Cowry Consulting

Quite simply, Cowry Consulting uses behavioural economics to help customers make better decisions. We are the science behind customer experience.

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MONEY CAN'T BUY HAPPINESS, OR CAN IT?

The cliché of ‘money can’t buy you happiness’ has long been thrown around, but can it? Well seemingly it can! But only up to a certain point. A study by Kahneman et al revealed that your income only improves your happiness up to earning $50,000 a year (£37,800). This is due to a principle called the focusing illusion.

The focusing illusion is when individuals look solely at certain aspects of their lives and focus on these aspects as an indicator of their happiness.

In the higher earning bracket people spent more time commuting rather than spending time on leisure activities. People focus on aspects like this as an indicator of their happiness, ignoring other things that contribute to their wellbeing. Furthermore, people readjust their spending habits following a payrise, meaning they have no more spare money than they did before (with extra funds often being quoted as something that would bring happiness).

However this increased spending could make you happier, if it is spent on the right things. Dunn et al found that we should spend our money in ways that we might not think to make us happy. So here are 5 realistic ways you could spend your way into happiness.

1. Firstly, rather than buy material things, we should buy experiences. Humans naturally acclimatise to things and it is this that reduces the happiness that material objects bring. Eventually we habituate to the new object and it is normal and ceases to bring us happiness.

2. It is for the same reason we should purchase lots of small things as opposed to one big thing. Doing so on a novel and variable basis stops predictability and thus stops the brain adapting; increasing the happiness from your purchases.

3. Spend money on others rather than yourself. Even after accounting for income, those who have higher pro-social spending are happier. We are hyper-social animals and it is this huge desire to please the group that underlies this finding.

4. This hyper-sociality is why we should look to other people for purchase inspiration. We are more likely to take pleasure from things that people similar to us also take pleasure in. So follow the herd rather than the heart when buying things.

5. The final piece of spending advice is to spend now and consume later. The recent rise in ‘get now pay later’ offers is actually detrimental to our happiness. We actually receive more pleasure from the anticipation of doing something than we do when actually doing it.

So maybe money can buy you happiness, as long as you spend it correctly.

Kahneman, D., Krueger, A. B., Schkade, D., Schwarz, N., & Stone, A. A. (2006). Would you be happier if you were richer? A focusing illusion. science, 312(5782), 1908-1910.

Dunn, E. W., Gilbert, D. T., & Wilson, T. D. (2011). If money doesn't make you happy, then you probably aren't spending it right. Journal of Consumer Psychology, 21(2), 115-125

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HOW CAN YOU CHANGE YOUR HABITS FOR GOOD?

We all have habits. Some of which we are openly aware of and some of which we may be ignorant to. In fact, almost everything that we do can be described as a habit.

The way you’re reading this article? That’s a habit. The way you drink your cup of tea? That’s a habit. Saving money? Funnily enough that’s also a habit! There are almost infinite things that you do and the vast majority of which can be described as habits. Luckily for us, we can change these habits.

To understand this, we must first understand what makes up a habit. A habit is made up of 3 simple components. A cue, a routine and a reward. All of these link with each other to form the habit loop that has long been the examination of neuroscientists. The presence of a cue activates areas of the brain associated with rewards before we have even received it. This leads to proceeding with the routine and then the reward reactivates the reward centres of the brain (similar to Pavlov’s dogs).

Unfortunately, two parts of the loop cannot be changed, the cue and the urge for a reward will always somewhat be hardwired. But crucially, the routine can be changed and this is the most important part of the sequence. This is what makes you eat the chocolate if you’re not hungry, or place a bet even though you’re low on money - it is the behaviour itself.

So how has knowledge of these habit loops been used to influence behaviour? As early as the 1990’s companies have been using habit loops to improve profitability. Metal manufacturer Alcoa, changed keystone safety habits to make Alcoa one of the safest companies to work for and saw a resultant stock rise of 200%. This concept was replicated at IBM, concentrating on their research and selling routines and at Goldman Sachs, a keystone habit of assessment undergoes every decision.

