Chances are you are terrible with money. I’m sure some of you aren’t but most of us, according to statistics, shouldn’t be trusted to manage our own wallets. Latest figures showed New Zealanders owed $5.36 billion on credit cards. 66 per cent of that was incurring interest. We all know how high interest rates on credit cards are, and yet we keep on using them. Why are we so irrational when it comes to our
Don’t worry! It’s not your fault. It’s the natural function of our terrible brains to want to spend money stupidly. A (comedy) book on practical psychology explains, “Thanks to evolution, the human brain has no idea how money works and will fight you every inch of the way to a responsible financial decision. Your broken thinking leads to logical fallacies that you can observe in your everyday life, often by looking at your own bank statement.” Basically your brain thinks that the future isn’t really going to happen and cares far more about having nice things now than saving for a boring future self. This goes for many other aspects of human behaviour, such as the difficulty we have with dieting, our tendency to procrastinate, and our poor sexual decisions.
When Dan Ariely was 18, a horrible accident left 70 per cent of his body covered in third degree burns. He spent the next three years in hospital enduring painful treatments, operations, and isolation from regular life. He ventured out into public only occasionally and dressed in a full-body, Spiderman-like suit. He had become an outsider. From this exceptional viewpoint Dan observed the world around him and noticed more than anything the irrationality of human beings. He devoted his life to what makes us act the way we do (particularly in regard to the experience, treatment, and management of pain) and eventually ended up as a behavioural economist studying the irrational responses people have to money. His research demonstrates how our financial decisions can be swayed by factors as disparate as having too many options to whether or not we are sexually aroused.
He also investigates criminal behaviour and our response to it. While we are all horrified at the thought of someone breaking into our house and stealing our stuff, you are far, far more likely to be the victim of fraud than outright burglary. Of course, the horror of a burglary comes from the invasion of personal space and possible danger of physical attack. Home burglaries, shop hold-ups, and car thieves are usually poor, desperate people who need money badly enough to have to resort to extreme measures. Fraud is more often done out of greediness and a kind of disassociation between what the criminal is doing and actual theft.
Elliot Castro was a telemarketer who dreamed of better things. He talked to journalist Jon Ronson about how a glimpse of the first-class part of the plane on a flight to South America when he was eight years old sparked a life-long desire for luxury. “I’ve always wanted to be better,” he explains. And he found a way to fund his dream. He discovered in his loathed job cold-calling strangers that he could tell the person on the phone that his card had been referred to the credit card company, put them on hold, come back to them and say he had the credit card company on the phone and they needed details. He ended up with a notebook full of these details, mother’s maiden names, and card numbers.
For some perspective on how much Elliot hated his job I asked my friend Reg to describe his time working in a call centre in Australia. His response: “Selling ideology under the guise of seeking the broader public vibe on an issue. Market research. Asking questions on behalf of big business and conservative political parties so they know what tag lines work, what may win/lose elections, and support for controversial major minor projects. If I were ever told to fuck off it would give me a warm feeling. Unless we really needed to meet a deadline. Then you perform like a motherfucker, predatory spider. That’s when it gets you. You’re at home knowing that ‘Bill’ broke down on the phone because his farm is fucked by some coal seam mining project and you’ve baited him for 40 minutes just so said company knows that in their next press release they need to avoid everything and anything. Just doing your fucking job.”
So it is not surprising that Elliot Castro wasn’t too upset when he was fired from his job. He left, taking with him his notebook full of hundreds of people’s credit card details. He could then call the bank and make changes to the account such as changing the address, and have a new card sent to him loaded with someone else’s credit. Elliot asked his mum what would happen if someone stole your credit card and used it and she told him that the bank would cover it. His mum says, “If I’d known why he was asking me that, I would have maybe elaborated a bit more. I didn’t go into all the stress that someone would have if someone stole their credit card.”
Elliott took his stolen credit cards on a shopping spree in London. He bought a Gucci belt that cost £300, a Louis Vuitton bag that was £600, and spent the nights drinking champagne at bars. He then started travelling first-class all around the world, living a fantasy lifestyle of shopping, dining and drinking, and all on other people’s money. He sent his mum perfume and massive bouquets of flowers. By the age of 21 Elliott had defrauded the credit card companies out of around a million pounds. Reality would creep back into Elliott’s high-life when he reflected on what he was doing alone in his hotel rooms. He lied to everyone he met about where he got his money, saying he was a doctor, secret service agent, naval officer or hotel consultant. This meant that if he ever met anyone he really liked and got on with he couldn’t become friends with them; they didn’t have any idea who he actually was. Elliott was eventually stopped in a clothing store where he was buying clothes with his personal shopper. He was sentenced to two years in prison, of which he served one year.
Perhaps the reason why Elliott could bring himself to carry out his fraud on such a huge scale is because of how we perceive theft when it comes to money. The more distance we have between physical cash and our personal transactions, the more likely we are to be dishonest. Dan Ariely uses the example of how you feel about taking a pen home from work and taking 70c out of the till (or whatever the pen’s value is). Most people would have no qualms about the former but cringe at the latter, because one feels like theft and the other seems like nothing important. When Elliot’s mum told him that the banks would cover the cost of the things he bought on other people’s credit cards, it gave him enough distance in his mind between himself and someone going into someone’s wallet and taking their cash to keep his conscience at bay. This disassociation with money is also what makes it so easy to make online purchases where your credit card details are already loaded into your favourite websites, needing only a couple of mouse clicks to have money go from your account and new things delivered to your house.
