times that of the bottom job within an organisation. It can be
rather embarrassing for the board to try to explain how one job is
worth so much more than another. Bosses, however, quite like social
comparisons. They note that the world is now one market and if you
are not prepared to pay international market rates, there will be a mass
exodus of talent to other countries.
2. How pay is determined. Again there are various issues: one is who is
involved and what mechanism they apply. Is it an in-house remuneration
committee, or should a review be conducted by some expert outside
consultancy company? What sort of algorithm should be used? For
instance, should it be based on some sort of performance measure?
How is that to be calculated? Anyone interested in performance
management knows how difficult it is to measure performance. You can
choose some metric: time, money, quality, quantity, customer feedback,
but there are three problems here: how to get measures for jobs that
don’t distort behaviours (see how bus drivers ignore waiting passengers
because they are often measured by on-time performance); the
contribution of others (teams) to productivity; and macro economic

forces that suddenly occur. Linking pay to the share-price can also have
serious and sudden unfortunate consequences as clever CEOs sell
properties, re-engineer (sack) middle management, etc., to make the
financials look good in the short term, only to have a later crisis.
3. What form should payment take? Salary, bonus, shares? And delayed
salary? What about the perks: the house, the jet, etc.? What should be
considered part of the total reward package? Most of the debate is
about the end-of-year bonus, which may increase a short-termist
approach to things. The paradox is that bonuses often make social
comparison much easier because of people’s natural boastfulness.
4. Should pay be secret and confidential or made public? While members
of the board can usually hide their salary, the CEO’s salary is nearly
always published. In some countries this data has to be made open so
there is no way to make it secret.
Pay secrecy
Surprisingly few companies communicate to employees all the issues about pay:
how it is determined and administered, i.e. pay level. But does open communication
about pay enhance perceptions of fairness or increase pay satisfaction? Essentially, if
a company is open and upfront with respect to its pay policy it has to be able and
willing to defend it.
Just after the First World War a big American company put out a “policy
memorandum” entitled “Forbidding discussion among employees of salary
received”. It threatened to “instantly discharge people” who disclosed their
“confidential” salary in order to avoid invidious comparison and dissatisfaction.
The staff would have none of it. The next day the staff walked around with large
signs around their necks showing their exact salaries.
The same issue continues to this day. People are worried that pay discussion
simply fuels “hard feelings and discontentment”. The question is: does pay secrecy
lead to lower motivation and satisfaction or the other way around? There have
been studies on this topic that show that secrecy is prevalent in most organisations
and that workers actually want it. It may be illegal.
Colella, Paetzold, Zardkoohi and Wesson (2007) looked at the costs and benefits
of pay secrecy. They argued that there were various costs:
1. Employee judgements about fairness, equity and trust may be challenged. If

people don’t know exactly what amount individuals are paid and why
they surely infer or guess it. Yet uncertainty generates anxiety and
vigilance about fairness. People believe that if information is withheld it

is for good reason. This in turn affects three types of justice judgements:
informational (it being withheld); procedural (lack of employee voice and
potential bias) and distributional (compressing the pay range).
2. Judgements about pay fairness will, if they have to, be based on a general
impression of the fairness in the organisation. People see all sorts of things
(hiring, firing, perks) that are vivid and remembered examples of
“fairness”. So, even if they have a “fair but secret” pay policy it will be
judged unfair if other perhaps unrelated actions do not look fair.
3. Secrecy breeds distrust. Openness about pay signals integrity. Secrecy
may enhance views about organisational unfairness and corruption.
Further, it signals that the organisation does not trust its employees. So
secrecy reduces motivation by breaking the pay for performance linkage.
4. People need to have (and perform best when they are given) goals/targets/
KPI and are rewarded for them. But if they do not know the relative worth
of the rewards (i.e. in pay secrecy) they may well be less committed to
those goals.
5. Pay secrecy could affect the labour market because it could prevent
employees moving to better fitting and more rewarding jobs. Pay-secret
organisations may not easily lure or pull good employees from other
organisations. Secrecy makes the market inefficient.
On the other hand secrecy can bring real advantages to an organisation:
1. Secrecy can enhance organisational control and reduce conflict. Pay

differentials can cause jealousy. So, hiding them may prevent problems in
corps d’esprit. Making pay open often encourages managers to reduce
differences. That is the range distribution is narrower than the performance.
So, paradoxically, secrecy increases fairness in the equity sense because
people can more easily be rewarded for the full range of their outputs.
2. Secrecy prevents “political” behaviour, union involvement and conflict.
Openness is both economically inefficient and likely to cause conflict.
3. Pay secrecy allows organisations more easily to “correct” historical and
other pay equity. So, paradoxically, one can minimise both unfairness
and discrimination as well as perceptions of those matters more easily
by secrecy.
4. Secrecy benefits team work particularly in competitive individuals,
organisations and cultures. It encourages interdependence rather than
“superstardom”.
5. Secrecy favours organisational paternalism in that organisations can (and

do) argue that employees themselves want secrecy, and a reduction in
conflict, jealousy and distress at learning about others. One can even
suggest that workers might make irrational decisions if they know what
their colleagues are (really) paid. So, paternalistic secrecy increases
control and the “feel good” factor.
6. Secrecy is another word for privacy and increasing concern in a technologically
sophisticated surveillance society. Perhaps this is why surveys show people
are generally in favour of secrecy because people do not want their salaries
discussed by their co-workers. People are willing to trade off their curiosity
about the pay of others for not having their own package made open.
7. Secrecy may increase loyalty or, put more negatively, labour market
immobility. If people can’t compare their salaries they may be less
inclined to switch jobs to those that are better paid. So, you get what is
called continuance commitment through lack of poaching.
Clearly the cost-benefit ratio depends on different things. Much depends on the
history of the organisation. It is pretty difficult to “re-cork” the genie if it has escaped
the bottle. It also depends on whether good, up-to-date, accurate industry
compensation norms really exist. What does – on average – a senior partner in a law
firm, a staff-nurse, a store manager get paid? The public industry norm information
can have a powerful effect on organisations that opt for secrecy or privacy.
The next issue is how the organisation does (or claims to) determine criteria for
pay allocation. Do they do payment for years of service, for level, for performance
on the job or for some combination of the above? The more objective the criteria
(number of calls made, number of widgets sold), the more difficult it is to keep
things secret. Next, appraisal systems strive to be objective, equitable and fair. The
more they are, the less need for secrecy. Where objective criteria are used staff have
less concerns for secrecy. So, subjectivity and secrecy are comfortable bedfellows.
People don’t know under pay secrecy what their pay is based on. And secrecy
means they can’t predict or believe that they can in any way control their pay.
When companies pay in secret, people have to guess how they rank relative to
others at the same level. That, no doubt, is why high performers want secrecy more
than low performers; they believe they are equitably being paid more and want to
avoid jealousy and conflict. So, you believe you are well paid because of your hard
work and all is well with secrecy.
When pay secrecy is abolished some people not only feel angry, they feel
humiliated by exposure to relative deprivation. They feel unfairly dealt with and
their easiest means of retaliation is inevitably to work less hard.
Pay secrecy is not just an HR issue. It relates to organisations’ vision and values
as well as individual job motivation. Secrecy can lead to more management control,
bigger differentials and less conflict. But can you enforce it? Paradoxically the more
enthusiastically an organisation tries to enforce it the more employees might

challenge the notion. Individuals and groups choose, or not, to talk.
Three things are clear. Once you have abolished or reduced secrecy the path
back is near impossible. Next, if competitors have openness and you have secrecy
they might undermine your system. But, most importantly, for openness to work
you need to be pretty clear in explaining how pay is related to performance at all
levels and to be able to defend your system.
It has been argued that pay communication seeks to establish and increase
perceived fairness in various ways (Day, 2012):
• It explains that pay is fair because it is based on relevant, agreed, socially

acceptable criteria (i.e. level, performance).
• It is fair relative to market standards.
• It is fair relative to past worker input.
• It is aligned with future pay practices.
• It encourages the focus of attention to relevant peers.
Thus, it is argued that if pay communication is clear and open and if the pay is
actually equitable, it leads to staff commitment, engagement and satisfaction.
Indeed, there are studies to suggest that pay communication often results in lower
trust and perception about fairness (Day, 2007). Certainly, early studies of salesmen
found open pay policies had little or no effect (positive or negative) on general
satisfaction (Futrell & Jenkins, 1998). What seems most important is to explain
what determines pay level (i.e. performance, loyalty) and why.
Money at work
There are both intrinsic and extrinsic rewards for people at work. The more
intrinsically a person is motivated the less important and powerful the effect of
money as a reward. Indeed, increasing the latter can even reduce the former. There
are four reasons why people are not simply motivated by money:
• First, they adapt to the changes in levels of money very quickly so any effect
wears off quickly.
• Second, it is not the absolute amount of money that people are paid that is
important but rather how much they are paid comparative to those in their
work group.
• Third, perceptions of fairness are ultimately important, which is why issues
around executive pay and pay secrecy are so important.
• Fourth, other things such as job security, work–life balance and time off can be
more important than money.
There are many subtly different pay schemes, which can have different effects
on performance.
11
BEHAVIOURAL ECONOMICS
I buy when other people are selling.

John Paul Getty
Nothing is more disastrous than a rational investment in an

irrational world.
John Maynard Keynes
There are two times in a man’s life when he should not speculate:
when he can afford it, and when he can’t.
Mark Twain
Why is the man or woman who invests all your money called
a broker?
George Carlin
Introduction
We are all “people of the heart and people of the head”. Our everyday decisions are
governed by our thought processes but also by our emotions. Despite the fact that
we like to think of ourselves as analytical, logical and rational there is considerable
evidence to suggest that this is not the case.
We are rationalising rather than rational and psycho-logical rather than
analytically logical. It is particularly an issue with money. People can be astonished
if for instance they are “natural savers” and they have some sort of (personal or
business) relationship with a “spender”. Equally, a financial risk taker may see a
cautiously investing friend as mad, wasting wonderful opportunities; while the
latter sees the former as irresponsible, even wicked in their profligacy.
Indeed, the central message of behavioural economics is that people make “big
money mistakes” for well-established reasons. The science has been able
to describe and explain the processes by which we take short cuts and make logical
errors. In essence, it is suggested that people try to simplify and speed up their
everyday decision making by adopting “rules of thumb”. They consciously try to
reduce complexity and in doing so make predictable and consistent logical errors.
We know why people do not think that all money is the same and treat it
differently with regard to how they obtained it in the first place. So, they may be
very happy to take wild risks with inherited or gifted money but not with money
they earned by hard work. We also know people are much more motivated (and
pained) by the prospect/experience of loss as opposed to the opportunity and
reality of gain. Many throw good money after bad in an irrational way or suddenly
disinvest when the market falls. A lot of people tend to believe that things they
own are worth more than they patently are. And very many delay making
investment or spending decisions; money issues frighten them.
It has been shown that people often make important money decisions based
on unimportant, trivial or irrelevant information. Often there is a lot of evidence
of the “ego trap”, which is the idea that people are supremely overconfident
about their money decisions. We know that very many people make spending
decisions without doing much research; that they “take heart” from winning
investments and are happy to “explain away” all poor ones. Many think they
are always beating the market or simply don’t know the rate of return on
their investments.
The studies on risk taking are also very illuminating. Some people are amazing
risk takers with all aspects of their lives. Risks – be they physical or behavioural –
seem to give then a great thrill: a rush of adrenaline that they seem to need to keep
them going. Others seem more complicated as they are cautious in some aspects of
their life (e.g. physical safety, diet) but almost outrageously risky in others (e.g.
their personal relationships).
But do people know how they “stack up” against others in their taste for risk
taking? They might believe they are risk takers or risk averse but does their
behaviour really show that? Many are ignorant about others’ risk taking because
the topic is taboo. They are disconnected in the sense that their view of themselves
is not what accords with what they do. The person who thinks of themself as
“super-cautious” actually turns out to be “quiet risky” while the opposite can
also be true.
Money is a great source of anxiety for many people: for the poor how to get
more of it; for the rich how to keep it; and for nearly everybody how best to invest
it particularly in uncertain times. We all know we have to save for our future and
that investing wisely is terribly important for our well-being. However little or
much we have “wealth management” is important; and if anything it will get more
so. Most of us want good advice from people who understand our “taste”, indeed,
we have a “need for” financial management whether it be taking no, few, some or
great risks. It is fundamentally bound up with our general well-being.
Behavioural economics 239
Prospect theory
Behavioural economics has its intellectual foundations in both psychology and
economics. It seeks to understand how people select, process and decide upon
financial (and other) information. It offers profound and parsimonious information
as to why so many seemingly educated and informed people make strangely illogical
or irrational decisions with respect to all aspects of their money: borrowing,
investing, saving and spending.
It is axiomatic in economics that people make rational decisions about their
money. Economists assume we (always) know what we want, which is for our own
good, and that we know how to get it. People make cost-benefit analyses in the
pursuit of personal satisfaction and getting the most out of life with their individual
resources.
Economists have been challenged by certain economic behaviours, which they
have not found easy to explain: why do people tip; why do they spend differently
with cash than a credit card; why do people have savings accounts which don’t offer
interest that even keeps pace with inflation; why do we happily and enthusiastically
spend more for a product when using a credit card as opposed to cash.
Behavioural economics was “born” in the late 1960s with experiments that
showed that people do not understand some basic statistical phenomena (regression
to the mean; the importance of sample size). The pioneers in this area – Amos
Tversky and Daniel Kahneman – explored the judgemental heuristics or mental
short cuts that people use to think about their money and other related issues.
Kahneman and Tversky won the Nobel Prize in economics in 2002 for their
work on prospect theory. It is a theory that describes decisions between alternatives
that involve risk, i.e. alternatives with uncertain outcomes, where the probabilities
are known. The model is descriptive: it tries to model real-life choices, rather than
optimal decisions. People decide which outcomes they see as basically identical and
they set a reference point and consider lower outcomes as losses and larger ones as
gains. The asymmetry of the S-curve (Figure 11.1) is indicative of Warren Buffett’s
Pleasure
Losses Gains
Pain
FIGURE 11.1 The pain and pleasure of loss and gain

finding that “losses gain twice the emotional response of gains” and shows that
people are risk averse (play it safe) in relation to gains, yet loss averse (gamble to
avoid losses).
For individual investors the purchase price of shares is the reference point against
which they make all decisions. Thus, they tend to sell too soon after making a small
gain or hold on for too long when the loss is terrifying. As we have seen many
times the market overreacts to bad news and encourages selling. The fear of loss is
over exaggerated.
An important implication of prospect theory is the framing of risky situations.
The following example highlights just what an effect framing has on people:
Participants were asked to imagine being a scientist working on an outbreak

of an unusual disease, which is expected to kill 600 people. Two alternative
programmes to combat the disease have been proposed. The first group of
participants were presented with a choice between two programmes:
Programme A: “200 people will be saved”

Programme B: “there is a one-third probability that 600 people will be
saved, and a two-thirds probability that no people will be saved”
Seventy-two percent of participants preferred programme A (the remainder,

28%, opting for programme B). The second group of participants were
presented with the choice between:
Programme C: “400 people will die”

Programme D: “there is a one-third probability that nobody will die, and
a two-thirds probability that 600 people will die”
In this decision frame, 78% preferred programme D, with the remaining

22% opting for programme C. However, programmes A and C, and
programmes B and D, are effectively identical. A change in the decision
frame between the two groups of participants produced a preference
reversal, with the first group preferring programme A/C and the second
group preferring B/D.
The framing of risky situations can drastically affect the way a person will react to
them and this has been widely used in behavioural economics and applied to a
diverse range of situations (investing, lending, borrowing decisions) that appear
inconsistent with the old economic viewpoint that humans act rationally. Would
you rather get a 5% discount, or avoid a 5% surcharge? The same change in price
framed differently significantly affects consumer behaviours and is an area of huge
importance to marketing.
It is not the reality of the loss that matters but the perception. Nations have gone
to war and “stayed the course” until their doom because of loss aversion. It simply
means you refuse to admit you made a mistake. As Aronson puts it, “Once we have
committed a lot of time or energy to a cause, it is nearly impossible to convince us
that it is unworthy.” The real question is: “How bad do your losses have to be
before you change course?”
Much research supports the assumption that human decision making
across contexts is influenced by perceptual cognitive biases, which are hardwired
from birth. These biases are heuristics: short cuts in decision making where
we make automatic and “unthinking” decisions, often about purchases on a
daily basis.
Most people do not have the capacity or motivation to fully process or
evaluate every piece of information that they encounter in their ever-changing
worlds. So, to cope with the sheer amount of data and enhance decision making,
humans rely on heuristics to deal with the complexity of their daily environments.
Such cognitive biases allow us to make rapid judgements about complex
information that we are unable to thoroughly evaluate. These stimuli are
responded to automatically, without conscious awareness of the underlying
cognitive process.
Kahneman (2011) has provided a masterful summary of the cognitive and social
psychology underlying behavioural economics. He distinguishes between two
types of thinking: fast and slow, or systems 1 and 2. Fast thinking is intuitive, relies
on heuristics, and is in a sense automatic, while slow thinking is effortful, deliberate
and more logical/rational. These two systems interact to minimise effort and
optimise performance.
System 2 thinking requires effort, attention and involvement. It involves
thinking, memorising and processing. It involves different forms of energy, but as
people become more skilled at any task, their demand for energy diminishes.
System 2 thinking keeps you busy and can deplete your willpower. People find
cognitive effort mildly unpleasant and avoid it as much as possible.
System 1 is lazy while 2 means being more alert, intellectually active, sceptical
and rational. Inevitably intelligent people may be better at slow thinking and
demanding computation, but that does not mean they are immune to biases and
lazy thinking.
Kahneman’s book contains 38 short chapters that explain and describe
admirably many aspects of fast thinking. These include the power of priming;
the idea that people in a state of cognitive ease are more casual and superficial in
their thinking; overconfidence and the neglect of base-rate effects; anchoring
and priming.
In the final chapter of the book he uses a new metaphor for the two types: the
experiencing (System 1) self that does the living and the remembering (System 2)
self that keeps the score and makes the choices. The experiencing self is less
conscious about time.
Heuristics
Heuristics are biases, mental short-cuts; the products of fast thinking. There are a
number of heuristics that are widely discussed in present behavioural economics
research. Advertisers and businesses have long known about these because they
have understood that the way they frame their message, price option, promotion
or proposition has a great impact on whether they will be chosen.
Many of these have been identified and they are briefly reviewed here.
1. Loss aversion
This is the tendency to prefer avoiding losses to acquiring gains. All of us treat
losses and gains quite differently. People’s decisions are powerfully influenced by
how they frame and describe situations. Nearly all people are much more willing
to take risks to avoid losses and much more conservative when it comes to
opportunities for gain.
People should test their personal threshold for loss. We are all sensitive to an
extent: the question is how sensitive are you? So, the good advice is diversify your
investments; focus on the big picture, the broader whole, the wider issues; forget
the past because you are not there to justify earlier behaviours; reframe losses as
gains like lessons learned, taxes saved; spread out your gains and, paradoxically, pay
less attention to your investments, otherwise you will overreact.
In one study a bank targeted people who had not used their credit card for some
time. Half were told how good/useful was the cards; and half were told it would
be withdrawn unless it was used. As predicted from the theory, those who received
the loss framed message were twice as likely to act (i.e. use the card) as those that
received the positively framed message.
In short the data show that people give twice the weight to the pain of loss than they
do to the pleasure of gain. We are therefore risk seeking in the realm of gains, but risk
averse in the realm of losses: almost the opposite of what most people suspect.
There are many good examples of studies where this has been demonstrated. For
instance:
a. Homeowners were randomly sent information about the benefits of or losses