However the use of habits is far from limited to use by global corporations. You can change any of your unwanted behaviours into good habits to improve your life. Let’s take saving money for example. Identify the cue to spend and the reward you get from spending - keep these the same and replace the routine with a more financially prudent one. Simple isn’t it.

As I’m sure you can see, whether it be saving money or turning over a profit, it’s all a matter of the right habits.

Duhigg, C. (2012). The power of habit: Why we do what we do in life and business (Vol. 34, No. 10). Random House.

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How can cookies help teach our children (and us) to save money?

Since 1969 children have been transfixed by the larger than life puppetry on Sesame Street, which is now the most decorated children’s show of all time. The Cookie Monster is one of the show’s most famous characters, world renowned for his insatiable appetite for sweet treats. However, recently the big blue monster has learnt to restrain himself. The reasons behind why could shed valuable light on our own, grown up behaviours.

BThe Marshmallow study by Walter Mischel has become famous for showing some incredibly cute children as well as being the catalyst for a growing field of self-regulation. Those children who are able to resist the temptation to eat the marshmallow the longest have been found to predict better academic achievement, less behavioural problems and social outcomes as teenagers and even greater income in adulthood.

What’s great about self-regulation is that it isn’t predetermined by genes and that anyone can learn to do it well. In light of this, the cookie monster has now been featured displaying multiple self-regulatory tactics in a number of episodes to complete his ultimate goal of joining a club and to pass a test directly based from Walter Mischel’s original Marshmallow task.

But how did this affect the children? Linebarger and Gatewood conducted an experimental analysis of the episodes and found that one single viewing of an episode helped children delay eating a treat four minutes longer than their unexposed counterparts. So what can we learn from the cookie monster to help us with our money? Quite simply a little self-regulation can go a long way! When participants were taught financial self-regulatory strategies, it resulted in more than quadrupling of savings rates, from 8% to 38% of income. And this was without any rise in income, just spending less and saving more through self-regulation.

No matter our age, whether it be for a cookie or our money, we can all learn to keep our hands out of the cookie jar!

Oaten, M., & Cheng, K. (2004). Longitudinal gains in self-control. Poster session presented at the annual meeting of the Society for Personality and Social Psychology, Austin, TX.

Kotler, J. A., Truglio, R. T., & Betancourt, J. (2016). How Sesame Street Meets the Changing Needs of Children in the United States. The Sesame Effect: The Global Impact of the Longest Street in the World. Linebarger, D. & Gatewood, R. (2014) Lessons from the Cookie Monster, Poster presentation at the London international conference on Education, London, UK. (A full paper is expected in 2016)

Linebarger, D. & Gatewood, R. (2014) Lessons from the Cookie Monster, Poster presentation at the London international conference on Education, London, UK. (A full paper is expected in 2016)

Mischel, W., Ayduk, O., Berman, M. G., Casey, B. J., Gotlib, I. H., Jonides, J., ... & Shoda, Y. (2010). ‘Willpower’over the life span: decomposing self-regulation. Social Cognitive and Affective Neuroscience.

Baumeister, R. F., & Alquist, J. L. (2009). Is there a downside to good self-control? Self and Identity, 2 & 3, 115-130.

Koval, C. Z., vanDellen, M. R., Fitzsimons, G. M., & Ranby, K. W. (2015). The burden of responsibility: Interpersonal costs of high self-control. Journal of Personality and Social Psychology, 108(5), 750.

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Thank you for all of the wonderful entries we’ve received this month!

We’ve narrowed it down and our favourite nudge this month was spotted by

Ed Carr!

Why do we love it?

A saying is judged to be more accurate or truthful if it rhymes, this is known as the rhyme-as-reason effect.

Therefore this poster encouraging people not to litter on the tube is effective because of the way it rhymes.

A famous example was used in the O.J Simpson trial with the defense's use of the phrase "If the gloves don't fit, then you must acquit."

Think you’ve seen a notable nudge?

