Do you find it easier to save than invest or vice versa? Or perhaps you prefer to spend money rather than put money aside for your future self. But have you ever thought about why that may be?
The answer often comes back to your “money mindset”, or the psychological difference between spending behaviours. Canstar caught up with Scientia Fellow Associate Professor Elise Payzan-LeNestour from UNSW School of Banking and Finance to find out more.
Q. Is there a psychological difference between saving and investing?
A: There certainly is. A useful metaphor to describe saving is the image of the forward-looking ant preparing for the future, stashing away any supplies and thinking of it’s wider colony. In contrast, an insect like the grasshopper is wired to consume all the grass now and not save a food supply for later.
There is a clear tension between the desire to get it now and the need to plan for the future, and this can be pinned back to our money mindset. Saving is inherently tricky for the human brain as it requires that one inhibits the immediate impulse to ‘get it all now’.
Related reading: A guide to investing while young
Q. Why do people react differently to these two financial options?
A: Not all investments are about saving. There are very different investing motives behind each stream of investment and the various options available that may trigger a different psychological reaction. The psychology of financial investing is multifaceted.
For example, there is an inherent difference between investing in an insured bank deposit versus pure gambles such as investing in high-yield bonds during certain periods of financial history. The latter is akin to recreational gambling as there are high risks involved and an element of thrill similar to that of gambling. People also like “lottery stocks” because they’re naturally attracted to positive skewness (the small probability of winning big).
Some modern financial products mix the two aspects—gambling and saving—to appeal to this type of mindset. An example of this would be prize-linked saving (PLS) which is a great nudge of encouragement as it uses people’s appetite for lotteries to make them save more.
Q. How can other areas of our life and our behaviour feed into our financial life?
A. Sadly, there are many examples of negative aspects of our lives feeding into financial behaviour. Common examples include:
- Health issues leading to bankruptcy
- Personal relationship issues leading to substance abuse which in turn leads to poor financial choices
- Stress leading to binge spending
- Employment uncertainty leading to reduced spending
This is not the case for everyone and the first step to being in control of your finances and investing is being self-aware—in particular, being aware of your reaction to adversity.
Related reading: How to be an effective investor as your income changes
Q. Why is it easier for some people to save/invest than others?
There are various reasons as to why it is easier for some people to save or invest than it is for others and it comes down to the individual, their life experiences and financial independence. Here are some key reasons:
- There are significant interindividual differences in self-control capacity.
- There are significant interindividual differences in risk-taking propensity
- There are significant interindividual differences in financial literacy
Learn more about your individual investor persona and how these factors may influence your investing decisions.
Q. What strategies can someone employ to fulfill a long term goal like investing or saving if they feel like it is challenging?
A. One smart strategy to help you achieve a longer term goal consists of using a “commitment device” to resist the temptation to deviate from the right course of action. This keeps the individual accountable but also adheres to the need for reward and gratification without giving into social pressure.
About Elise Payzan-LeNestour
Elise Payzan-Le Nestour is Scientia Fellow Associate Professor at the UNSW Business School. Her research program aims to elucidate how people perceive and react to financial risks, using a combination of theoretical and experimental methods from decision neuroscience, experimental economics, and financial economics. Elise has been collaborating with top behavioral scientists worldwide, both from North America (Brown University, The California Institute of Technology, Columbia University, and The Wharton Business School) and Europe (Geneva University).