Managing my money
Managing my money

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Managing my money

1.2 Your personality can seriously affect your finances

Are you risk averse or a risk taker? Find out about the behaviours that can lead to poor financial decisions and start to build your financial planning model.

Have you ever thought about how far your personality and, in particular your approach to risk taking, affects your financial decision making?

In this video Mark Fenton-O’Creevy, Professor of Organisational Psychology at The Open University Business School and an expert in behavioural finance, introduces the way behavioural biases affect personal financial decisions.

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Mark Fenton-O'Creevy:
So I want to start off by introducing you to a chap called Phineas Gage. Phineas Gage was a railway worker and they used to make tunnels, they'd drill holes in the rock and then they'd have tamping iron which they used to compress the blasting powder with, and sometimes what would happen; as they were compressing the blasting powder is a spark would trigger the blasting powder, which would shoot the rod out with quite high speed and that's what happened to Phineas Gage and it went straight through his head. It took out a very particular part of his brain that is responsible for emotional processing.
So that was a very early example of how we started to get to learn about what bits of the brain do. It used to be that psychologists treated cognition, thinking and emotions as two completely separate processes. Different people studied them. But what we're learning more and more through neuroscience is that cognitions and emotions are completely intertwined and that as humans, emotions are a very important part of our thinking processes.
A quite simple way of thinking about how emotions and thinking come together is the dual process model of cognition. If we have a situation, we've got to make a decision, a sort of classical way of thinking about this might be: well there's some facts, we've got some options for making decisions, we can represent the future in some way, maybe do a bit of internal modelling of what's going to happen. Going on in parallel with that though, is a completely different process.
It's the activation - and biases is perhaps the wrong word but if you like, pre-existing scripts for deciding; based on our emotional experience of comparable situations. And the first process in blue is quite slow and this process is like that - perceiving is deciding. But what about consumers? we've got responses from about 110,000 people across the UK on their psychological and emotional relationships with money. So one of the things we did is we looked at people's impulsive buying behaviour.
And in a lot of the marketing literature this impulsive buying gets talked about as if it were mostly a good thing. Actually there's good evidence that people who are very impulsive buyers are often doing this as a not very effective way of regulating their emotions. They're not good at managing bad emotions, going shopping turns out to be a form of emotion repair. It turns out that people who are impulsive buyers are typically much more likely to get into financial trouble.
They are for example about three times more likely to go bankrupt. It's also the case of course that retailers invest significant resources in engaging with impulsive shoppers. There's a lot of effort goes into: how can we get the impulsive spend? We need an investment into education, which promotes emotional literacy about money. We also looked at a series of scales, which measure people's attitudes to money. People see money as power, money as love, money as freedom, money as security.
Money as love tends to be the female vice, money as power tends to be the male vice. There are quite strong gender differences here. Again we find a strong relationship to financial outcomes. Those who see money as security are much more likely to have a positive financial earn. So a final observation to finish with.
Policy makers often seek to influence behaviour by providing information.
Firms, through their advertisements, often seek to influence behaviour through engaging with emotions.
Guess who is more pessimistic about influencing consumer behaviour? Thanks very much.
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