Tweet us a picture with the hashtag #NudgesOnTheFly for a chance to win a spot in next month’s Funny Money!

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AN INTERVIEW WITH GERALD ASHLEY

This month we were lucky enough to get a couple of minutes with Gerald Ashley, to ask him some questions about the weird and wonderful world of behavioural finance and economics.

So if brains can think so quickly, what’s the best rule of thumb for risk taking in your book?

I like the Venture Capital rule for business plans - always double the costs and halve the expected revenue projections! By their nature, entrepreneurs are confident and gutsy but they are not alone in tending to be overconfident. We can all suffer from overconfidence. Numerous studies show we overrate our driving skills, believe others are more likely to be hit by a bus than ourselves and that our neighbours are more likely to get burgled than us.

We are taught confidence is good - but decision makers and risk takers need to guard against misplaced "certainty”. One of the great lessons in risk is recognising that some situations are inherently uncertain and no amount of bluster or over-use of "models" will change that. Flexibility of thought and agility of action are the critical keys.

In one sentence could you share an example of how computers using Predictive Analytics have forecasted far better than humans?

Machine learning is transforming intelligent investment portfolio selection. We may think that the human fund manager will always be better but my money is increasingly on the smart asset allocation app.

“One of the great lessons in risk is recognising that some situations are inherently uncertain…”

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businesses BEhaving

Have you ever had a free coffee from Pret a Manger?

Last year, Pret a Manger’s CEO, Clive Shlee, told his staff that they had a certain number of hot drinks and food to give away each week for free, resulting in a huge 28% of customers walking away with something completely free that they had been prepared to pay for. The rumour quickly spread that these freebies were reserved for particularly attractive customers. Clive Shlee seems to be employing some effective behavioural principles to get people buying Pret coffees, instead of employing the more common, expensive and rational clubcard or loyalty systems.

Here’s why the Pret approach is a behaviourally insightful model:

Reciprocity

When we are subject to a random act of kindness, we are more likely to respond with an even greater benefit in kind. In Pret a Manger’s case, this would be repeat business.

Social Norms

Clive Shlee understands that if more people are walking around drinking Pret coffees, it creates a powerful social norm that that this is the thing to do.

Superiority Effect

The rumour that these freebies were only handed out to attractive customers plays on and confirms our innate superiority bias (the belief that we are all better than average at most things, a statistically impossible phenomenon!).

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AND THE FINANCIAL BIAS OF THE MONTH IS...

SOCIAL NORMS

We are herd animals and therefore we measure our behaviour in relation to each other to decide what is acceptable and appropriate in social settings.

Similarly, when we don’t have enough information about a given situation, we rely on the social default for guidance. For example, when English participants were asked to select a tea where the description was written in Korean, people were more than 3x as likely to mimic the choice of the person before them.

However, this effect was not observed when choosing between English teas. This is potentially because more information was available to help participants make an informed decision. Therefore they didn’t feel the need to follow others.

So what do Social Norms have to do with Donald Trump’s somewhat surprising success in the recent US presidential race?

In the US, each state takes it in turn to vote for their chosen presidential candidate. Therefore, due to the sequential nature of the voting system, winning one state can lead to voters in the subsequent states jumping on the bandwagon.

This often results in certain candidates picking up momentum as the primaries progress and, before you know it, Trump comes out on top #TopTrumps.

Huh, Y. E., Vosgerau, J., & Morewedge, C. K. (2014). Social defaults: Observed choices become choice defaults. Journal of Consumer Research,41(3), 746-760.

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How can artificial intelligence (AI) impact our understanding of behavioural finance and marketing?

In recent years, research in machine learning has made dramatic advances. Perhaps the most famous example is the AI Go player AlphaGo created at Google Deepmind. Although Go is overall a more popular game than Chess, it is not as well known here in the west owing to its Asian origins.

The scientific paper outlining Google’s approach, published in the journal Nature in January 2016 this year, leads with the sentence “the game of Go has long been viewed as the most challenging of classic games for artificial intelligence owing to its enormous search space and the difficulty of evaluating board positions and moves”.