accruing in not, insulating their home. Those who got the loss message
(expressed in daily cash loss) were over 200% more likely to proceed with
the insulation.
b. Another case study reported on trying to get people to imagine the benefit of
buying new technology. Those asked to imagine what they could not do if
they did not buy it were more than twice as likely to purchase it.
c. Supermarkets know that giving out small coupons increases sales, because if
they are not redeemed the customer has lost something.
d. The same is true with all sorts of loyalty cards. If these are given to people after
they have made a purchase with the acknowledgement or stamp showing they
have already made a purchase (and even better a double stamp as a generous
first offer) they are much more likely to use the card, because not doing so
represents a loss.
The moral of loss aversion is simple. People are more likely to act if threatened
with loss than promised gain in money. The same issue can be framed in opposite
ways (losses or gains) but the effects are very different.
2. Endowment
This is the idea that people have the tendency to overvalue things they own. We
place a higher value on things that we personally own (a car, a coffee mug, a
computer) than their actual, sometimes even printed, market value. These products
seem endowed with extra value. People also think a product is more valuable if
they get something in return for it, even though it may be of little value. Even little
things like stationery, old clothes or books, which are practically worthless, are
thought of by owners as potentially high in value.
Curiously, people want more money for a personal product or object that they
are trying to sell than the identical object they may want to purchase. This is
because the loss of the possession has a greater psychological impact than the benefit
derived from gaining it.
People overvalue what they have: they endow it with psychological wealth and
are misguided about actual worth. This can lead them to be very disappointed when
selling items, but can make manufacturers rich when they explore this heuristic.
3. Anchoring
Anchoring is the impact of an arbitrary reference point upon an estimate of an
unknown value. The heuristic bias is caused by people having insufficient
adjustment in decisions because final judgements (i.e. agreeing the price) are
assimilated towards the starting point of the judge’s deliberations.
This area has attracted a great deal of attention (Furnham & Boo, 2011). Anchors
can be both internal and external sources of information. Customers seem to have
internal expected retail prices (based on all sorts of things), which they use as
anchors, basing their response to prices in store upon them. Some customers also
base their evaluation of retail price on external sources of numbers such as prices of
other products they have come across in store. For instance, if a customer buys a
laptop they are often happy to purchase expensive accompaniments. This is because
in comparison to the price of the computer they are perceived as being good value.
It is suggested that the anchoring effect occurs as we are not motivated enough
to revise our price estimates away from a value that we can anchor upon, and so
settle with a similar figure. Further, the authors propose that individuals’ original
estimates of figures tend to be broad, and so it is cognitively less strenuous to accept
whatever an anchor figure is available and focus on more demanding thoughts.
You can anchor by proximity: placing low cost items next to high cost items.
Similarly, products of low inherent value can have their value anchored at a higher
level if placed next to something expensive.
We also anchor experiences. Against worst case scenarios, less serious issues
do not seem as bad. The flight might have been cancelled: it is going but eight
hours late.
Curiously, when people have no idea about cost or value they anchor on
anything that seems remotely plausible. All free giveaways are thought to be more
valuable if the product was seen to have an original cost. Because of the anchoring
effect it is usually advised in a negotiation situation to “go in early and go high”, to
anchor the person around a particular monetary value of your choosing.
4. Salience
Essentially the idea is that the more particular information or data seem salient or
relevant to a particular problem, the more disproportionate the influence they will
have. Thus, even though the information can be demonstrated not to be (at all, or
partly) relevant/salient to a particular decision it can carry more weigh if perceived
to be so. This information that is said to be salient is that which receives a
disproportionate amount of attention in comparison to other information available.
Such information also benefits from enhanced recall.
It could be that the salient information is that which is similar to that previously
experienced and thus has a large network of nodes in the memory, with a number
of linkages. Retrieval of such information is facilitated due to the network associated
with it, increasing the ease with which it is retrieved.
5. Fluency
Oppenheimer (2008) described fluency as being “the subjective experience of ease
or difficulty with which we are able to process and understand information” (p.
237). This is a simple heuristic, suggesting that we have a preference for information
that is processed with ease. Those things (ideas, objects, theories) which are
processed faster, more easily and more smoothly appear to have higher value.
Simple, straightforward things seem more important than they are.
Alter and Oppenheimer (2006) found that stocks with fluent and easily
pronounceable names outperformed non-fluently named stocks. The authors based
this finding on fluency, and the fact that fluently named stocks are considered to be
more valuable due to the ease with which they are processed.
The real test for any brand is that it “readily comes to mind”: in fact sooner than all
competitive brands. That which is easily read, understood and remembered is always
“top of mind”. That which is easy encourages behaviour: so people spend more on a
credit card than in cash and more with notes than coins worth the same amount
simply because they are so much easier. This can work in situations as simple as
having see-through containers: things “readily available” are more readily consumed.
This is why marketers try so hard to make their product stand out: it should be
easily and readily noticeable through packaging colour, shape or logos, which can
all have beneficial effects. People also respond to consistency in product design –
whether it refers to shape or colour or logo. Pack consistency helps recognisability,
which helps sales. It is no surprise that EASY is a brand that has done well.
Fluency can occur in other ways. If a product name rhymes, or is very easy to
pronounce and spell, it sells more. That is why car manufacturers struggle to find
new car names that can sound attractive and pronounceable in different languages.
Equally, the fewer the options people have the better. Having too many options
can easily overwhelm people. Less really is more.
Fluency is related to ease: ease of navigation round a store, ease of purchase, and
ease of recall.
6. Availability
This is based on the notion that if you can (quickly and easily) think of something,
it will be rated as very important. The more often a particular event occurs, the
more mentally available this is for retrieval – and this factor is used to estimate
likelihood of occurrence.
The trouble is that the frequency with which particular events come to mind is
usually not an accurate reflection of their actual probability in real life. This short cut
also leads to illusory correlations where because people can relatively easily recall
events that occurred at much the same time it was believed that they were related
to each other.
One famous example is asking people whether dying from a shark attack or
having airplane parts fall on your head is more common and they nearly always
choose the former.
7. Familiarity
This heuristic works on the basis of current behaviour being similar to a past
experience. We assume that previous behaviour and its results can be applied to
new situations. What worked in the (very different) past will work in current (and
future) situations. In this sense we are “victims” of our past. It also explains why
people learn more from failure than from success. The deja vu experience, then,
can be very bad for us. It makes us lazy and our decision making poor.
8. Peak-end rule
Kahneman (2011) suggested that the evaluations we keep in mind of previous
experiences are based on the peak of either how pleasant or how unpleasant they
were, and how the event was perceived at its end. Events are not evaluated
rationally, considering how pleasant the experience was on average. Memories are
powerfully coloured by powerful positive and negative experiences.
In one study he found that participants evaluated 60 seconds of 14ºC ice water
followed by 30 seconds of 15ºC ice water more positively than simply 60 seconds of
14ºC ice water alone. The one degree increase in water temperature was experienced
as a pleasant improvement and heightened overall memories of the experience.
This is related to the primacy–recency effect, well known to memory researchers.
Here, information that occurs at the beginning and the end is better recalled than
the information that occurs “in the middle”. The primacy effect is where
information that comes first or early is given more weight, while the recency effect
is where the information that comes last is given more weight.
9. Recognition
Recognisable objects and information are considered to have more value than
those that are novel. If a name or place or shape or colour seems familiar it is judged
more positively that if it is not recognised.
10. Simulation heuristic

Kahneman and Tversky (1982) suggest that the ease with which an event is
imagined in one’s mind is used to make predictions, assess probabilities, evaluate
statements and determine the likelihood of that event occurring. This may appear
similar to the availability heuristic, but differs in that the simulation heuristic
involves imagining fictitious experiences, whereas availability refers to the recall of
real-life memories.
This heuristic is said to be less automatic than the others, and we do not generally
spontaneously generate alternatives to a situation. However, when instructed to
imagine an alternative possibility this leads to the automatic generation of additional
alternative possibilities.
11. Sunk cost

Economists argue that sunk costs are not taken into account when making rational
decisions. It is the situation of throwing good money after bad; of continuing on a
loss-making project to “justify” the amount of money already spent on it.
Sunk costs may cause cost overrun. In business, an example of sunk costs
may be investment into a factory or research that now has a lower value or no
value whatsoever. For example, $20 million has been spent on building a power
plant; the value at present is zero because it is incomplete (and no sale or recovery
is feasible). The plant can be completed for an additional $10 million, or
abandoned and a different facility built for $5 million. It should be obvious that
abandonment and construction of the alternative facility is the more rational
decision, even though it represents a total loss on the original expenditure – the
original sum invested is a sunk cost. If decision makers are (economically)
irrational, or have the wrong incentives, the completion of the project may be
chosen. For example, politicians or managers may have more incentive to avoid
the appearance of a total loss. In practice, there is considerable ambiguity and
uncertainty in such cases, and decisions may in retrospect appear irrational that
were, at the time, reasonable to the economic actors involved and in the context
of their own incentives.
12. Default
Decision making requires effort. Defaulting on a typical response is easy. Some
people always default on “no”, others on “yes”. The former always refuse, the
latter always accept. Some people seem always to agree; others always disagree.
They don’t weigh up the evidence fully before defaulting to a particular position.
The default opt out is well known. It has been shown that if you require people
to opt out of something, few do so, but if you require them to sign up for donorship
few do so. They are less likely to opt out than in. Thus, by defaulting on inactivities
governments and manufacturers can ensure that they get people to behave in a
particular way. In some countries you have to opt out to register as a non-organ
donor. That means that everyone has the right to refuse actively. That is they have
to opt out. In most countries a very small percentage do, so any or all of their
bodily organs are used after death: but they have to be pro-active.
Manufacturers have learnt to tick boxes when offering people products and
services. If you have to “un-tick” or cancel the tick, most do as the manu-
facturer requires.
13. Compromise effects

Faced with a list of options most people avoid extremes. Usually they avoid the
cheapest and the most expensive option and compromise. That is why manufacturers
have decoy products. It has been argued that “organic” produce in big departmental
stores are essentially decoy products making more expensive non-organic products
seem cheaper and more attractive.
There is no simple agreed list of these heuristics or what they are called. Some
people stress the power of certain heuristics over others. Thus, the power of mental
accounting is stressed by some people in the insurance business to try to understand
why people think differently about money with different origins while others are
fascinated by the observation that although people always say they want more
choice (of products/services) when faced by more choice they choose less. It is no
surprise that “cheap” shoe shops have a “pile-em-high-an-sell-em-cheap” approach
while expensive, highly sophisticated shoe shops may display as few as three to four
very expensive shoes.
Practical advice
In a popular book entitled Why Smart People Make Big Money Mistakes, Belsky and
Gilovich (1999) discuss seven typical issues that demonstrate the problems with
“heuristic thinking”:
1. Not all money is seen as equal

This is also known as mental accounting or fungibility. It means people define and
therefore use money differently. People spend £100 obtained from a roulette win,
a salary, a tax refund or a lucky find differently. Whether money comes from a
bonus, a gift, a rebate or a refund it is all the same.
We draw and deposit our own money in different accounts of our own making.
If people get a bonus of £200 they are paradoxically more likely to spend it on
something “frivolous” than if they got a bonus of £2,000 or even £20,000. The
latter is more serious, sacred and “harder to spend”. Equally, buying something
using a credit card feels diffent to using cash (particularly low denomination notes).
Mental accounting can make people at the same time both spenders and savers:
reckless with certain “types of money” but excessively conservative investors with
other sorts of money. It means they are more likely to spend tax refunds or gift
money recklessly and to use cash quite differently from credit cards.
There are benefits to some mental accounting. It helps that the mortgage gets
paid; that retirement money or children’s university education money is never
touched. But it makes people reckless with windfall money or forgotten cash,
rediscovered savings, etc. Equally it is unwise to have savings acquiring low interest
while “borrowing” money on a credit charge by not paying off debts at the end of
the month. One solution is to imagine that all income – whatever the source – is
earned. Work out how long it would take to earn. This, Belsky and Gilovich
maintain, can make a big difference.
2. We treat losses and gains quite differently

People’s decisions are powerfully influenced by how they frame and describe financial
situations. The results are very clear: people are much more willing to take risks to
avoid losses and much more conservative when it comes to opportunities for gain.
Prospect theory stresses how important choices are described as gains or losses.
The same amount of pain and the same amount of pleasure have very different
impacts. This is the psychology of loss aversion. This oversensitivity to loss means
that people may respond too quickly to drops in the market. On the other hand
the selling of a stock or bond (the pain of making a loss fund) makes some people
more willing to take the risk of keeping the investment despite its continual decline.
Oversensitivity to loss also means people go for certain gains.
People, Belsky and Gilovich argue, should test their personal threshold for loss.
We are all sensitive to loss: the question is how sensitive are you?
Behavioural economists have shown how loss aversion and our inability to
ignore sunk costs means people often act unwisely. But they have also explained
why people don’t act when they should. We sometimes get overwhelmed by
choice, and paralysed by having to make a decision – so we defer the actual
decision. Decision paralysis happens particularly when we have plenty of – indeed
too much – choice. The more time we have to do a task, the more we procrastinate.
That is why some people have to be driven by deadlines to react. We also know
people like to compromise and have extremeness aversion. Given a choice people
choose an intermediate. Thus, people can be persuaded to buy more if a high price
item is introduced.
3. We are also prone to inaction

We also opt for the status quo: doing nothing; resisting change; showing
unwillingness to rock the boat. The endowment effect is particularly interesting.
It means people overvalue what they value. That is why organisations allow for
trial periods and money back guarantees. Belsky and Gilovich (1999) claim that
there are various telltale signs of this problem: having a hard time choosing
between investment options, not having a pension, delaying financial decisions
all the time.
The advice from the behavioural economists is simple. Deciding not to decide
is itself a decision. All decisions come with opportunity costs. Try to reframe a
problem: be a devil’s advocate.
4. The money illusion and the bigness bias

This problem classically arises when we confuse nominal changes in money (it goes
up or down) with real changes, for instance as a function of inflation or deflation.
The question is the current buying power of money as opposed to its actual amount.
Related to this is the idea of base rate: the fact that people buy lottery tickets,
which, because of the real odds of winning, have been described as “a tax on the
stupid”. People simply don’t understand the relationship between inflation and
buying power. Many ignore or downplay various fees/commissions that people
charge, and they don’t really understand compound interest. The authors warn
against being impressed with short-term success and ignoring the fine print when
making money decisions.
5. Anchoring and confirmation bias

This is quite simply the common and strong tendency to latch onto some idea/fact
or number and use it, whether relevant or not, as a reference point for future
decisions. We are, of course, particularly susceptible to anchoring when we do not
have much information about something (the cost of hotels in foreign countries,
typical discounts, etc.).
It is confirmation bias that also leads people to make important money decisions
based on unimportant or irrelevant information. This is searching out for, treating
less critically, and being overly and unjustly impressed by information that confirms
your preferences and prejudices. Warning signs include being somewhat over-
confident in your ability to bargain and negotiate, making important money
decisions without much research, and finding it hard to sell investments for more
than you paid for them. Belsky and Gilovich (1999) suggest that people broaden
their advisors and try a little humility.
6. Overconfidence is a common “ego trap” that people fall into

Too many people do not know how little they really know about financial issues.
They feel that they can do things like sell their own house and pick great
investments without specialist advice. Some people persist in the belief that they
are beating the market, but do not really know or understand their actual return
on investments. They seem to believe that investing in what they know is a
guarantee of success. It is really a case of “investor: know thyself”. Indeed, there
is evidence that people are overconfident in all things, like how safely they drive
and how insightful they are.
7. Getting information through the grapevine and relying too much

on the financial moves of others
This is the final “big money mistake” documented. This is all about investing with
the herd and (mindlessly) conforming to the behaviour of others. This is seen when
people invest in “hot stocks and shares”: most people buy when stocks are rising
and sell when shares are falling. This is about being too reliant on the ideas of
colleagues, friends, journalists and financial advisers. The advice is “hurry up and
wait”; avoid fashions, “tune out the noise” and actually seek out opportunities to
be contrarian. In fact, all the “gurus” of investing say the same thing: that they
often buy when shares are going down not up (once, of course, they have looked
at them carefully).
Belsky and Gilovich (1999) helpfully end their book with “principles to ponder”:
a. Every dollar/pound/euro spends the same: It does not matter where

money comes from, how it is kept or spent (salary, gifts, wins) it is all the same.
b. Losses hurt you more than gains please you: We are all loss and risk averse.
c. Money that is spent is money that does not matter: Mistakes from the
past should not haunt the present.
d. It is all about the way you frame/see/look at things: The way we code
potential losses and gains profoundly influences all the choices we make.
e. All numbers are amounts of money even if you don’t count them: In
the old jargon, look after the pennies and the pounds will look after themselves.
Don’t underestimate small amounts of money.
f. We pay too much attention to money matters that matter too little:
We tend to weigh some fact and figures too heavily.
g. Your money-related confidence is often misplaced: It is so easy and
common to over-estimate our money skills and knowledge.
h. It is very hard to admit one’s money mistakes: This is about pride and
hubris but also being very uncomfortable about self-criticism.
i. The trend may not be your friend: Trust your instincts before you follow
the herd when thinking about investing.
j. You can know too much: You can get overwhelmed by financial
information – much of which is irrelevant.
The priming power of money

