This week we’re joined by Ben Brinkerhoff from Consilium to talk about “the science of spending”.
The Psychology of Spending
Ben’s exploration into this phenomenon led him to some fascinating insights. Contrary to classical economic theory, where people are expected to spend money to maximise their future happiness, Ben discovered that many individuals hesitate to spend because it genuinely hurts them. Brain scans revealed that the area of the brain responsible for processing pain lights up when people contemplate spending large sums of money.
Identifying Tightwads and Spendthrifts:
To better understand this behaviour, researchers devised a test to categorise individuals as either “tightwads” or “spendthrifts.” Tightwads are those who find it extremely painful to part with their money, while spendthrifts are more comfortable with spending. Surprisingly, the research showed that the more money a person has, the more painful it becomes for them to spend it, contradicting the common belief that wealth makes spending easier.
Financial advisers often find themselves working with clients who want to enjoy their wealth but struggle to do so. To address this challenge, there are strategies to encourage spending while minimising psychological discomfort. One approach is to identify the client’s core values and help them align their spending with those values. This not only makes spending more purposeful but also reduces the fear associated with it.
Aligning Financial Goals
Another critical aspect is aligning financial goals with personal values. By helping clients set meaningful goals and emphasising the importance of these goals, financial advisors can guide them toward responsible spending without triggering anxiety.
Marriage and Spending Habits
An interesting revelation from the podcast is that people tend to marry partners with complementary spending habits. Spendthrifts often end up with tightwads, and vice versa. While this can initially seem like a good balance, it can lead to financial tensions down the road. Couples should strive to communicate openly about their spending habits and financial goals to maintain a harmonious financial relationship.
It sheds light on why people often struggle to spend their wealth, even when they have the means to do so comfortably. By understanding these psychological barriers, financial advisers can better assist clients in achieving their financial goals while enjoying their wealth. Ultimately, it’s not about spending recklessly but spending with purpose and aligning financial decisions with personal values.
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