The possibility of AI to beat the top human players was considered to be at least a decade away. The authors then describe the machine-learning algorithm that beat the European champion in five out of five professional games and later also beat the legendary South Korean player Lee Sedol, considered by many to be the top player over the past decade, in four out of five games. All games were broadcast on live TV across Asia and live streamed over the web to the rest of the world.

But it is not only in the area of games that machine learning has recently made significant progress. Another paper, also published in the journal Nature this year, shows how machine learning can be used to predict the synthesis of new inorganic-organic hybrid materials. The production of new materials is a complex process not fully understood and relies primarily on trial and error. A machine-learning algorithm trained on data from failed experiments was used to predict the successful synthesis of new materials. It greatly outperformed traditional human strategies. New hypotheses on the formation of materials, not previously understood, were revealed. These are only two out of many recent examples of where machine learning has supplemented human intelligence.

Practitioners in the areas of both behavioural finance and marketing are typically familiar with, now fairly standard, econometric techniques such as linear regression and controlled trials. These methods clearly have a firm place in the practitioner’s toolkit due to easy-to-understand properties and results that are easy to explain to clients. 

But there is now scope for machine learning to make similar massive advances in our understanding of behavioural finance and marketing. .

Silver, D., Huang, A., Maddison, C. J., Guez, A., Sifre, L., Van Den Driessche, G.,& Dieleman, S. (2016). Mastering the game of Go with deep neural networks and tree search. Nature,529(7587), 484-489.

Raccuglia, P., Elbert, K. C., Adler, P. D., Falk, C., Wenny, M. B., Mollo, A., ... & Norquist, A. J. (2016). Machine-learning-assisted materials discovery using failed experiments. Nature,533(7601), 73-76.

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HOW CAN YOUR BLADDER HELP YOU MAKE BETTER FINANCIAL DECISIONS?

We all know the saying, “Never go shopping when you’re hungry”. When people are food deprived, they’re impulsive, and the chance of them purchasing a high-calorie “quick fix”, such as chocolate or crisps is much higher. Even when they know that in the long run, low calorie, healthier foods would satiate their hunger more effectively. 

How often have you found yourself in the confectionary aisle, unable to stop yourself from filling your trolley with goodies that you just need? Frequently? Me too. However, hunger is not the only visceral state we need to consider when it comes to our ability to exercise self-control.

Impulsive control is very important for human functioning. Without it, we would fall into overindulgence or financial mismanagement. Mirjam Tuk, a professor at the University of Twente in the Netherlands has found that bladder-control can be an important determinant of impulsive and reward seeking behaviour. In the study, disguised as a water-tasting test, 193 participants were split into 2 groups.  One group drank 50ml of water and the other drank 700ml. After 45 minutes, participants were asked a series of financial decision questions. They were offered either $16 tomorrow or $30 just over a month from now.

They found that those who had consumed less water had a desire for smaller but sooner rewards over later, larger rewards, whereas those with the urgency to urinate displayed increased impulse control in the behavioural domain.

Tuk also examined whether external cues could increase bladder control. Participants were primed with words related to urination – “bladder”, “toilet” – or unrelated words. They then had to perform the same financial decision task as before. They found that inhibitory effects triggered by cues in the environment can control urges in other domains. Put simply, even thinking about controlling our bladders can reduce the urge to act impulsively and help us to make more rational decisions. 

So next time you’re about to make a large purchase, drink a few glasses of water first and then think again.

Tal, A., & Wansink, B. (2013). Fattening fasting: hungry grocery shoppers buy more calories, not more food. JAMA internal medicine, 173(12), 1146-1148.

Tuk, M. A., Trampe, D., & Warlop, L. (2011). Inhibitory spillover increased urination urgency facilitates impulse control in unrelated domains.Psychological Science, 22(5), 627-633.

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HOW DOES YOUR FUND MANAGER’S MARRIAGE AFFECT YOUR RETURN ON INVESTMENT?