The power of money can be illustrated by its powerful priming ability. This can
have powerful, immediate, predictable, but unconscious effects on behaviour. The
“mere” exposure to (real) money can trigger a mindset that really influences
behaviour. Primes have an effect on beliefs and behaviours because they activate
powerful associations. Prime with money, therefore, and you get a set of positive
and negative associations that can impact on all sorts of behaviour.
In one celebrated illustration Peter Naish (on a BBC programme in 2013)
from the (British) Open University split people into two groups. Both counted
pieces of paper with their non-preferred or weaker hand. One counted real
money (used banknotes to the value of £250) and the other pieces of paper.
Once primed, both groups did three further studies. First, they were asked to eat
chocolates to rate them for taste, sweetness, etc. Second, they were asked to test
their pain endurance by seeing how long they could keep their hands in freezing
cold water. Third, they were confronted by a situation where they could help
someone or ignore them.
As predicted the money group ate significantly more chocolate, endured pain
significantly longer and were less likely to help others in need. The simple effect of
exposing them to money stimulated them to be hungrier, more able to endure pain
and more self-oriented (thus projecting this on others).
Bonini et al. (2002) showed that the same amount of money is judged
differently after priming. In Canada, DeVoe and House (2012) showed that
asking people to think about their income in terms of hourly payments reduced
their rating of the pleasure they received from leisure time spent on the Internet.
They argued that priming people to think about time in terms of money
influences how they experience pleasurable events by creating greater impatience
during unpaid time.
In other studies Boucher and Kofos (2012) showed that if you prime people
with money they experience greater self-control. They showed in two studies that
money priming decreased feelings of fatigue, and made people see difficult tasks as
less so and put more effort into them. They noted that “surreptitiously reminding
oneself of money (perhaps by installing a money screensaver on one’s computer) is
vital for helping people achieve their goals and live harmoniously with others”
(p. 810).
In a series of interesting and innovative studies, Vohs and colleagues showed the
psychological power of money (Vohs, Mead & Goode, 2006, 2008; Zhou, Vohs &
Baumeister, 2009). The idea was that if you prime people with money they will
take a “market-pricing” orientation to the world. Money primes make people
attend to ratios and rates, and ideas of self-sufficiency: an insulated state where
people put in effort to attain particular goals and prefer to be separate from others.
That is, money is a tool that enables people to achieve their goals without the aid
of others.
The self-sufficient pattern helps explain why people view money as both
the greatest good and evil. As countries and cultures developed, money
may have allowed people to acquire goods and services that enabled the
pursuit of cherished goals, which in turn diminished reliance on friends and
family. In this way, money enhanced individualism but diminished
communal motivations, an effect that is still apparent in people’s responses
to money today.
(Vohs et al., 2006, p. 1156)
In later work, Vohs et al. showed that subtle reminders of money elicit big changes
in human behaviour. They showed that, compared to people not reminded of/
primed by money, people preferred more solitary tasks and less physical intimacy
but worked harder on challenging tasks and even desired to take on more work.
Thus, from an employer’s perspective, money priming has contradictory
effects, reflecting the ambivalent attitude to money so often shown. The money
primed individuals seemed to favour equity over equality, and competitiveness
over cooperativeness.
What is interesting is how powerful an effect a little priming has. Just a quick
task with “play” money versus “real” money is enough to change behaviour
toward fellow workers.
Can money primes have other negative effects? Kouchaki, Smith-Crowe, Brief
and Sousa (2013) asked the simple question: “Can mere exposure to money corrupt
people?” They hypothesised that money priming leads people to develop a
“business decision frame”, which includes ideas of self-interest, market pricing,
utility calculus, etc. This is the idea of the pursuit of self-interest and the weakening
of social bonds resulting from money priming, but also the likelihood of increasing
unethical behaviour. In four studies this is exactly what they demonstrated. Money
priming objectifies social relations and dampens morality. Cost-benefit analysis
makes us selfish.
Kouchaki et al. conclude thus:
Considering the significant role of money in business organisations and

everyday life, the idea that subtle reminders of money elicit changes in
morality has important implications. Our findings demonstrate that the mere
presence of money, an often taken-for-granted and easily overlooked feature
of our daily lives, can serve as a prompt for immoral behaviour operating
through a business decision frame. These findings suggest that money is a
more insidious corrupting factor than previously appreciated, as mere, subtle
exposure to money can be a corrupting influence.
Behavioural finance
Behavioural finance, according to Shefrin (2007), is about how psychological
processes influence the behaviour of all those involved in the financial world. He
argues that there are three themes to this literature:
1. Most financial decision making is based on heuristics/rules of thumb.

These “back-of-the-envelope” calculations are generally imperfect and
predispose one to numerous (predictable) errors.
2. Finance people’s perception of risk and return is powerfully influenced
by the way in which decisions are framed.
3. Human biases mean markets are inefficient – that is the price of things
does not coincide with fundamental value.
The idea is to help financial practitioners recognise and then reduce their cognitive
errors. Further, a small numbers of behavioural concepts explain a large number of
financial errors. The whole thesis is explained (again) thus:
• People develop general principles as they find things out for themselves.
• They rely on heuristics and rules of thumb to draw inferences from the
information at their disposal.
• People are susceptible to particular errors because the heuristics they use
are imperfect.
• People actually commit errors in particular situations.
What is the difference between behavioural economics and behavioural finance? In

fact very little, though the latter may be seen as a part of the former. In many ways
behavioural finance is simply a way to explain to those in finance the essential
message of behavioural economics.
Neuro-economics
The development of a wide range of brain-scanning devices that allow one to map
brain activity during various tasks has led to the rise of neuroscience. Various
writers and consultants have jumped on the bandwagon and put the prefix neuro-
in front of many disciplines, hoping to show their scientific credentials. Hence one
has neuro-marketing and also neuro-economics.
Zweig (2009) described neuro-economics as a hybrid field that is beginning to
understand what drives the biology of investing behaviour. The argument is familiar:
Our investing brains often drive us to do things that make no logical sense
– but make perfect emotional sense. That does not make us irrational. It
makes us human. … your brain has only a thin veneer of relatively modern
analytical circuits that are often no match for the blunt emotional power of
the most ancient parts of your mind. (p. 3)
He notes early on seven “basic lessons that have emerged from neuro-economics”:
1. A monetary loss or gain is not just a financial or psychological outcome,

but a biological change that has profound physical effects on the brain
and body;
2. The neural activity of someone whose investments are making money
is indistinguishable from that of someone who is high on cocaine
or morphine;
3. After two repetitions of a stimulus – like, say, a stock price that goes up
one penny twice in a row – the human brain automatically, unconsciously,
and uncontrollably expects a third repetition;
4. Once people conclude that an investment’s returns are “predictable”,
their brains respond with alarm if that apparent pattern is broken;
5. Financial losses are processed in the same areas of the brain that respond
to mortal danger;
6. Anticipating a gain, and actually receiving it, are expressed in entirely
different ways in the brain, helping to explain why “money does not
buy happiness”;
7. Expecting both good and bad events is often more intense than
experiencing them. (pp. 3–5)
The idea is simple: we count on our intuition to make sense of the world around
us but only tap into our analytical systems when intuition stalls or fails. Intuition
is the first filter of experience. This has been called the reflexive brain system:
the brain leaps to conclusions and operates automatically, unconsciously and

uncontrollably.
The argument is to become more self-aware of your two brains/systems. Trust
your gut feelings when something seems wrong, but know when your emotional,
less rational reflexive thinking kicks in. Ask questions about understanding and
certainty before making an economic decision. Try not to prove, but instead disprove
assumptions. Beware of emotional words and pictures and get to numbers. Follow
sensible investment rules. Wait before deciding – don’t let your mood influence your
decisions. Be ready to move quickly by understanding long-term plans.
Zweig (2009) has advice for various economic situations:
1. Greed
We are activated by financial reward, which, like sex and drugs, provides a
wonderful but dangerous feeling, and hence an addictive experience. So, beware
certain deals with potentially massive gains. Remember that lightning seldom
strikes twice and that stocks and shares go up and down. “Lock up your ‘mad
money’ and throw away the key” (p. 50) – put a strict cap on how much you will
risk on speculative trading. Write a checklist of clear standards every investment
must meet before buying and selling. Think twice – don’t blink, think; sleep on it;
be calm before any major decisions.
2. Prediction
Many economic predictions by experts go wrong because they believe whatever
has happened in the past is the only thing that can happen in the future. Further,
they post-cast by relying too heavily on the short-term rather than the long-term
past. Recommendations include: controlling what you can control (expenses,
taxes, expectations) rather than trying to predict the unpredictable; restrict yourself
from making too many bets; always ask for (and check) evidence; track your
investment portfolio but not obsessively often; check the base rate – that is, is
something that seeks to “beat the market” at least now what the market offers;
correlation is not causation: most market strategies are based on coincidental
patterns – take a break from pattern-seeking predictions; don’t obsess by continuous
monitoring – remember that investing is a long-term project.
3. Confidence
We are surprisingly overconfident in our ability to predict and understand economic
events. There are numerous studies that show overconfidence is misplaced,
particularly by “experts” making decisions. Recommendations include: having no
shame in saying you don’t know when asked questions like, “Which computer/
company/country will dominate in the next 10 years?”; know what you don’t
know and have a pile of “too hard” questions about investment; crop your over
hopeful investments to become more realistic; keep an investment diary or log to

see how accurate you actually are/were; use trading to see what works and what
doesn’t; handcuff your “inner conman” by always asking: how much better than
average do I think I am? What rate of performance do I think I can achieve? How
well have other people performed on average over time? Zweig (2009) also suggests
embracing your mistakes and trying to learn from them. Don’t buy just what you
know and like but also consider other stocks. Equally, do not get stuck in your
own company’s stock, because diversification is the best defence. Finally, be like a
child and ask “why” over and over again.
4. Risk
Highly variable mood factors considerably influence risk tolerance. Our perception
of the half-empty/half-full glass depends on how we feel about the glass, which can
be relatively easily manipulated. Most people cannot easily distinguish false fears
from real dangers. Further, the language of risk and chance powerfully influences
what risks we are prepared to take. The recommendations for dealing with risk are
similar to others: take time; look back; know yourself; try to prove yourself wrong.
Zweig (2009) also recommends guarding from framing issues by reframing. Thus,
if someone offers a 90% success rate, think of a 10% failure rate. Try to prove
yourself wrong by using the devil’s advocate approach.
5. Fear
The emotion of fear or dread acts as a very hot button on the brain. Overreacting
to raw, mainly negative feelings of loss leads to very bad decisions. The idea is to
try to be calm when making decisions to break out of anxiety. Next, to use cool
language to evaluate problems and ask questions like: Other than the price, what
else has changed? What other evidence do I need to evaluate in order to tell
“whether this is really bad now”? If I liked this investment enough to buy it at a
much higher price, shouldn’t I like it even more now that the price is lower?
Zweig (2009) recommends again that we track our feelings in an emotional register.
Also, beware the herd and conforming and consensus.
6. Surprise
Getting one thing when we expected another can cause unexpected shocks, which
can easily influence automatic emotional thinking. The best advice is to expect to
be surprised. Equally, whenever you are tempted to follow everybody else because
“everybody knows”, do not: the best investment is the overlooked opportunity.
High hopes can cause big trouble because they can cause nasty surprises, which
lead to bad decisions. Again track your reactions to surprises. More importantly,
look at statistical gimmicks which can manipulate which companies to avoid and
sometimes can increase surprise.
7. Regret
The endless cycle of “shouldawouldacoulda” can cause powerful emotions which
“eat people up” and stop them learning from both their regrets and their errors.
People suffer more from negative regret emotions when they believe they could
have chosen other options; they have had near misses; the problem was to do with
errors of commission rather than omission. People often get paralysis after loss, not
taking action they can and should take to prevent further loss. People are extremely
reluctant to admit being a loser and making mistakes. They torment themselves
with imagining what might have been. Further, the higher you think the odds of
making money, the more regret you will feel if you don’t. Zweig (2009) offers
various bits of advice for making do and moving on. Just face it, fess up, and stop
being in denial. Next, dump your losers and get help getting out of bad investments.
Find ways to sell like investing in radically different things. Cut your losses but not
too much. Do not let too much cash pile up. Reframe by focusing on how much
you made from your starting point rather than how much you lost from the peak.
8. Happiness
Unfortunately, if you already earn enough cash to live on, the odds that merely
having more money will make you happier are pretty close to zero. (p. 228)
Instead of labouring under the delusion that we would be happy if we first had
a little more money, we should recognise the reality that we might well end up
with more money if we just took a little more time to be happy. (p. 229)
A large number of recommendations of how to become happy are provided.

Zweig (2009) offers ten pieces of advice that are in part informed by neuro-
economics:
1. Take a global view of all your investments and your net worth.
2. Hope for the best but expect the worst by diversifying and bracing
yourself for disaster.
3. Investigate before you invest. Do your homework.
4. Never say always and never put more than 10% of your portfolio in
any investment.
5. Know what you don’t know and you won’t become overconfident,
believing you are an expert.
6. The past is not a prologue: buy low and sell high, not the other
way around.
7. Weigh what investors say: get a complete track record of people whose
advice you seek.
8. If it sounds too good to be true, it is. People who offer high return on
low risk for a short time are a fraud.
9. Costs are killers: lots of people tax you so compare, shop and
trade slowly.
10. Never put all your eggs in one basket.
The cognitive miser

Kahneman’s (2011) book Thinking Fast and Slow has become a best seller.
Economists, marketers, psychologists and lay people have become fascinated by the
message of, and clear evidence for, behavioural economics. People who resist the
message and believe their monetary decision making is coolly rational and logical
are poorly informed.
Understanding how and why people think about their money and make money
decisions is of considerable interest to many groups. Governments as well as big
business are interested in how to shape individuals’ and groups’ decision making.
To say that many groups are eager to exploit the fast thinking of individuals may be
too cynical. However, it is clearly the case that forearmed is forewarned: the more
we know about the “unfortunate” consequences of heuristic thinking the less
vulnerable we (hopefully) are to it.
12
PERSUASION, PRICING AND MONEY
Capitalism is what people do if you leave them alone.

Kenneth Minogue
Nothing is illegal if one hundred businessmen decide to do it.

Andrew Young
The creditor hath a better memory than the debtor.

James Howell
It is only the poor who pay cash, and that not from virtue, but
because they are refused credit.
Anatole France
Introduction
There are many organisations interested in how people think about, and use, their
money. They are predominantly in the financial and commercial sectors. Banks
want you to invest and borrow from them. Advertisers are paid to devise
commercials that help sell products. Retailers are committed to tempt you to buy
certain products. All are in the business of attempting to persuade you to act in a
certain way with respect to your money.
This chapter is on the social psychology of persuasion and the marketing
psychology of pricing. It is an area of research that has attracted a great deal of
attention because of concerns about how “gullible and innocent” people are
persuaded to part with their money.
The six principles

Many of us are searching for ways to influence and persuade others in order to reap
the most benefits from these individuals.
Cialdini (2001) proposed that there are (only) six key (identifiable) principles of
persuasion which can be employed to influence others. His work has been among
the most influential in the whole of social psychology.
1. Reciprocity
When we are given something by another person, or treated well, we feel obliged
to reciprocate the kind behaviour shown to us. We reciprocate in kind: you send
me a Christmas card and I send another back; you buy me a drink and I “return the
favour”; you spend money on me and I give it back in some way; you invite me
to dinner, I reciprocate.
Charities know the power of reciprocity, often enclosing a small gift (i.e. a pen,
personalized address labels) with mail shots. Cialdini (2001) showed how these very
cheap gifts could double the number of donations. It is important to note that gifts
do not have to be valuable or even tangible: information can act as a gift.
The felt need to reciprocate can make people feel uncomfortably indebted.
Hence unemployed people eschew the option to go “drinking with their pals”
because they cannot afford a round. Similarly, many organisations have a set (and
rather low – £/$5–20) limit on Christmas gifts that people give to each other
because a poorly paid worker may not be able to reciprocate a present to equal
value and therefore feel uncomfortable and indebted.
It may help to hint at what you would like in return, although this is ground which
must be trodden carefully, as some individuals are wary of reciprocation. Those with
high reciprocation wariness show traits such as declining assistance and failing to
return favours (Cotterell, Eisenberger & Speicher, 1992). With such individuals,
taking a different route to persuade would be advantageous. The whole psychology
of the “free gift”, the coupon and the “taster” is the psychology of reciprocation.
Principle: People (nearly always) repay in kind.
Application: Give what you want to receive.
2. Commitment and consistency