I put a post on Facebook asking my friends for stories about money. I said they could be funny, sad or interesting. I suppose I was secretly hoping for someone to come and tell me a story as wild and entertaining as Elliott Castro’s. But he stole all his money. It is very different if you are responsible for the money you are spending, even if it isn’t your own. The stories I got were just really, properly sad. A young mother whose boyfriend bought a whole lot of things on hire-purchase then left her with all the bills in her name. An old woman who put her house into a trust for her kids and then struggled to get by on her pension while living in a Salvation Army flat, only to have the bank sell her house and keep the money for themselves. Money stories are generally the depressing result of a depressing system.
One woman, who I will call Kelly, told me about her credit card habit which stemmed from insecurity and anxiety about socialising. She thought she absolutely had to have a new outfit each time she socialised. After moving to a new town and struggling to make close friends, she bought new clothes, shoes and makeup every week for several months, all on her credit card. She says, “I just kind of blocked out what I was doing. I didn’t look at the transaction as it went through, and I never looked at my statements. I just kept going till my card ran out.” Often nobody would comment on her outfit, making her think it was hideous. She remembers looking at her clothes in her wardrobe and feeling like none of them were good enough to wear on a particular night, so she would buy more. She had two credit cards with a combined limit of $7,000, so once they maxed out she had to stop buying. She says that she “knew I was getting myself further and further into debt and that I wouldn’t be getting out of it in a hurry, but I felt at the time that my personal image was more important than worrying about money. It sounds stupid to say it out loud but I really felt that to be liked and accepted I needed to keep improving my wardrobe.”
After hearing Kelly’s story I went to a bank to try to talk to someone about their responsibility concerning credit card debt, but they didn’t want to talk to me. To be fair they had no obligation to give me their time when I wasn’t a customer.
Dan Ariely explains that once we own something, it becomes like an extension of ourselves and we value it like it is part of our person. If you ask someone how much money they would want for their favourite jacket, chances are they would either refuse to sell it or ask for far more money than it would go for in a second hand shop. Maybe Kelly’s compulsive buying of clothes was an effort to create an “extension” of her self-image that she thought might be more desirable to the people around her. It’s nice that we value our stuff in a way that makes it worth more to us than its “actual” monetary value. But there is something about this trait that can be exploited by businesses to make you pay more for something than you really should be. Anything that gives the option of taking something home for a free trial is tricking you into adopting the item into the realm of your personal things, where its perceived worth will swell in the warm glow of your extended ego. Once you’ve had something at home, it seems like it is already yours and the thought of parting with it is like giving one of your possessions away.
Even sneakier are the online auction sites like TradeMe that work on an auction system rather than a simple accepted price. This means that rather than seeing something’s price and deciding it is too expensive, we can ogle items and imagine getting them for a bargain price, speculate on how high we would be willing to bid, and cast the first (often modest) offer with the good intention of pulling out of the auction once the price goes beyond our means. But by bidding on an item you inadvertently welcome it into your personal sphere of extended self – it starts to feel like it is kind of yours. So when someone else comes along and bids on it, suddenly they are bidding against you for your item, and the loss of it seems far more heart-breaking than if you had decided yourself that the price was too high. You bid higher and higher until it seems like a matter of personal pride as much as acquisition of goods. Suddenly you have placed a bid that is higher than what you had privately decided was your maximum price, and you are locked into the deal.
An illusion of scarcity is at play on TradeMe. A feeling of being associated with something special or scarce can make us spend more money on an item because of its status rather than superior function or quality. Writer Charlie Brooker says of his desire to be seated in first-class areas of trains that “it’s like you’ve been given a special fancy hat to wear.” Once the value of an item is fixed in our minds, we rarely question it.
Following from this phenomenon is the “Sunk Cost Fallacy:” the compulsions to keep spending money in order to justify money spent in the past. For example, if your car breaks down and requires $3,000 worth of repairs, but you could buy a new, better car for $2,500, you may feel that to ditch your old car would be wasting the $5000 you spent on it initially. And if you get it fixed and it breaks again, this time needing $4,000 worth of repairs, it seems like you are wasting $8,000 if you ditch it. The same goes for anything you own that you spent a lot of money on but now never use, but refuse to sell cheaply or give away because it would feel like you are losing the money you spent (even though it’s already gone).
So while we may like to think that financial struggles in regular people are avoidable if we are smart, sometimes our brains can sabotage our best intentions and leave us with a whole lot of junk and nothing in the bank. The desire for nice things can be so strong that an otherwise nice guy like Elliot Castro can end up committing gross fraud and not feeling like he is really doing anything wrong. Or an intelligent person like Kelly can ignore rapidly growing debt because of a need to be accepted. And we can all get sucked into online auctions, be more dishonest than we think we are, spend money on “sunk costs,” and feel the need for certain things because of their aura of specialness. Though it seems that the exchange and management of our money should be one of the most rational, straightforward aspects of our lives, our emotions and feelings have more sway over our financial decisions than we may be comfortable admitting.