It’s comforting to think that the people who manage our money are human calculators who are completely unaffected by the day to day emotional turmoil that affects the rest of us. However, a group of researchers have shown that this is not the case and that they too are capable of experiencing a whole spectrum of human emotions. 

Researchers gathered data on fund managers’ divorces across 4 US States and correlated this with the performance of their respective funds. They found that when a fund manager gets divorced, they underperform by 7.4% that year. Interestingly, the event doesn’t have to be emotionally straining, as marriage has also been shown to lower performance, albeit by a slightly lower factor of 5.4% annually. 

The researchers attributed this drop in performance to an increased reliance on a bias known as the Disposition Effect. This relates to the tendency of investors to sell shares once the price has increased, whilst holding on to assets that have dropped in value. They argue that when fund mangers are emotionally distracted, they are less inclined to cut their losses and so hold on to underperforming stocks. 

This finding lends support to the growth of “robo-advice” platforms that use computer programmes and algorithms to make investment decisions in place of fund managers, such as the newly launched ‘Netwealth’. Headed up by Dr Gerard Lyons, Netwealth is a fund management platform which costs a third of the price of established money management firms and promises an emotionally vacuous (and hassle free) fund manager!

Lu, Y., Ray, S., & Teo, M. Till Death Do Us Part: Marital Events and Hedge Funds. 

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HOW DO YOU GIVE A LOAN TO A CUSTOMER WITH NO FINANCIAL HISTORY?

When we ask a bank for a loan, they go away and assess our suitability based on our financial history, by assessing our previous behaviours and reviewing our assets and liabilities. So what happens in developing countries where people have little or no formal financial history? 

The unfortunate answer is that often loans don’t get granted which means that new businesses don’t have the capital to start and houses are not purchased. Clearly, without loans being granted in the first place, people aren’t able to build a financial history and so the vicious cycle continues.

A group of researchers were keen to find a way to overcome the lack of loans being granted in the absence of banking histories. They hypothesised that the answer might lie in the way that people use their mobile phones. For example, were they prudent enough to always ensure that they had enough phone credit in case they needed their phone in an emergency? They analysed data from a Caribbean bank of over 3,000 loans and the repayment behaviours associated with each loan. They then correlated these loan-related behaviours with mobile usage behaviours exhibited by the same population in the 90 days leading up to their loan being granted.

Interestingly, they found that behavioural patterns in mobile phone usage are predictive of who will default on loans with similar accuracy to the credit scoring method used by banks.

Given the huge prevalence of mobile phone subscriptions, reaching over 7 billion by the end of 2015, this behavioural insight could be crucial in establishing credit scoring techniques in the developing world.

Bjorkegren, D. (2015): “Behavior Revealed in Mobile Phone Usage Predicts Loan Repayment,” Working Paper.

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HOW CAN LEICESTER CITY HELP US TO SAVE MORE FOR RETIREMENT?

A Leicester City fan, who stood to win £250,000 from a £50 bet on his team winning the Premier League, cashed out for £72,000. But how can understanding this behaviour help us to save for retirement?

Being from Leicester myself, I couldn’t help but get swept up in the recent excitement of the Premier League. After all, who could have predicted that with odds of 5000-1, Leicester City would win? One lucky Foxes fan stood a chance of winning £250,000, so why did he cash out early with winnings of £72,000? It all comes down to two things. Firstly, people feel the impact of losses twice as strongly as they enjoy acquiring equal gains, a cognitive bias known as loss aversion. The prospect of losing £50 may cause some pain, however, the thought of losing £72,000 is much greater.

Secondly, empathy gap is the tendency to underestimate just how strongly the influence of emotions and urges will impact our future decisions. As a result, how we think we will act and how we actually act can vary dramatically. For example, upon placing the bet, the fan was in a “cold” emotional state (calm, rational and objective) and understanding the odds, he would have been confident that he could hold out for the £250,000 in the event that Leicester was on a winning streak.  However, when Leicester exceeded expectations and the fan was in a “hot” emotional state (stimulated and excited), the lack of certainty and prospect of losing a lot of money became too much and he took the smaller payout of just £72,000.