We (particularly in the West) have a drive to be consistent in what we say and do.
When we make a commitment to do something, we experience personal and
interpersonal pressure to behave as we have suggested we will. Inconsistency is
frowned upon and considered to be an undesirable personality trait by (Western)
society and so is avoided. It is often called hypocrisy and people are chastised for
doing “U turns”.
Making a small commitment can therefore result in significant behavioural
changes. It is for this reason that politicians are so unwilling to answer questions that
Persuasion, pricing and money 261
would seem to commit them to a certain strategy. It is also why sales people ask very
specific questions like, “If the price were right, would you buy today?” They know
people feel foolish and dishonest if their words and actions do not match.
In order to persuade people to accept large requests, it is suggested that they are
first presented with small requests in the same area. This is called the “foot in the
door” technique. People are likely to agree with later larger requests in order to
appear consistent in their values and behaviour. Guéguen and Jacob (2001), for
example, increased compliance to give a charitable donation when individuals had
previously made a small commitment online.
In our society (but not all) people feel they will look weak, confused and
dithering if they openly change their mind or do not behave in a way consistent
with what they have said or promised. That is why people like to “get things in
writing” or use the “foot in the door technique”.
Principle: People feel the need to fulfil/act in accordance with written,
public and voluntary commitments.
Application: Encourage people to make active, open/public commit-
ments to a behaviour plan you want them to follow.
3. Social proof
We use others’ behaviour to determine what is correct and accepted. The more
uncertain we are about how to behave, what is valuable and how we should be
spending our money the more we look to others to show us “what to do”.
We look for social proof: what others do, say and think. This is proposed to be
especially true when we are unsure of ourselves. If a decision is ambiguous we are
likely to accept others’ actions as the correct route. We are more likely to imitate
behaviours of those who we consider similar to ourselves.
When you are the first person in a restaurant it is very common for you to be
asked to “sit in the window” as social proof that people like to eat there. Faced
with different places to eat (in a food court, for example) people often opt for the
more crowded choice, even if there is a longer queue, because this (somehow)
proves that it is good. Moreover, if they see Indians eating at an Indian restaurant,
or Chinese eating in a Chinese restaurant, in a place like London or New York
people are reassured that it is a good choice.
Television stations used canned laughter to encourage better ratings. The
process goes like this: we see/hear others laughing and we tend to (contagiously)
follow suit. The more we see them laugh the more they prove to us they are
enjoying the show and the more likely we are to rate it highly.
There are some excellent examples where people have been nudged to behave
in a particular way because of social proof. If people are told most people in their
area (immediate environment) complete their tax forms on time or own a
particular product they are more likely to “follow suit”. All parents know the
power of peer pressure on their children. This is why hotel chains tell you that
previous guests behaved in a particular way (i.e. reused their towels, used room
service). The more “people like us” are seen to be doing something positive, the
more likely we are to follow.
Principle: People follow the lead of others particularly those with
referent power.
Application: Use peer power to influence “horizontally”; prove to
people that (valued/liked/admired) others behave in the way you want
them to.
4. Authority
People want to follow the lead of real experts. Many in business strive to increase
their credibility by assuming impressive titles, wearing expensive clothes and
driving expensive cars. It has been shown again and again that merely giving the
appearance of authority increases the likelihood that others with comply with
(monetary) requests.
We are trained from birth to trust and abide by instructions from authority
figures. Once an individual in a position of authority has given an order, we are
said to stop thinking about the situation and to start responding as suggested. People
show their authority with uniforms and titles, or with particular ways of speaking
or acting. In doing so they “command authority”, which means you are more
likely to follow their advice.
Such a strategy can be employed beneficially by companies with a large
budget, who, through paying well-respected celebrities to represent their brand
in advertisements, persuade others to purchase products. Charities also often
employ the use of celebrities in an attempt to encourage people to make donations
to a cause that “must be worthy” if an authority figure is supporting it. People
like us can also employ the technique, through hinting to others how much we
like a gadget or car belonging to a celebrity, for example; if they have it, it must
be good.
Principle: People tend to defer to “experts”, “authorities” or “celeb-
rities”, who provide and seem to have specialised information. We follow
those we respect.
Application: Establish your expertise to others: do not assume that it
is self-evident.
5. Scarcity
The language of loss, or closing windows of opportunity, of time and goods
running out can be deeply behaviourally motivating. It is the law of supply and
demand: the less there is of something (usually) the more valuable it is.
Things are evaluated more favourably when they are less available. Products will
be more popular when they are available for “a limited time only”, or when they
are in short supply and likely to sell out. Organisations have closing down sales
showing the scarcity of time. Products have “limited editions”. Anything that is
rare is seen to be more valuable. Any resource that is “running out” is therefore
seen as more desirable.
Further, if you have some information that few other people have, businesses
are willing to pay for it. Insights into specific consumer behaviour, for example,
can be priced highly. In order to persuade, therefore, the scarcity of an aspect of
the product should be highlighted.
When persuading another, the communicator must highlight the features of
the recommendation that are unique, telling the person what they will miss out
on by failing to follow the recommendation. Humans are motivated more by
losses than they are by an equal gain (see previous chapter). Therefore, clued-in
advertisements communicate the money that will be lost if an individual does not
invest in their product.
Marketing people often advertise scarcity: they have an under-supply, there is a
limited stock, there is a closing down sale. “Hurry, limited stocks” has been shown
to be an effective marketing campaign. Some customers have been influenced by
the idea of future scarcity: because of the weather, the mine running out, the age
of the craftsman … there will soon be very serious shortages of a particular product.
This is similar to having a limited edition.
Principle: People value (much more) and are eager to acquire what is
scarce and rare.
Application: Use “exclusivity/rarity” information about a product or
service to persuade.
6. Liking
We like people who are like us, and we tend to follow their advice more. Thus,
the more we share with others (language, education, world view, religion) the
more we are likely to be persuaded by them. A number of factors lead to “liking”.
Physical attractiveness plays a role, with research showing that we believe good-
looking individuals have more desirable traits, such as kindness and intelligence.
We like those who are similar to us; this seems to be the case whether we are alike
in terms of opinions, personality or lifestyle. Cooperating and having to work
together to achieve mutual goals also results in liking. We also develop liking for
those who compliment us, believing and accepting these compliments, as well as
developing positive feelings towards those who have praised us.
Therefore, in order to persuade we need people to like us. It may be beneficial
to share information about yourself and establish similarities and mutual opinions
with people who you later intend to persuade.
Principle: People like others who are similar them, who (also) say they
like (compliment) them.
Application: Win friends through showing similarity and praise
(Charm to disarm).
Examples
The London-based consultancy Mountainview Learning sought to put some of
these principles into practice.
(a) Apple sales techniques

They studied Apple and their conclusion from visiting many of their stores in
England was the following:
Apple uses heuristics in three ways. First, to increase store traffic; second, to
increase in-store sales; and, third, to sustain high or higher margins. Apple’s Path to
Purchase is simple and effective:
• Reach more people (through communications).

• Get more people to visit the stores or websites (consider) and seek out information.
• Get as many people to play with/use the products as possible (shoppers).
• Increase the conversion ratio (shoppers to buyers).
Heuristics can be evoked at each and every stage in a retailer’s “Path to Purchase”,
amounting to a big difference in sales and margins.
Scarcity is a widely used demand-creating strategy but rarely has it been used as
effectively. Apple uses scarcity to get news coverage and to cause line-ups (queues)
outside and inside the store, creating even more news value. It is human nature to
rate things which are perceived to be scarce higher than things which are not
perceived to be scarce.
Apple first started using this as a strategy when it launched the iPod and it was
taken to a new level when pre-printed “Out-of-Stock” posters were put in iPhone
retailers’ stores.
Social proof is a heuristic wherein the value of a course of action is dependent on
the number of people doing it. When Apple uses scarcity to increase a product’s
value, people queue for hours outside stores and these record queues make news
headlines. The queues provide social proof that the products must be great and
increase their perceived value – driving yet more traffic to the stores.
Social proof is used very effectively in-store. The products are laid out for
customers to play with; the store is open plan, so that from any vantage point you can
see many people playing with them; experts are on hand to help overcome any
problems; and lectures are taking place on the latest developments. Being surrounded
by so many Apple disciples exerts a powerful pressure to “follow the crowd”.
Reciprocity is where people are more likely to make a purchase having been
given a prior free gift. Apple allows people to check their e-mail on computers in
store, as well as providing free advice, iPhone charging and tech support. As one
sign put it, “Only the Apple store gets you up and running before you leave.” This
degree of personalisation, and the variety of free services, leaves shoppers indebted
and more likely to buy, as well as increasing liking and positive affect.
Imagine. By encouraging us to use products (Apple salespeople are told to

encourage customers to use the product not to teach them how to use it). Physically
interacting with a product gets us to imagine already owning one.
Apple moved electronics retailing forward by giving the customer enough
unmonitored examples of all their products that anyone who enters the store can
use them at will. The products are set out such that you are encouraged to pick
them up and play with them.
Fluency. Simplicity and ease of buying is at the core of everything Apple does.
Whilst other brands were talking about memory or capacity Apple focused on
10,000 songs in your pocket or concepts such as “Plug n Play”. Reducing the
mental processing involved in both using and buying their products makes them
harder to resist.
Contrast this (minimalist/fluent) approach with that of Apple’s competitors –
electrical retailers and department stores selling exactly the same products as Apple
but in a completely different way. And think of how much “clutter” fashion
retailers and grocery stores put in the way of the customer making easy (and quick)
buying decisions.
Liking. We are more easily influenced by people we like. Apple employs trendy,
friendly, attractive young people. We tend to like attractive people, and this
increases our tendency to comply. Staff seem to be trained to evoke a natural smile
– a sales technique proven to increase bar tips by 140%.
When we see someone smiling, the “smile” mirror neurons in our brains are
activated, which puts us in a good mood and lowers our resistance to persuasion.
People rate products more highly when they’re happy, as they misattribute their
good feelings to things around them, and, importantly, they spend more money!
Authority is a tool of persuasion wherein people comply when the source of the
request is seen as trustworthy and credible. Apple uses this extremely well to
position its products and brand as the epitome of the industry.
Employees are named “specialists”, they give “lectures”, run “training”
programmes and work behind the “Genius Bar”. A “Genius” commands more
authority than a “Service Assistant”, although they both do the same job.
Emotions. Hedonic consumption is no secret in marketing. Apple is, in our
view, world-class when it comes to engaging its customers emotions and influencing
their mood. Apple adverts use emotions to get noticed and remembered, and to sell
the experiential benefits of the product. For example, one advert has a grandfather
using his iPhone to see his grandson’s face for the first time. And once the customers
are in the store, this emotional engagement continues:
• The posters on the walls depict emotional scenes of family bonding.

• The products are laid out for ease of play and there is a sense of childlike
excitement.
• The products are described as “magical” with “even more to love”.
• The Beatles are strumming away in the background bringing back some
emotional memories for some.
These products are arguably not for children, and yet pictures and videos from
films like Toy Story surround customers, and products are laid out with simple,
colourful games ready to be played. Apple cleverly markets these products as a
connection to the emotionally laden play of our youth.
(b) Increasing charitable donations

Next Mountainview Learning was asked to help a charitable organisation
increase the donations that people gave it. After reviewing the very extensive
literature it boiled down its recommendations to a number of simple points, which
are set out in Table 12.1.
TABLE 12.1 Increasing donations
Kinship We are geared to protect our “clan”. Emphasise the

similarity the donor has to the person in need – even
generic values and traits will do.
Use a single People process groups on an abstract level (i.e. rationally).
victim Single victims are more concrete, and engage emotional
thinking – which drives altruism.
Identify the Identifying the person in need by name makes people more
victim likely to donate – because they become less abstract and
more tangible.
Be emotional Emotions drive prosocial behaviour: use emotional materials
in appeal pictures and narrative. Sad facial expressions are
more effective than others.
Don’t be Remove from appeals any material which might engage the
rational reader in rational thinking. Even maths calculations make
people less generous.
Make them People can only think about helping others when they are
happy sure they themselves aren’t under threat: where possible,
make them feel safe, happy and secure.
Priming #1 Prime people to behave generously by exposing them to
concepts like care-giving, religion, being watched (e.g.
mirrors) or exemplary behaviour, like superheroes.
Priming #2 Don’t prime people to concepts of money or individualism,
since it makes them antisocial and less generous.
Tangible It is very effective to show what the direct effect of donating

results #1 an exact amount will be (e.g. “1 Pack = 1 Vaccine”);
donations should not be shown to pay for abstract costs
like overheads.
Tangible Donations increase the closer to the fundraising goal the
results #2 appeal claims to be.
Social proof People generally “follow the herd”. If everyone else is

shown to be donating, or donating a lot, then others will
follow suit.
Authority Use authority in appeals to persuade donors that donating is
the right thing to do.
Commitment People behave so as to maintain a coherent concept of self;

and tell them they are charitable, or remind them of a charitable
consistency deed of theirs, and they will be more likely to donate.
#1
Commitment First, ask people a question or small request that they can’t
and refuse; then they will be more likely to say “yes” to a
consistency follow-up request.
#2
Reciprocity People often “return the favour” – prosocial behaviour can
be encouraged by first offering a gift.
?
Complexity Keep things as simple as possible – when a choice is (even a
little bit) complicated, people tend to just avoid it.
Opt-out People tend to stick with the default. Using an opt-out

option is a great way to increase donations.
Deferred People value money more now than they do in the future;
donations so asking them to donate later on, rather than “today“, will
increase donations.
Anchoring Numbers are not judged, or produced, in a vacuum.
By showing people figures, you can influence how much
they will donate, or how large they perceive a suggested
amount to be.
Decoy A proposed donation plan will look a lot more attractive if
placed next to one which is more expensive, or less
appealing in any way.
Cost saliency If a proposed donation amount is less reminiscent of a
painful financial loss (e.g. removing the pound sign and
using fewer zeros), it is more attractive.
Time isn’t People value their time less than their money; where
money possible, it may be more cost-effective to ask people to
volunteer than to donate.
Source: Mountainview Learning, London.
Tipping
The term TIP supposedly stands for “To Insure Promptness”, which was derived
from the eighteenth-century English tradition of giving coins with written words
to publicans. It is now estimated that over $10 billion is given as tips in America to
waiters/waitresses, porters, hairdressers, taxi drivers, chambermaids and a host of

other “professionals”.
What is the meaning and function of tipping? Why does it exist? Why tip taxi
drivers and hairdressers but not tailors? What are the determinants of tipping? How
does tipping affect the service-givers (e.g. waiters), the recipients (i.e. customers)
and the relationship between the two parties?
Psychologists suggest that tipping is a form of ego massage calculated to enhance
the self-image of the tipper. Also, by giving a tip – above and beyond the agreed set
price – the tipper can demonstrate he/she is not fully trapped by market forces and
can be capable of voluntary, discretionary action. The tip can sometimes be seen as a
result of the customer’s insecurity or anxiety. A maid or hairdresser deserves a tip
through having access to the customer’s private territory or articles that may just pose
a threat to the customer’s public face. The tip can buy their server’s silence because it
buys loyalty or indebtedness. Psychologists stress that tipping is intrinsically motivated
rather than performed for the sake of the external material or social rewards.
Lynn and Grassman (1990) spelt out, in detail, the three “rational” explanations
for tipping:
1. Buying social approval with tips: following the social norms (i.e. 15%
tipping) is a desire for social approval or else a fear of disapproval.
2. Buying an equitable relationship with tips: tips buy peace of mind by
helping maintain a more equitable relationship with servers.
3. Buying future service with tips: tips ensure better service in the future
because the tit for tat works but only with regular customers.
In their study they found support for the first two, but not the third explanation.
Despite the number of people fairly dependent on tips for their income, little
research has been done until comparatively recently into this curious and widespread
habit. Lynn and Latane (1984) summarised studies done in the 1970s:
1. Most tips are around the 15% American norm.

2. The percentage of the tip to total cost is an inverse power function of the
number of people at the table.
3. Physically attractive and/or attractively dressed waitresses receive greater
tips than less attractive waitresses.
4. Tips are bigger when paid by credit cards, relative to cash payments.
5. Tips are not related to whether alcohol is consumed.
6. Tips increase with the number of non-task-oriented “visits” by waiter
and waitress, but are unrelated to the customer’s ratings of service.
7. Often, but not always, males tip more than females.
Some studies have focused on the server’s behaviour. Rind and Bordia (1995)
noted that server (waiter)–diner interactions were related to tip size.
So the factors/behaviours that encourage a larger tip are:
1. Whether the server touched the diner.