Put simply, we lack the imagination to visualise what life is like in our future-self’s shoes. Ersner-Hershfield, Wimmer & Knutson (2009) explained this behaviour using fMRI (functional magnetic resonance imaging). They found that thinking about your future-self actually activates the same neural pathways that are triggered when thinking about a stranger. This lack of connection with our future selves leads to our inability to act confidently.

So how does this relate to pensions? Both loss aversion and empathy gap are key factors contributing to our shoddy saving skills. Unfortunately, the seemingly exponential increase in life-expectancy seen over the last century means that very few people are financially prepared for a secure and comfortable retirement. So how can we use this knowledge to bridge the gap between our present and future selves?

In 2011, Hershfield & Goldstein et al used virtual reality to allow people to interact with a photorealistic, age-progressed rendering of their face. Seeing themselves aged 65 years old helped to bridge the gap between their present and future self. Furthermore, participants had to use a slider bar to allocate their desired retirement contribution. Importantly, when they adjusted the slider, it affected the facial expression of their “future face”, providing emotional feedback on their choice. Forgoing present income for increased retirement income caused the face to smile, whereas a high current income at the cost of a lower retirement income caused the face to frown. They found that interactions with your future-self led to an increased tendency to accept later monetary rewards over immediate ones. This is most likely due to the intensified emotions experienced during the simulation that enable people to become better informed about future consequences of their decisions.

This study shows that we can overcome the cognitive biases we encounter when making financial decisions. With the rapid development of virtual reality, the prospect of saving could become a whole lot easier. After all, if Leicester City can win the Premier League, why can’t we learn to save for retirement?

Ersner-Hershfield, H., Garton, M. T., Ballard, K., Samanez-Larkin, G. R., & Knutson, B. (2009). Don’t stop thinking about tomorrow: Individual differences in future self-continuity account for saving. Judgment and Decision Making, 4(4), 280.

Hershfield, H. E., Goldstein, D. G., Sharpe, W. F., Fox, J., Yeykelis, L., Carstensen, L. L., & Bailenson, J. N. (2011). Increasing saving behavior through age-progressed renderings of the future self. Journal of Marketing Research, 48(SPL), S23-S37.

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OUR FAVOURITE NUDGE THIS MONTH WAS SPOTTED IN STARBUCKS!

As humans and other animals approach a goal, their efforts toward that goal increase, this is known as the goal-gradient effect.

We purchase faster if the task is started for us. Therefore a 10-space coffee card with 2 stamps will be completed faster than an empty 8-space card.

Think you’ve seen a notable nudge?

Tweet us a picture with the hashtag #NudgesOnTheFly for a chance to win a spot in next month’s Funny Money!

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AN INTERVIEW WITH DAN GOLDSTEIN

This month we were lucky enough to get a couple of minutes with Dan Goldstein, to ask him some questions about the weird and wonderful world of behavioural finance and economics.

What's your favourite 'Nudge' of all time & why?

That would have to be the default effect: people tend to choose the default option, even when it takes the same amount of effort not to do so.

Eric Johnson and I published our paper on organ donor pool defaults in European countries in 2003, (read it here) and it went on to become a leading example in books like “Nudge” by Thaler and Sunstein and “Predictably Irrational” by Dan Ariely.

We hear it’s used in the first lecture of behavioural economics classes. It’s nice to see one’s work as a canonical example. That one will always be close to my heart.

Who would join you, if you wrote a book entitled 'Three Behavioural Economists in a Boat'?

I understand that Herbert Simon said "I thought all economics was behavioral" many years ago, so I'd like to have him along in the boat. However, he's deceased, so that is probably not such a good idea. I did get to meet him when I was a baby, though. As the other two economists I'd choose Charlie Plott and Vernon Smith because they were doing behavioral economics long before people were saying behavioral economics, and their ideas influenced me.