2. Whether the server initially squatted in their interaction with the diner
as opposed to stood.
3. The size of the server’s initial smile.
4. Whether the server introduced him/herself with their first name.
5. The number of incidental (non-task oriented) visits to the table.
One tool for effective tipping is the “liking” heuristic. Tips can be significantly
increased by anywhere up to 140% by:
• Waitresses wearing make-up and a flower in their hair, and drawing smiley
faces on receipts.
• Waiters drawing the sun on receipts.
• Writing hand-written messages on the receipts, like “thank you” or a weather
forecast.
• Staff using large, open-mouthed smiles.
• Staff giving customers jokes, puzzles and facts; sweets too, if costs permit.
• Staff addressing customers by name, and introducing themselves.
• Staff mimicing customers’ body language and verbal behaviour, and touching
them appropriately during interactions.
The second useful heuristic for encouraging tipping is reciprocity – people tend to
help those who have helped them before. This does not have to be costly, though.
Tips are significantly increased by giving customers a puzzle, joke or interesting
fact with the receipt; giving customers a hand-written message forecasting the
weather or saying “thank you”; waitresses drawing a smiley face on the receipt,
though waiters can get the same result by drawing the sun; giving customers a
sweet, though giving them two is better, and giving them two at different times is
even more effective than that (Guéguen, 2002; Rind & Bordia, 1995; Strohmetz,
Rind, Fisher & Lynn, 2002).
In all his many studies on tipping, Lynn is eager to replace homo economicus
with homo psychologicus. Most of his recent studies suggest that tipping for all
sorts of service in many different countries is primarily driven by three things: the
desire to (1) reward good quality service; (2) help the service providers; and (3)
personally gain social approval and status. More recently, he has noted two other
factors: gaining good quality service in the future as well as conforming to
internalised tipping norms (or doing what is right).
Lynn and colleagues have studied car guards in South Africa (Saunders & Lynn,
2010) as well as waiters in America (Lynn, Jabbour & Kim, 2012). These studies
have looked at all sorts of factors that might have a small influence on the tipping
behaviour of individuals. These include: the sex and race of the server; the sex,
race, age, education, income, worship frequency and alcohol consumption of the
customer. Inevitably, they did find that the bigger the bill, the bigger the tip.
Nearly all the papers argue that the economists’ view is that tipping is irrational
and needs to be replaced with the insights of behaviour economics to be understood.
Pricing practices in shops

How do retailers price goods to increase sales? Why are all goods £/$5.99 and
never £/$6.00? What is the psychological power of BOGOF: Buy One Get One
Free? Pricing practices used to advertise products and services to consumers, such as
“3 for £/$5”, “60% off” or “sale – one week only”, are very common. How do
they work and how effective are they?
Ahmetoglu and Furnham (2012) undertook a comprehensive review, which is
the basis for this section. A version of this report was used by the Office of Fair
Trading in Great Britain to warn consumers about pricing practices.
Price consultants advise retailers on how to price their products and brands and
the design of price tags, rebates, sale adverts, cell phone plans, bundle offers, etc.
These are increasingly based on psychological variables and research findings
rather than economic ones (Poundstone, 2009). Competitors can easily respond
to price changes, in fact more so than to most other tactics (Sigurdsson, Foxall &
Saevarsson, 2010), but pricing practices are more subtle. Marketers have learnt
how to tactically manipulate pricing procedures so as to influence buyers’
perceptions and purchase decisions. Interestingly, this often does not have to
involve any changes to the price and profits but rather to how prices are displayed.
As the price of goods becomes a less important differentiating factor, it is likely
that the “design” of the price and the manner in which these products are displayed
and evaluated will become instrumental. There are price insensitive customers as well
as those who are much more interested in product features than price.
Pricing strategies have become a great battleground between retailers. Further,
various government bodies (such as the Office of Fair Trading in Great Britain)
have become interested because of the way some believe shoppers are “duped” or
misled by cunning pricing practices.
A significant amount of recent research on consumer decision making has
established that consumers are notoriously susceptible to the influence of
environmental cues that are often irrelevant to the utility of the offer. For example,
consumers have been shown to comply with signs that prompt them to buy higher
quantities of a product even when there is no rational incentive to do so. Studies
have found that placing a sale sign on an item can lead to increased demand for that
item even when the price remains the same (Inman, McAlister & Hoyer, 1990).
Recent research even shows that consumers’ willingness to pay for a product can
be influenced by manipulating the price of an adjacent and functionally unrelated

product (Nunes & Boatwright, 2004).
1. Drip pricing (partitioned pricing)

Drip pricing refers to purchases where consumers only see an element of the price upfront,
and where either optional or compulsory price increments are revealed as they “drip”
though the buying process. The most common examples are airline taxes or charges to
pay for using credit cards. Thus, the total price is only revealed (or can only be
calculated) later on in the purchasing process.
When price is separated in this way, it is also called “partitioned pricing”. People
are “lured” into a buying procedure, more often now online, discovering as they
go along that the (total/final) price they understood that was required to be paid
was only a small part of the cost demanded by the retailer. Sometimes the total cost
(say to include postage and packing) can even double the advertised price.
Sellers can either separate a surcharge, in which the charge represents an additional
amount inherent to the purchase situation, or a component of the product as a
consolidated total price for the bundle. While the consumer can choose whether
to purchase these options in the latter scenario, in the former situation consumers
cannot opt out of them. Both are considered a form of drip pricing.
Several moderator variables have also been examined with regard to the
effectiveness of portioning prices. The first is the size of the surcharge. Research
shows that compared to a single price, partitioning a small (6%) surcharge leads
to higher purchase intentions, price satisfaction and perceived value, and lower
search intentions. This difference is not observed when the surcharge is high
(12%) (Xia & Monroe, 2004). It is noteworthy, however, that while a large
surcharge (12%) leads to lower perceived value and reduced acceptance of the
surcharge, it does not lower consumers’ intentions to buy the product. Furthermore,
partitioning increases value perceptions and willingness to pay when the surcharge
is considered reasonable, but decreases when the surcharge is unreasonable
(Burman & Biswas, 2007).
Other moderator variables examined in the literature include number of surcharges,
seller trustworthiness, whether the total price is presented or not, and individual differences in
consumers. The evidence indicates that one large surcharge leads to higher purchasing
perceptions and behaviours than two surcharges of the same total value (Xia &
Monroe, 2004).
Furthermore, studies that have taken into account seller trustworthiness have
shown that a larger number (9 vs. 2) of price components may lower perceived
fairness and purchase intentions for less trustworthy sellers, when total price is not
presented (Carlson & Weathers, 2008).
Partitioning add-on products may also have a similar anchoring-adjustment
effect, particularly in instances where the focal product in the bundle is priced
lower than that of a comparison bundle (even if the total price remains constant).
Thus, partitioning prices into a base price and (various possible) surcharges can
significantly increase consumers’ perceived value and purchase intentions for

products, and can lower search intentions compared to combined pricing. They
are “lured in”, not noticing what the total cost really is. This is because consumers
may fail to adjust from the initial (lower) price of the base good and underestimate
the total price of the partitioned-price product. The result could be for some
shoppers “once bitten, twice shy” and the serious loss of reputation for any product,
retailer or brand that over zealously applied drip pricing.
2. Reference pricing
A reference price is a price that is communicated to the consumer as being the
“normal”, most commonly charged, or undiscounted previous price (e.g. was
£199, now £169).
There are three basic types of retail reference pricing practices:
1. comparing an advertised price to a price the retailer formerly charged for

the product;
2. comparing an advertised price to a price presumably charged by other
retailers in the same trade area; and
3. comparing an advertised price to a manufacturer’s suggested retail price.
As with drip pricing, the fundamental psychological principle (heuristic) underlying

reference pricing is anchoring.
There is an abundance of evidence to show that advertised reference prices
(ARPs) influence a range of consumer price-related responses, including increasing
perceptions of the fair price, the normal price, the lowest available price in the
market, the potential savings and the purchase value, and also that they decrease
additional search effort.
As Lichtenstein (2005, p. 359) notes:
ARPs work, a lot of research shows they do, and retailer practice and returns
show that they do. This is not new – it is widely known. If I advertise a sale
price of, say $29.95 and accompany it with an ARP of, say $39.95, in most
contexts, sales will increase relative to a no ARP present situation. Sales will
increase as I increase my ARP to $49.95, to $59.95, to $69.95.
A number of studies have since focused on the mechanisms through which

reference pricing might work (Furnham & Boo, 2011), as well as the conditions
under which it has the most/least impact. Several moderator variables have been
put forward; these include the size of the reference price (e.g. exaggerated or implausible
reference prices), consumer scepticism, price knowledge, and consumers’ familiarity
with the brand/product.
Surprisingly, evidence shows that implausible or exaggerated (or simply
dishonest) reference prices often have similar effects on consumer behaviour as
plausible reference prices. Research shows mixed results with regard to price
knowledge. Some studies find that shopping experience has no effect on consumers’
acceptance of reference prices.
Thus, the presence of a reference price increases consumers’ deal valuations and
purchase intentions and can lower their search intentions as compared to when a
reference price is absent. Reference prices can in some instances influence
consumers even when these are very large and when consumers are sceptical of
their truthfulness. It is obviously a very common strategy.
3. The use of the word “free”

There are different ways in which the term “free” is used in advertising, for
example: “Buy one get one free”; “Free case” with a given broadband package; or
“Kids eat free”. Thus, the word free is used as a priming mechanism, or to indicate
that a free product is being offered as part of a deal. This may be like a gift:
something that entails no (direct and obvious) cost, at least in terms of money.
Most people have clearly forgotten the well known line that “there is no such thing
as a free lunch”.
A product offered as “free” may affect consumer behaviour because it
eliminates buyers’ regret as nothing was spent on the product, causing people to
overvalue anything that is free (Shampanier, Mazar & Ariely, 2007). People
choose the benefit which avoids trade-offs (including calculating discounts that
require cognitive effort). Because free is an absolute price, we know exactly what
it means. There is no relative thinking, no calculation required, and therefore no
fear of loss.
Few studies have specifically examined the “priming” effect of the word free (as
in “kids go free”) on consumer behaviour. Raghubir (2004) shows that once a
“free” product has been bundled together with another product and offered for
one price, consumers are unwilling to pay more for the free product when it is sold
alone. Kamins, Folkes and Fedorikhin (2009) found that describing one of the
products in a bundle as free decreased the price consumers were willing to pay for
each product when these were sold individually. However, other studies have
shown positive valuations of the overall bundle when one of the items is described
as free, at least relative to when it is offered at a price discount.
This discrepancy creates a degree of uncertainty about the effect of a free
designation and the underlying mechanism at work. Thus, free offers can have
seemingly inconsistent effects, suggesting the presence of moderator variables. It is
interesting that there appear to be no good synonyms for the word free.
4. Bait pricing
Bait pricing involves consumers being enticed with a discount, but subsequently
ending up purchasing a more expensive product because there are very few, or
indeed no, items available at the discounted price. The mechanism behind bait
pricing is likely to be the commitment and consistency principle (Cialdini, 2001).
Once people have committed to an action (e.g. to buy a product), they are more
likely to be consistent with that particular deed (i.e. buy rather than leave
the shop or website). They start off thinking they are paying less but end up
paying more.
The literature on sales promotions has shown that short-term sales are positively
affected by offering promotions (Raghubir, 1998). Darke, Freedman, and Chaiken
(1995) showed that consumers use the size of a percentage discount as a heuristic
cue to help decide whether a better price is likely to be available elsewhere. This
line of research indicates that promotions can serve as baits such that they attract
customers in the short term.
Evidence derived from examining the independent effects of discount offers
(baits) and consumer behavioural patterns in stock-out situations (predominantly
switching within store) makes it possible to infer that bait and switch practices are
likely to influence customers’ purchase decisions in favour of the retailer employing
this pricing strategy.
We do not know what sort of person is particularly prone to “fall” for the bait,
or which withdraw during the purchase. Nor do we know the long-term reputation
gained by retailers that have lured in many customers by the bait technique. It is
possible that customers feel “once bitten, twice shy”, so that this method might
only make money in the short term.
5. Bundling
Bundling offers come in various forms, including volume offers (“3 for 2”, “Buy one
get one half price” or 3 for £/$20, etc.) and comparative/mixed bundles where
comparisons are made across a bundle or “basket” of goods.
Most of these practices will also be based on the anchoring heuristic. In addition
to numerical cues, however, bundle offers may be preferable because they signal a
saving (even if there isn’t one) simply because shoppers consider that bundles
usually offer such savings (i.e. this inference may have become a shortcut in itself).
People assume things are cheaper in bulk buys. For years supermarkets and
hypermarkets have tried to persuade us that bulk buying is a very good deal.
Multiple unit price promotions (such as buy 3 for 2) are popular among retailers
of packaged goods. Foubert and Gijsbrecht (2007) showed that a bundle discount
increases the probability of switching to the bundle, more so than per unit discounts
(again with an identical saving). They found that even when the consumer did not
purchase enough of the product to qualify for the discount, they would still switch
to the promoted items. Thus, the mere communication of a bundle discount is
enough to attract consumers to the promoted items, even when they are not
obtaining any savings, and potentially incurring a loss.
A number of studies have shown that mixed bundle promotions can have a
significant effect on consumer choices. Johnson, Herrmann and Bauer (1999)
conducted experiments in which respondents evaluated car offers that varied in
bundling. They found that the respondents’ positive evaluations of the offers
increased as component price information was progressively bundled.
Bundling may also influence consumers simply because it decreases cognitive/
thinking effort. Thus, service providers may be able to convince consumers to stay
or entice them to switch service providers not by offering the best or cheapest
option, but simply by promoting the convenience of having bundled services billed
on a single statement.
6. Time-limited offers
Time-limited offers generally refer to offers which only last for the immediate
period of negotiation and the customer is advised that the price will not be available
at a later date. Time-limited offers are based on a psychological principle called
scarcity (Cialdini, 2009).
People assign more value to opportunities/items when they are (or are
becoming) less available. This is because things that are difficult to obtain are
typically more valuable (Lynn, 1989), and the availability of an item can serve as a
short-cut cue to its quality.
While there is an abundance of evidence on the effect of scarcity (in general) on
consumer behaviour, studies specifically examining time-limited offers are
somewhat mixed and suggest the presence of moderator variables. Early research
found strong support for the impact of scarcity (though not restricted to time-
limited offers) on consumer behaviour.
In a meta-analysis, Lynn (1991) found a strong and reliable (positive) relationship
between scarcity and value perceptions.
The following inference can be made with a reasonable amount of confidence:
under conditions in which time-limited offers do trigger feelings of scarcity,
consumers are more likely to overestimate the product quality, or the value of the
deal, lower their intentions to search, and have higher intentions to buy.
Ahmetoglu and Furnham (2012) have tabulated useful information on pricing
practices, their moderators and their effects (Table 12.2).
Thus, from a bottom-up, tactic-by-tactic perspective, there is a substantial
amount of evidence that these strategies work. It is, however, also clear that there
are a range of variables that may moderate their effect. Specifically, the impact with
these strategies may be highest with products that are infrequently purchased or
have a relatively high ticket price, or are new, unique or highly customised.
Conversely, they are likely to have less impact with established or standardised
offers on cheaper or more frequently purchased items.
TABLE 12.2 Common pricing techniques
Pricing practice Moderator variable Effect
Drip pricing Partitioned (vs. Partitioning into a product and a surcharge (compared to a single price) leads to increased demand, higher purchase
consolidated) intentions, higher perceived value, higher price satisfaction, lower recalled price, lower price estimation, and lower
price search intentions
Surcharge size Compared to a single price, partitioning a small (6%) surcharge leads to higher purchase intentions, price satisfaction
and perceived value, and lower search intentions. This difference is not observed when the surcharge is high (12%)
Reasonableness Partitioning increases value perceptions and willingness to pay when the surcharge is considered reasonable, but
of surcharge decreases them when the surcharge is unreasonable
Number of One large surcharge leads to higher purchasing perceptions and behaviours than two surcharges of the same total value.
surcharges A larger number (9 vs. 2) of price components lowers perceived fairness and purchase intentions for less trustworthy
sellers, when total price is not presented. However, when a total price is presented, a larger number of price
components leads to higher perceptions of fairness, as well as a lower recalled total price, resulting in increased
purchase intentions (regardless of seller trustworthiness)
Presenting total Presenting the total sale price and then the additional surcharge information results in higher purchase intentions,
price upfront perceived value, and lower search intentions, compared to a total price alone
Consumers’ Partitioning has no effect on value perceptions or willingness to pay for consumers who have low need for cognition
need for – i.e. those that do not engage in or enjoy effortful cognitive activities
cognition
Partitioning Whilst partitioning surcharges benefits sellers fairly consistently (to the detriment of consumers), the effects of
add-on products partitioning add-on products (optional or compulsory) seems to be more complex and depend on numerous features of
(not surcharges) the add-on(s), which may or may not be beneficial for sellers. Thus, there is no general answer to whether partitioning
optional or compulsory products will be detrimental to consumers. Rather, this will depend on the particular
product(s) added/partitioned, as well as the context
Opt in/out Default effect People tend to stick with the default option; they do so because of preference for inaction and/or because they take
the default option as the one best recommended
Reference Presence (vs. Presenting consumers with an external reference price (higher than the sale price) leads to higher purchase intentions,
pricing absence) of a higher inferred savings and lower search intentions, compared to when no external reference price is provided
reference price
Size of reference Product valuations increase linearly as the reference price increases
price
Plausibility of Implausible or exaggerated reference prices often have similar effects on consumer behaviour as plausible reference
reference price prices. In some cases, these may even increase value perceptions significantly more than plausible reference prices
Consumer Reference prices have their effects even when consumers are sceptical towards the offer. Consumers may believe
scepticism pricing claims even when they exceed their initial price expectations by 200%
Price knowledge Research shows mixed results with regard to price knowledge. Some studies find that shopping experience has no
effect on consumers’ acceptance of reference prices, while others show that price knowledge of competitors reduces
the effect of reference prices. This may be due to different designs (e.g. remoteness of experience) and samples (e.g.
amount of knowledge of participants) used in these studies
Familiarity with Effects of reference prices are reduced with familiar brands and with inexpensive (and therefore more frequently
product/brand encountered) products
Use of the Describing a There is a degree of uncertainty about the effects of free designation. Some studies show that a freebie promotion can
word “free” bundle product have negative effects on consumers’ valuations of the overall bundle and on the focal product compared to when the
as “free” same type of promotion lacks a freebie designation. However, other studies have shown positive valuations of the
overall bundle when one of the items is described as free, at least relative to when it is offered at a price discount.
Thus, freebies can have seemingly inconsistent effects, suggesting the presence of moderator variables
Bait sales Bait and switch There is very limited direct evidence, but the results from one large-scale online study show that offering a low-quality
product at a low price to attract consumers and then trying to convince them to pay more for a superior product has a
strong effect on consumer purchasing behaviour
Price Price promotions increase sales in the short term indicating that consumers are attracted by “baits”
promotions/
baits
Stock-outs Faced with an out-of-stock product, over 60% of consumers substitute it with a product from the same store. They are
more likely to do this if in a hurry or brand-loyal, but more likely to shop elsewhere if surprised or the shop has high
prices
TABLE 12.2 (continued)
Pricing practice Moderator variable Effect
Complex Multiple- Multiple-unit discounts increase sales by up to 40% more than single-unit promotions of the same value. They also
pricing (vs. single-) unit
increase purchase intentions (and switching to the bundled products), even when consumers are not buying enough of
promotions the product to qualify for the discount
Number of unitsCompared to single-unit promotions, multiple-unit promotions may only increase purchase intentions for large
bundles (8 items), but not for small (2 or 4 items) bundles
Single-unit price The presence (vs. absence) of the single unit price in a bundle does not alter the above effect, suggesting the effect is
information not due to consumers’ inability to calculate the relative discount. A large proportion of consumers do not use single
unit prices
Mixed-bundle Compared to an individual (unbundled) pricing, a mixed-bundle offer increases consumers’ evaluations of the offer and
promotions purchase intentions and lowers their estimates of the cost of the bundle. This is because consumers generally infer
savings from bundled offers and/or because of the convenience that the single bill provides
Complexity of Within the utility sector, customers tend to remain with the supplier they have always had rather than switch to a
pricing more beneficial supplier. Consumers seem to find it hard to understand the differences in tariffs charged by different
companies and are unwilling to spend the time making the necessary comparative calculations. Within the
telecommunications industry customers are rarely very accurate in their estimate of call charges
Time-limited Scarcity Scarcity (not restricted time limits) increases perceptions of value of the offer, as well as purchase behaviour and
offers willingness to buy
Short-term time Time pressure or time constraints imposed on consumers can increase perceptions of offer value as well as “drive” their
pressure choice to high quality/low risk brands
Time-limited There have been conflicting findings regarding the impact of time-limited offers on consumer behaviour. At least two
offer studies have found that imposing a time limit on an offer can increase purchase intentions, choice probability, and
perceived deal value for the product. However, one study found this effect not to be true. The discrepancies indicate
the presence of moderator variables (hypothesised to be scepticism and product category)
Discount size Where the effect (of time-limited offers) has been found it has been true only for high-discount offers (20% or 50%),
and not for low-discount offers (5%), where the effect actually reverses
Length of time Shorter time limits increase urgency and, subsequently, purchase intentions; but too short a time limit increases
limit inconvenience perceptions, decreasing deal evaluation and purchase intentions
Source: Ahmetoglu and Furnham (2012).

There are also categories of people who are likely to be more influenced by
some of the pricing practices discussed. However, research examining individual
differences in susceptibility to these practices is near to non-existent. This is perhaps
not surprising as the main aim of this research is to establish pricing strategies that
work universally, rather than for a subgroup of individuals. Nevertheless, advances
in technology increasingly enable retailers to readily profile and target consumers.
Thus, the study of individual differences may provide a fruitful avenue for future
research and may prove to be very relevant for retailers and manufacturers.
It is interesting to note that the effects of the three pricing practices mentioned
above (i.e. reference pricing, bundling, and drip pricing) can (at least partly) be
attributed to the anchoring heuristic. There is a wealth of evidence deriving from
a variety of disciplines that shows that this mechanism has a substantial and robust
influence on human decision making. The current review of the literature suggests
that this mechanism is potent also in terms of influencing consumer behaviour.
Conclusion
There are many people eager to exploit our laziness with respect to thinking about
money. All businesses attempt to persuade us to buy their brand at the highest
possible amount they are likely to be be able to obtain. Hence the science of
persuasion and the disciplines of advertising and marketing.
There are a limited number of strategies to use in the business of persuasion but
many organisations use more than one at the same time. Moreover, given that we
are often attracted or put off by the price of products and services, how these are
priced is very important. Indeed, government agencies dedicated to helping to
protect consumers are particularly interested in the legality of some pricing strategies
that are essentially aimed at befuddling consumers.
APPENDIX 1
PERSONAL CONFESSIONS
They say psychologist study their own problems. This may have some kernel of
truth to it. So, what are mine and how do they inform the content of this book?
We all try to be disinterested scientists but obviously interests and beliefs affect
what one writes about (and does not write about) and why. In the (British) Sunday
Times every week there is a celebrity interview in the Money Section of the paper.
A (usually) well-known person is interviewed. At the risk of being too disclosive
or judged too arrogant, here are my answers to the various questions posed every
week. It might, in part explain some aspects of this book.
How much money do you have in your wallet?

£110, and €50. I withdraw around £400 a week in two visits to the “generous
wall” as my wife calls the cash machine.
What credit cards do you use?

Never had one, though I do have a Barclays debit card; one of my parental “money-
grams” (deeply ingrained messages from parents) is disapproval of credit. Knowledge
of fraud makes me even more wary of cards.
Are you a saver or a spender?

Very much a saver, but not I hope a miser. I am a saver, despite the now near
pointlessness of this activity. Money represents for me security and autonomy. I am
a bargain hunter and rejoice in finding discounted food near its sell-by date.
282 Appendices
How much did you earn last year?

My academic salary is around £75,000, but I supplement this in various ways:
books; journalism; talks; test publishing. I work hard for it – seven days a week –
but enjoy it.
Have you ever been hard up?

Yes, for many years. My wife remembers me stapling my shoes together in Oxford
and feigning illness because I could not afford to eat out. I was a student for too
long. But I never felt deprived, jealous or unhappy. Many of my friends were
roughly in the same boat.
Do you own a property?

Yes three: houses in Islington, and Olney (Buckinghamshire) and a cottage in the
country. The latter belonged to my wife when she worked as Strategic Planning
Director for Avon. I got on the property ladder as soon as I could and it certainly
paid off. I owned a one- and then a two-bedroom flat less than five minutes’ walk
from the office. I first lived in a University of London hall of residence while at the
LSE. Our current house is ideal for our needs: seven minutes by bicycle to work,
in a lovely square and recently redecorated.
What was your first job?

I made nursing attendant in the hospital where my mother was matron. I did it for
three years during university vacations and never enjoyed it. My mother really
wanted me to read medicine but it wasn’t for me. I liked the shift work, particularly
working weekends. It taught me more about skiving than anything else. But I was
always entrepreneurial as a boy, making five times my pocket money returning
large empty soft drink bottles and doing waste paper collections on my soap box.
What has been your most lucrative work?

Motivational speaking. I am not in the top of my league by any means but have
replaced serious gurus at the last moment. Once I spoke for 11 minutes to 1,600
people in Barcelona and got more than my monthly salary. Text books and
successful business books don’t make as much money as people think. And I really
enjoy the performance aspects of public speaking.
Are you better off than your parents?

Immeasurably, but I have inherited their money habits: middle-class thrift; mend
and make do; disapproval of conspicuous consumption. They bought nothing on
Appendices 283
credits except their house. They tithed at church and gave to charity but hated
waste. I have written a book on the Protestant Work Ethic to explore their mindset.
Do you invest in shares?

Not much. Anyway, that’s my wife’s department. She is much more financially
literate than I am. I trust her judgement totally.
What’s better – property or pension?

Both, but increasingly property. The ageing population has put too much strain
on pensions.
What has been your best investment?

Property and I suppose education, though the latter is much more intangible. And
I would say that, wouldn’t I? I also default on “yes” when people ask me to do
things – write books, give talks, help with consultancy assignments. Many of these
have led on to further engagements.
What about worst?

After working a lot in Asia in the 1980s and 1990s I became beguiled by the myth
of Japanese success. I bought Japanese stocks which went slowly down.
What is the most extravagant thing you’ve ever bought?

I don’t do extravagant really. Once I bought a bottle of wine for £60. And then
there are the gold necklaces I buy for my wife. But nothing really serious. It’s just
not me.
What is your money weakness?

Books, carved boxes, Japanese lacquer work. And good theatre tickets.
What aspect of the tax system would you change?

First, simplification to stop the ever growing army of poachers and gamekeepers
trying to differentiate between the avoidance and evasion issue. Second, having
every tax law with a sell-by date, meaning it has to be reconsidered for issues such
as the law of unintended consequences. Third, reducing non-dom Scandals by the
American system of worldwide tax. Fourth, realising how reducing tax rates
encourages more growth and more revenue for the government.
284 Appendices
What are your financial priorities?

Saving for my son’s education and the infirmities of old age. Care home costs.
What is the most important lesson you have learnt about money?
Work out what you need, as opposed to want; cost it and aim to earn that amount
of money rather than to earn large amounts that have no effect on well-being,
perhaps even the reverse.
APPENDIX 2
MY TEST RESULTS
I was fortunate enough to be able to take a money test, called The Psychology of
Money Profile, devised by Dr James Gottfurcht, because I supervised his daughter’s
PhD. It was a self-report questionnaire, designed to give insight into your own
money attitudes, beliefs and values. I completed this test and below is part of my
feedback from Dr Gottfurcht, which I have permission to publish.
How to understand your scores

In addition to the seven psychological money skills defined below, you are receiving an
additional score on a scale called Looking Good. If your score on Looking
Good is H (High), it suggests you may have tried to look good or better on the
Profile than your skills really are. If this is true, your Profile scores may be inflated,
and it could mean your real skill levels may be lower than you scored. If your score
on Looking Good is L (Low), it suggests you may be underestimating your skill
levels and/or you may have lacked financial guidance when you were growing up.
This could mean your true skill levels may be higher than your scores. If you
scored M (Midrange) on Looking Good, it likely means you did not overestimate
or underestimate your skill levels, and your Profile scores are more likely to reflect
your true scores. You scored M.
If you score Low on a psychological money skill, it will be denoted by L. This
suggests your skill in this area is less developed, is probably holding you back from
financial success and satisfaction, and is highly likely to be strengthened by coaching,
classes, training or therapy. If you score Midrange, it will be denoted by M. This
suggests your skill in this area is moderately developed, may or may not be holding
you back from financial success and satisfaction and likely will be strengthened by
coaching, therapy, etc. If you score High Midrange, it will be denoted as HM.
This suggests that skill is moderately highly developed and is unlikely to be holding
286 Appendices
you back from financial success and satisfaction. If you score High, it will be
denoted by H. This suggests that skill is highly developed and can be a valuable
resource to accelerate your financial success and satisfaction.
Most people agree with the scores we give them (L, M, HM or H) on the seven
skills. In other words, they think they are accurate. It is not unusual, however, to
score a bit differently than you believe yourself to be on one or two of the
psychological money skills. This discrepancy can stimulate you to look inward and try
to discover why those scores are different than you thought they would be. If you
scored differently than you see yourself to be on many of the skills, it is very
possible you may not have answered each item accurately. Remember, if none of
the answers were an exact fit, you were asked to choose the response that was most
true for you.
Here are your scores on the seven psychological money skills

1. Financial planning – Integrating financial values, beliefs and feelings into a
cohesive set of goals and knowing the concrete action steps that lead from
your starting point to your destination. You scored M.
2. Realistic financial expectations – Aligning financial expectations with
long-term financial results. This means perceiving money realistically to be the
way it actually is instead of the way you want it to be or the way you fear it
may be. You scored HM.
3. Financial confidence – Believing and feeling deeply optimistic you will
reach and enjoy financial success. You scored H.
4. Stepping stones – Learning new financial behaviours by engaging in
gradual steps that progress from smaller financial goals to larger ones. You
scored HM.
5. Change tolerance – Your tolerance for handling and engaging in new
behaviour with money. This means overcoming the unsettling or stressful
aspects of change so that you may embrace and use them to reach your
financial goals. You scored M.
6. Passion – Having a burning desire and commitment toward attaining and
sustaining financial success and an enriched life. You scored HM.
7. Taking charge – Initiating behaviour to deal with a financial issue or
relationship in a proactive way. You scored HM.
The three most important psychological money skills for you

to develop
1. Financial planning is essential because it is difficult to reach your financial
and life goals in a timely manner without some sort of a guiding plan. A
coherent plan enables you to organise your thoughts and actions in a systematic
way to expedite getting from your starting point to your destination. You
scored M.
Appendices 287
2. Realistic financial expectations is necessary because even if you have a

plan, unless it’s realistic, you are likely to be headed in the wrong direction and
encounter unnecessary obstacles. If you don’t have a plan, you are likely to
reach your goal less efficiently or not to reach it all. You scored HM.
3. Financial confidence is also essential because it provides the energy and
stamina to overcome the obstacles on your path. Many research studies show
that whatever you truly believe, you are likely to manifest. In fact, recent
research has proven that when you genuinely believe something, you produce
cellular changes in your body that help manifest what you believe. In medicine,
we call this the placebo effect. In psychology, we call this the self-fulfilling
prophecy. You scored H.
Our professional experience is that these three psychological money skills are the
most important in manifesting and maintaining self-made financial success and
satisfaction. Not many people score H on all three skills unless they have had
coaching, training or therapy with a professional who specialises in the psychology
of money. If you score H on all three skills, it is very likely you already have (or
soon will have) a high level of financial success and satisfaction. If you did not
score H on all three skills, the good news is you can significantly increase your
scores and financial success and satisfaction through coaching, telephone classes,
workshops or therapy.
The four other important psychological money skills

1. Stepping stones – For most people, this is the easiest skill to develop and
enhance. It is highly beneficial because it is one of the quickest, most powerful
ways to overcome feelings of helplessness and procrastination. Once you
accomplish an easier smaller goal, your hope and confidence usually increase
and provide you with extra motivation and energy. You scored HM.
2. Change tolerance – This is important because financial opportunities and
risks are constantly evolving and shifting. If you can “investigate before you
invest”, be aware of potential risks and rewards, and be willing to take
calculated risks despite uncertainty, you have an edge on others who are afraid
of change. You scored M.
3. Passion – This is powerful because passion supplies the motivation and fuel
to jumpstart and sustain your efforts. It helps you to persevere and overcome
adversity until you succeed. It also improves the richness of your life. You
scored HM.
4. Taking charge – This is important because it includes being proactive and
assertive rather than reactive. You can anticipate financial challenges accurately
and pre-empt them or you can respond quickly and make the most of them.
You scored HM.
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INDEX
[Note: page numbers in bold refer to tables; page numbers in italics refer to figures.]
Aarts, H. 77 anhedonia 192

Abramovitch, R. 119, 147–9 anxiety 46, 57, 86, 88–9, 92, 95, 178, 196
abundance zone 207 Apple 264–6
accelerating incentives 229 approaches to topic of money 33–54;
achievement 95 economic anthropology and primitive
acquisition centrality 108 money 42–4; economics of money
Adams, Scott 33 39–42; introduction 33–9; money in
addiction 38 literature 51–2; other approaches 52–4;
advice for parents 153–8 religion and money 47–51; sociology of
affirmation 206, 208 money 44–7
affluenza 62–4, 163–4 Arora, R. 70
Affluenza 62–3 Ascent of Money 5
age and subjective wellbeing 70 assertiveness training 202
agency theory 216 attachment 74, 76
aggregation 4 attitudes towards money 1–14, 81–114,
Aguinis, H. 229 99–100; history of money 5–12;
Ahmetoglu, G. 270, 275 introduction 1–5; see also behaviours
Al-Fayed, Mohamed 26–7 towards money
alchemy 2, 82 attribution therapy 206
alcoholism 189 authority 262, 265
Alexander, Scott 21 autonomy 73, 195–6
alienation 92 availability 244
all money is equal 248 avoidance of tax 3, 6, 23, 130
allowances 143–51; studies on 147–51
Alter, A. 244–5 bait pricing 274
altruism 50, 142–6 Baker, P. 92
Amazon 17 Baker, W. 44
American Express 16 balanced mutual funds 159
anchoring 30, 243–4, 250, 271–2 Ball, R. 66
Anderson, C. 143 Bank of England 12
Angeles, L. 67 bank money 41
Index 309
banking 123–5, 175 Biswas-Diener, R. 65, 69

bankruptcy 24, 64, 101, 142 black or white thinking 201
banks 11–12 boasting 184
Barclays Wealth 19 Bodnar, J. 155–7
bargain hunters 194, 200 Boehm, J. K. 70
Barnet-Verzat, C. 142–3 Boer, D. 73
bartering 6, 40 BOGOF see buy one get one free
Barth, F. 204 Bombi, A. 119–20, 125
basic economic utility model 66–7 Bonini, N. 252
Batt, Al 33 Bonner, S. 215
Bauer, H. H. 275 boom to bust 3
Baumeister, R. 78 Bordia, P. 269
Beccheti, L. 68, 77 Borneman, E. 186, 188
behavioural economics 237–58; borrowing 154, 170, 248
behavioural finance 253–4; cognitive Bottomley, P. A. 107, 109
miser 258; heuristics 242–8; introduction Boucher, H. 252
237–8; neuro-economics 254–8; bouncing cheques 12
practical advice 248–51; priming power Boyce, C. J. 67
of money 251–3; prospect theory brand awareness 107
239–41 bribery 161
behavioural finance 253–4 bride payments 43–4
behaviours towards money 81–114; Brief, A. 253
financial risk taking 110–113; Brin, Sergey 25–6
introduction 81–2; materialism 106–110; Bristol Pound 18
measuring economic beliefs 103–5; Britt, S. 168
money ethics 82–5; money locus of Brixton Pound 18
control 85; structure of money attitudes Brown, G. 67
85–103; thinking about money 113–14; Brown, R. 218–19
unconscious/conscious finance 105–6 Bruce, V. 29
behaviourist approaches to money 54 Bruner, J. 27–8
beliefs about money 81–114 Brusdal, R. 140
Belk, R. W. 49–50 Bucklin, B. 229
Belsky, G. 248–51 budgeting 83, 85, 95, 154, 160, 175
beneficial therapeutic outcome 204–6; see buffer against pain 74–6
also positions on therapy payment Buffett, Warren 24–5, 239–40
Benson, A. 189–91 bundling 274–5
Berg, L. 140 Burgess, S. M. 101
Berggruen, Nicholas 22 Burgoyne, C. 116
Berkowitz, L. 218 business decision frame 253
Berman, J. S. 205 buy one get one free 270, 273–4
Berti, A. 119–21, 124–5 buying happiness 55–7
Beutler, I. 175 buying locally 18–19
“bi-metallism” 9 buying love 195
Biel, A. 252 buying and selling 119–21
big money mistakes 248–51 B£ see Brixton Pound
big spenders 105
Biggins, John 16 Campbell, A. 56
bigness bias 249 Carlin, George 237
Bijleveld, E. 77 Carroll, S. M. 101, 107
Billings, Josh 1 cash 9–10, 41; coins 9–10; paper 10;
binge eating 189 plastic/virtual money 10
biological psychology of money 37–9; drug Casserly, J. 208
theory 37–8; tool theory 37–8 Castano, E. 30, 113
Bird’s Eye Walls 144 catastrophisation 191
310 Index
causal effects of money 70 conflict reduction 232–3