Richard Thaler recently did a cameo in 'The Big Short', looking at your secret past life, will you be in a movie anytime soon?

I'm going to play the voice of Prospect Theory in an animated feature based on the works of Kahneman and Tversky. Watch out for it.

Click here to try and beat Dan’s evil dictator game

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businesses BEhaving

Have you ever tried to get out of a gym membership that you don’t use?

You’re not alone. The Office for Fair Trading was concerned that gym contracts were exploiting people’s optimistic view of their future selves and tendency to overestimate their gym use. Some gyms were tying customers into contracts for three years, and if they wanted to terminate their contract any sooner, they would have to pay all remaining fees. Following an investigation, the High Court ruled that the minimum length contract across a range of gyms were both unfair and unenforceable.

Since then, we’ve seen an emergence of gyms operating a ‘pay as you go’ system. These gyms are using their understanding of behavioural economics to restore customers’ trust in the industry and to treat customers fairly.

We love the new pay-as-you-go hipster gym in Liverpool Street, 1Rebel, who use one of the most powerful insights from behavioural economics, commitment bias, to get customers returning. Their brick wall acts as a tangible driver to get fitness bunnies to commit to sessions.

Operating a pay-as-you-go system can be a risky strategy but giving customers chalk to write their fitness goal on the wall and completing a tally underneath every time they workout, increases the likelihood of them going back.

This is due to the fact that customers can easily see their progress and research has shown that  if we have already made some progress towards a goal, we are more likely to complete that goal, a phenomenon referred to as the goal-gradient effect.

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AND THE FINANCIAL BIAS OF THE MONTH IS...

PRESENT BIAS

We are impatient and tend to be biased towards making decisions that provide instant gratification and often put off decisions that are associated with future outcomes.

We saw this bias earlier this year with a couple who won the lottery and opted to take £200 million as a lump sum instead of taking the full £500 million over 30 years in the form of an annuity. A famous video showing this bias features on the next page (but you have to finish reading this page before you can see it!)

Furthermore, present bias means that we have difficulty understanding our future requirements and therefore people rarely save enough to live on in retirement. Currently, only 7% of the UK are ready for retirement.

The Marshmallow experiment was published in 1972 and took place at Stanford University.Children aged 4-5 were sat in a room and left to face a lone marshmallow on a plate.The children were told that they could eat the marshmallow now, or if they waited until the researcher returned, they could have two!

The choice was simple: one treat now, or two treats later!

The researcher then left the room and left the child alone with the tempting treat.

They found that the children that were willing to delay gratification (or in other words, overcome their present bias), were more successful in life. This included higher SAT scores, lower substance abuse and better social skills.

Mischel, W., Ebbesen, E.B., Raskoff Zeiss, A. (1975). Cognitive and attentional mechanisms in delay of gratification. Journal of Personality and Social Psychology, 21(2): 204-218.

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Does foreign money make us spend more or less abroad?

With the Easter holiday approaching, we wondered whether people’s spending patterns change when they travel abroad.

People often say that foreign money feels like play money and therefore we predicted that people would spend more when they’re abroad.

However, an interesting study has shown that it’s not quite as simple as that.

Wertenbroch et al. (2007) showed that differences in our spending patterns when we go abroad arise from a mistake in the way that we perceive the value of currency. Across a series of laboratory experiments, they gave participants in the US, Hong Kong and Germany a budget to spend in either a foreign or local currency and asked what they would spend on a variety of transactions.

The results showed that people spent less in real terms when the denomination of the currency was less that that of their local currency (e.g. for a US citizen spending Euros where $1 = € 0.8). On the other hand, participants spent more in real terms when the face value of the currency was higher than their local currency. This is due to a phenomenon known as the money illusion and occurs because people evaluate transactions by estimating the nominal difference between their budget and the price of a given good.

Wertenbroch, K., Soman, D., & Chattopadhyay, A. (2007). On the perceived value of money: The reference dependence of currency numerosity effects. Journal of Consumer Research, 34(1), 1-10.