CBT see cognitive behaviour therapy conformity 199–200
Cerreto, Salvatore 21 conscious finance 105–6
Chaiken, S. 274 conservatism 38, 92, 94, 103–4
Chan, K. 135 consistency 260–61
Chan, M. 70 Consumer Involvement Scale 107
change-making strategies 118–19 consumer orientation 107
changing forms of money 31 consumer’s dilemma 108
“Charge-It” programme 16 Converse, P. E. 56
charitable donations 50–51, 155, 266–7 convertible paper 10
Chatman, J. 66 Corey, Irwin 165
Chaucer, Geoffrey 51 costs and benefits of pay secrecy 232–3
Chechov, Anton 183 Coulbourn, W. 40
Chen, E. 101 counter-transference 202
Chen, H. 159 counterfeiting 9
Chen, Y.-J. 84 couples and money 166–8
Chernova, K. 66 cowries 6–7, 43
childhood-related money problems 160–62 Cram, F. 125
children and development of economic credit 41
ideas 116–18 credit cards 16–17
chocolate balls 122 crimes of passion 53
Chown, J. 9 criminology of money 52–3
Christopher, A. N. 101, 107 cultural sociology of money 44–5
chronic congestion 64 Cummings, S. 116
Cialdini, R. B. 260 currency 41
Clark Graham, Robert 21 Custers, R. 77
Clarke-Carter, D. 29
clean money 78; see also dirty money Danes, S. M. 171, 175
Cleare, A. 120 dark side of happiness 61–2; time/place for
clipping 9 happiness 62; ways to pursue happiness
co-dependency 105 62; wrong degree of happiness 61;
co-partnerships 223 wrong types of happiness 62
coaching 175 Darke, P. 148–9, 274
Cochran, S. 218 Davies, P. 120
cognitive behaviour therapy 191–2, 201 Davis, A. 204
cognitive dissonance therapy 204–5 Davis, G. 84
cognitive maturation 127 Davis, K. 154
cognitive misers 258 Dawson, S. 108
cognitive triggers 190 de Beni, R. 120
coins 9–10, 27–30, 38; experimental studies De Bens, E. 134–5
of 27–30; perception of 38 de-stressing 201
Colella, A. 232 debasing currency 9
Coleman, J. W. 53 decelerating incentives 229
Collier, C. 172–3 Deci, E. L. 213–14
commercial communications 133–5 Deckop, J. R. 106, 110
commitment 260–61 default 247
commodity money 41 deferring to experts 262
compensation 219–21 defining money 1–5; overlooked topic
compromise effects 247–8 3–5
compulsive buying 101, 107, 189–91 degrees of happiness 61
compulsive savers 193 demagnetisation 191
confidence 256 demand–change questions 122–3
confirmation bias 250 depression 57, 59, 61, 192
confiscation of money 148 desacralisation 50
Index 311
determining fair pay 222 Ealy, D. 178–81

detrimental therapeutic outcome 205; see early learned experience 185
also positions on therapy payment Easterlin paradox 64–9; economic utility
Deutsch, F. 167–8 model 66–7; is happiness a good thing
development of economic ideas in children 69; reanalysis of data 68–9
116–18 Easterlin, R. A. 64–6
development of economic thinking EASY brand 245
118–37; banking 123–5; commercial Economic Belief Scale 104–5, 104
communications 133–5; life assurance economic beliefs 103–5
136–7; market forces 121–3; money economic socialisation 116–17, 139–64,
118–19; other issues 137; pensions 169–70, 175; advice for parents 153–8;
135–6; possession and ownership 125; allowances and family rules 143–6;
poverty and wealth 131; prices and profit childhood-related money problems
119–21; saving 131–3; taxation 125–30 160–62; introduction 139–40; parental
development of symbolism 34 involvement and motivation 140–43;
DeVoe, S. E. 77, 252 poor little rich kids 162–4; quizzing your
DeVor, M. 207 children 151–3; studies on pocket
Di Muro, F. 30, 113 money/allowances 147–51; teaching
Dickens, Charles 51 economic theory 158–60
Dickinson, A. 229 economic theory 158–60
Dickinson, J. 117 economic thinking, development of
Dickson, L. 175 118–37
Diener, E. 56–8, 65, 69–70, 73–5 economic world, understanding 115–38
Diez-Martinez, E. 137 economics anthropology 42–4
digesting 188 economics of money 39–42
diligence 47 Economidou, M. 136
Dimen, M. 203–4 economising 36
dirty money 30, 47, 78, 113, 187 “economy of gratitude” 167
disconnect 110 educating about money 139–40
discovering money 2 effort and task performance 215–16
disempowerment 181 ego massage 268
dissatisfaction 107 “ego traps” 250
distrust 88–9, 92–3, 232 electronic money 27, 41
Dittmar, H. 107, 178 electrum 7–8
Dodd, N. 45 elevation 59
Dodds, A. 29 embezzlement 183
domestic money usage 47 Emler, N. 117
dopamine 76 emotional intelligence 101
Dormanen, Craig 33 emotional spending 180
double coincidence of wants 6 emotional triggers 190
Douglas, M. 43 emotional under-pinning of money
Dow Jones Industrial Average 25 pathology 192–201; freedom 195–201;
Dowling, N. 101 love 195; power 194–5; security 193–4
dreams 205–7 emotions 265
drip pricing 271–2 empire builders 194
Drotner, K. 178 empowerment 181
drug theory 37–9 endowment effect 243, 249
Drury, J. 178 Engbers, T. 224
Dulebohn, J. 220 Engelberg, E. 101
dummies for money 97, 112 environmental degradation 67
durability: of money 41 envy 89
Durband, D. 168 equitable payment 217
Durkheim, Émile 44 equity theory 216–19
Dworkin, Andrea 165 eroticism 186
312 Index
ethics of money 82–5, 186 financial security 112

etiquette 184 fining 148
evaluation 95 Finn, D. 39–40
Evangelista, Linda 81 Fischer, R. 73
evolution 111 Fisher, S. 186
executive pay 229–31 Fitzpatrick, S. 85
expectancy theory 216 Fletcher, B. 178
expelling faeces 188 Flouri, E. 106, 109, 141
experimental studies of coins 27–30 fluency 244–5, 265
exploiting laziness 279 Folkes, V. 273
exterior finance 105 folklore about money 2, 187, 206–7
external locus of control 85 following suit 261–2, 264
extreme consumerism 133–4 Fontenot, G. 88, 177
extrinsic motivation 212–15 football cards 121–2
Forbes list 75
face-consciousness 73 Forman, N. 199–201
factors influencing relation between wealth Forrester Research 18
and happiness 70–75; amount of money Foubert, B. 274–5
74–5 Fox, K. 105–6
factors in risk tolerance 110–111 France, Anatole 259
failure of PFP systems 226 frankness 112
fair day’s wage 216–19 Fraser, C. 218
fairness of pay 232 Freedman, J. 119, 147–9, 274
fake consciousness 206 freedom 195–6
falling into the “ego trap” 250 freedom fighters 196
familiarity 244–5 Freud, S. 3, 53, 186, 192, 195, 202–3, 205–6
family accounting 172 Frey, D. 30, 74–5, 113
family disorders 160–61, 197–8 Friedman, M. 126
family and money 165–82; see also sex Friedrich, A. 94
differences Frijters, P. 69
famous people with odd money habits frugality 92–3
22–7; investors 24–6; misers 22–3; functional use of money 42
spendthrifts 23–4; tycoons 26–7 fungibility 30, 44, 113, 248
fanatical collectors 194 Furnham, A. 28–30, 84–5, 89–93, 101–4,
fast thinking 242, 258; see also heuristics 120, 127, 131–2, 135–7, 143–4, 148–9,
fate 89 177–8, 184, 270, 275
fear 49, 105, 256–7 Furth, H. 120
Feather, N. 148
Fedorikhin, A. 273 Galbraith, J. K. 5
fees in psychotherapy 202–6; positions on Gallo, E. 156
204–6 Gallo, J. 156
fending off fights 157 gambling 34, 97, 101, 112, 189, 192, 200
Fenichel, O. 186 Gandelman, N. 69
Fenton-O’Creevy, M. 101, 184 Ganin, M. 118
Ferenczi, S. 186 Gao, D.-G. 74, 76
Ferguson, N. 5 Gardner, D. 220
Ferguson, Y. L. 107, 109 Gardner, J. 69
fetishism of commodities 4–5 Garling, T. 252
Feuerstein, C. 205–6 Gates, Bill 25
fiat money 41 Geller, J. D. 205
financial literacy 149, 158–60, 173–4 gender 88, 165–82; see also sex differences
financial moves of others 250–51 Getty, John Paul 237
financial parenting 173 “ghost money” 9
financial risk taking 110–113 Giacalone, R. A. 106, 110
Index 313
gifts 38, 42, 47–9, 143, 155 Hanley, A. 92

Gijsbrecht, E. 274–5 Hansen, J. 78
Gilbert, E. 6 happiness and money 55–80, 257–8;
Gilbert, P. 84 affluenza 62–4; buying to increase
Gilmore, D. 29 happiness 76–8; dark side of happiness
Gilovich, T. 248–51 61–2; Easterlin paradox 64–9; impacts on
goal-setting theory 216 75; introduction 55–7; life evaluations
godfathers 194 70; money and pain 75–6; other
Godfrey, N. 154–5 variables 70–75; success 70; variations in
Goh, A. 177 happiness 78–9; wellbeing 57–61
Goldberg, H. 192–5, 201 Harrah, J. 126
Goldstein, H. 19 Harter, J. 70
Goletto-Tankel, M. 135–7 Hatano, G. 124
good money 41–2 hatred 185
good parenting 139–64; see also economic Hausner, L. 162
socialisation Hayhoe, C. 101, 177
“good Samaritans” 51 Haynes, J. 202
good tax vs. bad tax 129 Headey, B. W. 69
Goode, M. R. 252 hedonism 77
Goodman, C. 27–8 heirlooms 49
Google Earth 26 Helliwell, J. F. 74
“Google Guys” 25–6 Hendersen, Harold 15
Gottfredson, R. 229 Herrmann, A. 275
Gottfurcht, James 285 Herron, W. G. 202, 204
government use of tax monies 128 heuristics 239, 241–51, 264–6; anchoring
Graef, Akilin 21 243–4; availability 245; compromise
Graham, C. 68 effects 247–8; default 247; endowment
Grassman, A. 268 243; familiarity 245–6; fluency 244–5;
Gray, T. 118–19 loss aversion 242–3; peak-end rule 246;
Great Depression 5 problems with 248–51; recognition 246;
greed 2, 184, 193, 202, 255 simulation heuristic 246; sunk cost
Green, Russell 81 246–7
Greenberg, R. 186 Heyes, A. 29
Greitemeyer, T. 30, 113 high street banking 12
Gresham, A. 88–9, 98, 177 higher order needs 73
Grigoriou, N. 73 Hill, Benny 22
Grivet, A. 121 Hinden, S. 154
Groenewegen, P. P. 73 Hira, T. 171
group piece work 222 hire purchase 11
growing money 2 history of money 5–12; banks 11–12; cash
Gruber, J. 61–2, 69 9–10; precious metal 7–9
Guégen, N. 261 Hitchcock, J. 28
guilt 105, 113, 171, 180, 192–3, 202–3 HNS see National Health Service
Gunther IV 21 Holzman, P. S. 204
Homo economicus 40, 269–70
Haberman, H. R. 171 homogeneity of money 41
habituation 66–7 horizontal influence 262
Hacker, J. 74 House, J. 252
Hagedorn, R. 92 how money is used 35
Haisken-DeNew, J. P. 69 Howarth, C. 29
Halachmi, B. 121 Howarth, E. 187
Halifax Pocket Money Survey 145 Howell, James 259
Hanashiro, R. 178 Hughes, Howard 23
Hanges, P. 221 Huston, S. 168
314 Index
iconography of national currency 6 Jimerson, J. 44

ignoring money 3–5 job satisfaction 219–21
illusion of money 38, 249 Johnson, M. D. 275
imagination 265 Jonas, E. 30, 113
imagining fictitious experiences 246 Joo, H. 229
immorality of stock market 112 Journal of Happiness Studies 59
impulse disorders 189 Journal of Positive Psychology 59
impulsive spending 178–80 Judge, T. 220
“in specie” valuation of coinage 9 Jun, S. 224
inaction 249 Jurkiewicz, C. L. 106, 110
incentive plans see performance-related pay
incentive power of money 37 Kahler, R. 105–6
inconvertible paper 10 Kahneman, Daniel 239, 241, 246, 258
increasing charitable donations 266–7, Kamins, M. 273
266–7 Kardos, P. 30, 113
individualism and subjective wellbeing 73 Karlsson, N. 252
inertia of money 2 Kasser, T. 107, 109
inflation 30, 112–13, 249 Katona, G. 36
influence of menstrual cycle 178 Kaufman, W. 188
information through grapevine 250–51 Kaun, D. 73
ingesting 188 “keeping up with the Joneses” 189
Ingram, Kay 165 Keller, C. 96, 112
inheritance tax 130 Kesebir, P. 57–8, 74
inherited beliefs 208 Keynes, John Maynard 237
inherited wealth 162, 172–3 Kids and Cash 154
Inland Revenue 23 Kim, J. 84, 178
insecurity 101 King, L. 56–7
Interbank lending system 12 Kirchler, E. 126
interest in financial matters 112 Kirkaldy, B. 149
interest in use of money 259 Kiyosaki, R. 173–4
intergenerational transfer of money altruism kleptomania 82, 106, 195
142–6 Kline, P. 187
intergroup rivalry 185 Kofos, M. 252
interior finance 105 Kohn, A. 214–15
internal locus of control 85 Kouchaki, M. 253
interpersonal triggers 190 Krantz, R. 154
interval/ratio measurement of money 34 Kutzner, F. 78
intimacy avoidance 180
intrinsic motivation 212–15 lack of impact on therapeutic outcome
intrinsic reward 211–12 205–6; see also positions on therapy
intuition 255 payment
investors 24–6; “Google Guys” 25–6; Langdon, K. 207
Warren Buffett 24–5 Langs, R. 204
Iondono-Bedoya, D. 77 Lassarres, D. 149
iPod 264 Latane, B. 268–9
irrationality of financial activities 3–4, Lawler, E. 227
183–6 Lea, S. 4, 29–30, 33–4, 36–9, 116
Izak, G. 30, 112–13 Leahy, R. 131
learning about money 138
Jackson, K. 51 Lebowitz, Fran 139
Jackson, Michael 23–4 legal tender 41, 45
Jacob, C. 261 Leiser, D. 30, 112–13, 118, 121, 125–6
Jahoda, G. 120, 123 Lesh, K. 178–81
James, Oliver 62–4 Levchenko, P. 141, 175, 177
Index 315
levels of money at work 234–5 manipulators 194

levels of taxation payable 128 Mansfield, P. 174
Levy, D. 125 Marcos, Imelda 81
Lewis, A. 145–6, 169 Marek, P. 101, 107
Lewis, R. 192–5, 201 marital break-up 79, 166
Li, N. 77–8 market forces 121–3
Lichtenstein, D. R. 272 Marshall, H. 147
life assurance 136–7 Martocchio, J. 220
life evaluation 70 Marx, Karl 4, 44, 53, 206
lifestyle 139–43 MAS see Money Attitude Scale
liking 125, 263, 265, 269 Mason, L. 29
Lilly, Doris 165 MasterCard 16
Lim, V. 95, 177 Masuo, D. 178
limitations of money 41 materialism 47, 106–110, 208–9
Lindgren, H. 3 Materialism Values Scale 106–7
linear incentives 229 mating preferences 77–8
liquid money 9, 11 Matthews, A. 160–61, 175, 197–9
Lis, A. 125 Maurer, W. 42
literary references to money 51–2 Mauss, I. 61–2, 69
Lloyd Wright, Frank 55 Mayer, S. 205
Lobil, C. 171 Mayhew, P. 29
local currencies 10, 18–19 Mead, N. 78, 252
locus of control of money 85 measured day work 222
loss aversion 242–3, 248–9 measuring economic beliefs 103–5
loss of control 192 measuring worth 6
losses vs. gains 248–9 media of exchange 6, 7, 43
lottery money 30, 69, 82, 113, 212, Medina, J. 89, 98
249 meditation 207
love 195–6 Meeska, C. 167–8
loyalty 233 Menninger, K. A. 204
loyalty cards 18 mental accounting 248
Luna-Arocas, R. 85 mental health 183–210; compulsive buying
Lundholm, P. 120 189–91; emotional under-pinning of
Lunt, P. 116 money pathology 192–201; introduction
luxury fever 63 183–6; paying for psychotherapy 202–6;
Lyck, L. 126 psychoanalysis of money 186–8; self-help
Lynn, M. 93, 268–70, 275 books 206–9; treating pathology 201–2
Lyonette, C. 166–7 Merchant of Venice 11
Lyubomirsky, S. 70 merit ratings 223
MES see Money Ethic Scale
McClure, R. 89 messages about money 175–7
Machiavellianism 84, 88 Microsoft 26
McNeal, I. 135 “Midas” scale 86, 206
McVey, L. A. 66 Middleton, J. 207
Madares, C. 171–2 Mikulincer, M. 75–6
madness and money 183–210; see also Milken, Michael 15
mental health Miller, J. 148
magic of money 118–19 Milligan, Spike 55
Magruder, L. 147 millionaires 19–22; eccentric behaviour
making money 2 21–2
Malka, A. 66 mindful shopping 191
malleable desire for material goods 73–5 Miner, J. 227
Malroutu, Y. L. 178 Minogue, Kenneth 259
Mandela, Nelson 137 Miramontes, S. 137
316 Index
misers 22–3, 187, 200; Benny Hill 22; neurosis 199–202

Howard Hughes 23; Lester Piggott 22–3 Nevitte, N. 142–3
modelling 141–2, 156, 159–60, 175 new money 18
modern family economic activities 169–72 Newcomb, M. D. 170
Mogilner, C. 77 Newson, E. 148
Monaci, M. 124 Newson, J. 148
monetary groupings 41 Ng, S. 123–5
monetary incentives 215–16 Ng, W. 65, 70
monetisation 46–7 Nicholson, Viv 24
Money Attitude Scale 87–8, 92, 101, 102 Nobel Prize 239
money avoidance 97–8 nominal measurement of money 34
“money biography” 207–8 non-generosity 95
“Money in the Contemporary Family” 169 non-spenders 105
money disorders 175–7, 188 Norton, P. 205
Money Ethic Scale 82–4, 83 Noseworthy, T. 30, 113
“money game” 2 “not enough theory” 179
“money grams” 161, 175–7, 176 novelty 76
Money is Love 207 Nyhus, E. 119, 140, 142
Money Magic 207
money problems, childhood-related obsession 92, 94–5, 112
160–62 obsessive–compulsive disorder 23, 186
money scripts 97–8, 105 odd money habits of famous people 22–7
“money shadow” 208 Office of Fair Trading 270
money smartness 143, 152, 154, 159–60 Oishi, S. 73–5
money status 38, 95, 97–8 Okamura, R. 178
MoneySense 145 O’Neill, J. 162–4
monthly productivity bonus 222–3 O’Neill, R. 186–7
mood swings 178 oniomania 189
Moore, R. 206 online banking 17–18
Moore, S. 67 open books 97, 112
motivation of parents 140–43 Oppenheimer, D. 244–5
Mountainview Learning 197–9, 264–7 optimality 47
Muffels, R. 69 ordinal measurement of money 34
multiplying money 2 Ormrod, J. 107, 109
Munroe, R. 28 Orr, L. M. 95
Myers, D. G. 56, 70 Oswald, A. 69
other issues for children to understand 137
Nairn, A. 107, 109 Otto, A. 133
Naish, Peter 251–2 overconfidence 250, 256
Naito, Fern 183 overdrafts 41
Napa, C. 56–7 overestimation effect 28
National Health Service 204 overpayment inequity 217
National Opinion Research Centre 56, 70 overseas taxation 128
natural human faculties 44 overshopping 189–91
near money 10 ownership 125
negative reinforcement 187
negligence 3–4 pack thinking 199–200
Nestlé 169 Paetzold, R. 232
net worth 159, 168 Page, Larry 25–6
neuro-economics 254–8; confidence 256; pain and money 74–6, 105–6
fear 256–7; greed 255; happiness 257–8; paper money 10
prediction 255–6; regret 257; risk 256; parental involvement 140–43
surprise 257 parental socialisation 174–5
neuroscience 254 Parente, D. 174
Index 317
Parker, Suzy 1 “political” behaviour 233

parsimony 186, 239 Pollio, H. 118–19
partitioned pricing 271–2 Polyani, Karl 42
pathology of money 177–81, 192–202; poor calibration 111
emotional under-pinning 192–201; poor fathers 173–4
treating 201–2 “poor little rich kids” 162–4
Patterson, J. 103 Pope, K. S. 205
Pay by Text 18 pornography 37
Pay Per Click 25 portability of money 41
pay for performance see performance- Porzecanski, R. 69
related pay positions on therapy payment 204–6;
pay satisfaction 94, 219–21 beneficial therapeutic outcomes 204;
paying for psychotherapy see fees in detrimental therapeutic outcomes 205;
psychotherapy no impact on therapeutic outcome
PE subjects see Protestant ethics 205–6
peak-end rule 246 positive psychology 58–61
peer power 262 Positive Psychology Centre 58
Pendrill, Graham 21 positive thinking 206
pensions 135–6 possession 49, 125
percentages of tax payable 130 possession-defined success 108
perception of coins 38 post-materialism 108, 142
perennial child syndrome 163 Pouwels, B. 73
performance-related pay 223–9, 224; poverty 5, 47, 131
failure of systems 226 power 2, 95, 194–6
Perry, J. 224 power–prestige 88–9, 92–3, 101
personality variables 85–6 PPC see Pay Per Click
persuasion and pricing 259–80; conclusion Praher, D. 126
279; introduction 259; pricing practices precious metal 7–9
in shops 270–79; six principles 260–67; prediction 3, 255–6
tipping 267–70 Presidential Savings Bank 17
persuasion principles in practice 264–7; Prevey, E. 147
Apple sales technique 264–6; increasing Price, D. 207–8
charitable donations 266–7 prices/profit 119–21
Pfeffer, J. 77 pricing see persuasion and pricing
PFP see performance-related pay pricing practices in shops 270–79, 276–8;
philosophy of money 53 bait pricing 274; bundling 274–5; drip
physical health and subjective wellbeing 73 pricing 271–2; reference pricing 272–3;
physical triggers 190 time-limited offers 275–9; use of the
Piachaud, D. 135–6 word “free” 273
Piaget, Jean 116–17 priming power of money 251–3, 273
Piccolo, R. 220 primitive money 6, 42–4
piece work 222 Prince, M. 89
Pierce, J. 220 principles of persuasion 260–67; authority
Pierson, P. 74 262; commitment/consistency 260–61;
Pietras, M. 126, 131 examples 264–7; liking 263; reciprocity
Piggott, Lester 22–3 260; scarcity 262–3; social proof 261–2
Pine, K. J. 178 problems with heuristic thinking 248–51;
Pinto, M. 174 anchoring and confirmation bias 250;
Pizza Hut 17 illusions of money 249; inaction 249;
plastic money 10, 27, 31, 41 information through grapevine 250–51;
playground economy 140 losses vs. gains 248–9; not all money is
Pliner, P. 119, 147–9 equal 248; overconfidence 250
pocket money 143–51; studies on 147–51 Prochnow, Herbert 183
Podsakoff, N. 220 profanity 49–51
318 Index
profit-sharing 223 relative value of products 6

profligacy 177 reliance on others’ financial moves 250–51
projective identification 203 religion and money 47–51, 186, 208–9;
Promislo, M. D. 106, 110 sacred and profane 49–51
proneness to inaction 249 Rendon, M. 154
prospect theory 239–41 repayment in kind 260
Protestant work ethic 57, 84, 94, 283 repossession 101
proximity 244 representative money 41
psychoanalysis of money 186–8 resolving family issues with money 165–6
psychological money skills 285–8 restrictions on money 38
psychological “theories” of money 33–9; retention 92, 94–5
biological psychology of money 37–9; retention time 88–9
factors 34–5 reunification of Germany 69
Psychology of Money 4 reward systems 221–3
Psychology of Money Profile 285–8 Rich, B. 220
Psychology Today 86 rich equals happy 78–9
psychophysical perception of money 28–30 rich fathers 173–4
psychosomatic illness 86, 192 Richins, M. 108
punishment 214 Rijken, M. 73
Puritanism 192 Rim, Y. 85
purpose of taxation 128 Rinaldi, E. 159
pursuit of happiness 62, 108 Rind, B. 269
risk 256
quality 88–9 risk seekers 97, 112
questioning whether happiness is good risk tolerance 110
thing 69 rituals of money 43–4, 49
quizzing children 151–3 Robertiello, R. 202
Roberts, J. 101
Rabeder, Karl 21 Rogers, W. L. 56
Rabow, J. 170 Roksa, J. 167–8
radiating wealth 207 Roland-Levy, C. 127
Raghubir, P. 273 Rose, G. M. 95
rank–income hypothesis 67 Rosenberg, Harold 33
ratio of incentive to base pay rate 229 Rossetti, F. 68
rationalisation 13, 237–8 Rothstein, A. 186
rationality 33–6 Rubinstein, S. 86–7
Rawles, R. 127 rules of the family 143–6
RBS Group 145 Ryan, R. 213
ready money 9–10
real worth of money 42 Sabri, M. F. 177
reanalysis of better data 68–9 sacred vs. profane 49–51, 203–4
reciprocity 43, 78, 260, 264, 269 sacrificial effect of money 43–4, 204
recognisability: of money 41 sadomasochism 53, 186, 206
recognition 246 Saegert, J. 89, 98
recording dreams 207 safe players 96, 112
redistributive transactions 43 sales techniques 264–6
reference pricing 272–3 salience 244
reflections on money 52–4; behaviourist Salvaggio, A. 221
approaches to money 54; criminology of Sanchez, M. 137
money 52–3; philosophy of money 53; saving 112, 131–3, 147–8, 154, 175
social ecology of money 53–4 scarcity 207, 262–4, 275
regret 257 schedule of reinforcement 229
relastionships within money 38 schizophrenia 3
relative deprivation 216–19 Schmidt, P. 101
Index 319
Schneider, B. 221 Sitkowski, S. 204

Schofield, W. 205 situational triggers 190
Schor, B. 107 Sjoberg, L. 101
Schor, J. 56 Skandia 20–21
Schots, P. 133 slang words 81–2
Schulz-Hardt, S. 30, 113 Smith, Adam 6, 44
Scott, A. 145–6 Smith, D. 221
Second Life 21 Smith, G. 133
secrecy over pay 231–4 Smith-Crowe, K. 253
Secret of making money 4 social capital 101
security 95, 193–4, 196 social comparisons and subjective wellbeing
seignorage 9 66–7, 73, 216–17, 230–31
Self, J. 157–8 social ecology of money 53–4
self-aggrandisement 107 “Social Meaning of Money” 46
self-denial 193–4 social proof 261–2, 264
self-determination theory 225 socialisation pathways 141
self-efficacy theory 216 socioeconomic understanding 123
self-enhancement 106 sociology of money 44–7
self-esteem 57, 84–5, 92, 109, 162–3, 189, Solheim, 175, 177
200, 202, 220 Solheim, C. 141
self-help books 206–9 Sonuga-Barke, E. 131–2, 147
self-hypnosis 207 Sort Out Your Money 207
self-medication 105 Sousa, C. 253
self-transcendence 101 Spain, A. 205
self-worth 49, 76 Spectrem Group 19–20
selfish capitalism 63 Spencer, Herbert 44
Seligman, M. E. P. 75 spendthrifts 23–4, 187, 200; Michael
selling love 195 Jackson 23–4; Viv Nicholson 24
sensible shopping 207 spilt-over theory 141
Sepulveda, C. 101 Sprinkle, G. 215
Sevon, G. 125 squandering 188
sex differences 165–82; conclusions 181; stability of money 41
introduction 165–6; money in couples Stacey, B. 131
166–8; money and families 169–72; in stage-wise theories about development of
money grams 175–7; money pathology economic ideas 115–16
in men and women 177–81; parental stamp duty 130
socialisation 174–5; rich and poor fathers start age for taxation 129
173–4; wealth in families 172–3 status symbols 4–5, 43–4
Shand, Karen 21 stealing love 195
Shapiro, M. 167 Steed, L. 85
Shaver, P. R. 75–6 Steinem, Gloria 183
shaving coins 10 Stevenson, M. 101
Shaw, J. 220 stocks and bonds 111–12, 173
Shefrin, H. 253 story of online shopping 17–18
Shields, M. A. 69 Stout, Rex 15
Shinawatra, Thaksin 22 Stroud Pound 18–19
Shipton, B. 205 structure of money attitudes 85–103
shopping fever 64 structured sociology of money 44–5
shops’ pricing practices 270–79 studies of notes 27–30
Siegers, J. 73 studies on pocket money/allowances
Siegler, R. 118, 121 147–51
Siegrist, M. 96, 112 Stutzer, A. 74–5
simulation heuristic 246 subjective wellbeing 57–8, 70–75; factors
Singer, M. 131 associated with 70–75
320 Index
substitute money 41 thrift 142

success measured by money 70, 108 Thurnwald, A. 43
Sunday Times 281 Tian, P. 73
sunk cost 246–7 time-limited offers 275–6
superstition 184 time/place to be happy 62
supply of money 41 tipping 267–70
surprise 257 Todesco, L. 159
surveillance society 233 toilet training 186–7
Sutarso, T. 84 token coins 9–10, 41
Swangfa, O. 66 token economies 54
swapping 140 Tolstoy, Lev 181
SWB see subjective wellbeing tool theory 37–9
Sweeney, E. 133 “tough love” 143–4, 152–3, 160
Switek, M. 66 Tov, W. 65, 69
symbolic compensation 212 Toy Story 266
symbolism 3, 33–5, 41, 43, 113–14 Treasure, F. P. 218
Symes, M. 85 treating pathology 201–2
systematic bias 226 treatment of losses and gains 248–9
systematic relaxation 201 “tri-metallism” 9
Trovato, G. 77
taboo topic 3, 28–9, 164, 166, 175, 181, Tversky, Amos 239, 246
184, 238 Twain, Mark 237
Taebel, D. 116 Twist, L. 208–9
Tajfel, H. 28 tycoons 26–7, 200; Mohamed Al-Fayed
Takahashi, K. 124 26–7
Tamir, M. 61–2, 69 types of bonus 223
Tang, L.-P. 84 types of happiness 62
Tang, T. 82–5 types of tax 128–9
Tarpy, R. M. 33–4, 36 typologies of money madness 197–8
task performance 215–16
Tatarko, A. 101 unconscious finance 105–6
Tatzel, M. 107–9 underpayment inequity 217
tax relief 50 understanding economic world 115–38;
taxation 125–30; avoidance 130; definition development of economic concepts in
128; good or bad? 129; government use children 116–18; development of
of 128; income tax vs. others 128–9; economic thinking 118–37; introduction
inheritance tax 130; levels 128; other 115–16; learning about money 138
countries’ 128; percentages 130; stamp unemployment 67, 79, 86, 137
duty 130; start age 129; VAT 130 unwise spending for happiness 76–8
Taylor, R. 154 use of money 35
teaching economic responsibility 139–40; use of other benefits 223
see also economic socialisation use of word “free” 273
teaching economic theory 158–60 usury 11
team working 225 utility theory 40
technological changes 31
Telford, K. 101 value seekers 107
Templer, D. 87–8, 94 value–size hypothesis 28
Teo, T. 95, 177 Van Dyne, L. 220
Teplinsky, I. J. 206–7 Vanderbruaene, P. 134–5
thinking about money 113–14 Varese, K. 94
Thinking Fast and Slow 258 VAT 130
Thomas, P. 148 Vaughan, Bill 55
Thompson, D. 118, 121 Veblen, T. 4–5
threshold to achievement of happiness 74–5 vigilance re money 97–8
Index 321
virtual money 10 workaholism 105

visualisation 207 workplace motivation 211–36;
Vlasbom, S. 73 compensation 219–21; equity and
Vogler, C. 166–7 relative deprivation 216–19; executive
Vohs, K. 78, 252 pay 229–31; incentives/effort/task
Volpe, R. 159 performance 215–16; intrinsic/extrinsic
voluntary commitments 261 motivation 212–15; introduction
volunteering 155 211–12; money at work 234–5; pay for
Von Stumm, S. 101, 184 performance 223–9; pay secrecy 231–4;
vulnerability 184 reward systems 221–3
world of money today 15–32; credit card
wage–work bargain 221–2 story 16–17; experimental studies of
Wallendorf, M. 49–50 coins/notes 27–30; introduction 15;
Wanke, M. 78 local currencies 18–19; millionaires
wealth 131, 172–3; in families 172–3 19–22; odd money habits 22–7; online
Wealth in Families 172–3 banking/shopping story 17–18;
wealth management 132, 238 technological changes 31
Weber, Max 44 worry see anxiety
Webley, P. 4, 33–4, 36–9, 116, 119, worship of money 49, 97–8
131–3, 140, 142, 147 Wosinski, M. 126, 131
Weissman, D. 29 wrong type of happiness 62
wellbeing 57–61 Wu, X. 78
Welt 202 Wyatt, E. 154
Welt, S. 202
Wernimont, P. 85 Yahoo! 26
Wesson, A. 232 Yamanchi, K. 87–8, 94
Westerman, J. 133 Yang, Q. 78
Wiener, J. 202 Yap, K. 101
Wiggins, R. D. 166–7 Yoken, C. 205
Wilder, B. 207 Yong, J. 77–8
Wilhelm, M. 92, 94 Young, Andrew 259
Wilkinson, L. 205 Young, B. 116
Wilson, E. 101 Yung, S. 148
Wilson, Earl 1
Wilson, G. 103 Zardkoohi, A. 232
Wilson, Gahan 55 Zelizer, V. 45–6
Wiseman, T. 82 Zhang, X. 73
withholding of excrement 187–8 Zhou, X. 74, 76, 778
withholding income 148 Zuiker, V. 141, 175, 177
Wolfenstein, E. V. 53 Zuo, J. 177
Wolff, F.-C. 142 Zuzanek, J. 68
Wooden, M. 69 Zweig, J. S. 66, 254–8
work and subjective wellbeing 73
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The New Psychology of Money

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THE NEW PSYCHOLOGY OF MONEY

Adrian Furnham is Professor of Psychology at University College London. He has

ISBN: 978-1-84872-178-4 (hbk)

1 The psychology of money 1

3 Different approaches to the topic of money 33

4 Money and happiness 55

5 Money attitudes, beliefs and behaviours 81

6 Understanding the economic world 115

7 Economic socialisation and good parenting 139

8 Sex differences, money and the family 165

9 Money madness: money and mental health 183

10 Money and motivation in the workplace 211

11 Behavioural economics 237

12 Persuasion, pricing and money 259

4.1 The evidence for the Easterlin hypothesis 65

1.1 Unusual items which have been used as money 7

8.1 Money grams 176

Money is like promises – easier made than kept.

I do everything for a reason, most of the time the reason is money.

Always remember, money isn’t everything – but also remember to

Money n: affluence, arrears, assets, bank-notes, inf bread, capital, cash,

Lea and Webley (1981) wrote:

We do not need to look far to understand this negligence. Psychologists do

It is, of course, impossible to do justice to the range and complexity of economic

The history of money

TABLE 1.1 Unusual items which have been used as money

Beads Parts of Africa and Canada

Source: Furnham and Argyle (1998)

a. goods and services which form part of the national income;

Themes in this book

Human capital has replaced dollar capital.

Business ethics is to ethics as Monopoly money is to money.

Beauty is potent, but money is omnipotent.

Nothing is more admirable than the fortitude with which millionaires

The story of the credit card

The story of online banking and shopping

TABLE 2.1 Today’s equivalent to £1m in the past

TABLE 2.2 Reasons for millionaires’ wealth accumulation

Reason $100000– $1000000– $5000000–

Hard work 93% 95% 95%

Note: *Not including principle residence.

These findings are supported by Skandia (2012) “millionaire monitor” research.

There are a few famous examples of eccentric millionaire behaviours:

1. Salvatore Cerreto: the 71-year-old property magnate was found to

Famous (modern) people with odd money habits

Hughes moved to Hollywood aged 23 and began producing films, winning

2. The “Google Guys”

Experimental studies of coins and notes

I sell, therefore I am. You buy, therefore I eat.

What better way to prove that you understand a subject than to

Money changes people just as often as it changes hands.

1. Nominal: Here money operates only at the level of equivalence. That is

1. Factors associated with the development of symbolism. Thus, for

Money is not psychologically interchangeable. It is of value and is a measure of

1. The most strict and least acceptable meaning of economic rationality is

The biological psychology of money

1. Although money is an efﬁcient tool, and so gains incentive power by

2. The inadequacies of Tool Theory can be overcome, and the phenomena

The economics of money

is the science of the motive to maximise wealth. This is argued to be a primary,

Reason $100000– $1000000– $5000000–