A counterintuitive principle of psycho-economics
Psycho-economics is relatively new. I met this branch of knowledge around five years ago when I read “Nudge” by Richard Thaler. Although he did not invent the entire subject, Thaler is considered the father of behavioral economics, which earned him a Nobel Prize.
The basics of psycho-economics are quite simple: as the word itself says these studies are connecting behavioral sciences with the economic ones. Easily said: that the way we earn, spend, and use money depends on how we behave, and our behavior depends on how we feel.
For example, when I approached this learning, I found out why I couldn’t sell my house in the mountains. The reason was that I didn’t accept that its market price was lower than I expected. It’s a basic principle of psycho-economics: we often attribute greater value to our possessions than they may actually hold in the market. This frustrating feeling is due to our projects for the future (we’ve already spent in our mind the money we think we’ll get) and it depends also on our refusal to give up something that is ours.
The economic pleasure (and pain)
One of the most important studies in psycho-economics sheds light on the pleasure and pain associated with money. This study was conducted through some medical research: A group of subjects was informed that they had won an unexpected sum of money, while another group was informed that they had suffered a loss. During the experiment, both groups were submitted to MRI. The study discovered that every time we get a win, our brain activates a specific area associated with pleasure. When we lose, the same process takes place, but the area is linked to pain.
We suffer for many reasons while spending; for example, when we physically see money leaving our wallet. That’s why in a casino they give you fiches instead of letting you use real money. The fiche reduces the perception of loss, and you are tempted to spend more. Similarly, the use of a credit card lightens the pain of spending (at least until the bank presents the balance of expenses).
Furthermore, the research indicated that the larger the financial loss, the larger the brain area involved. So, if we lose a small sum, the suffering is also limited; if we lose an important amount, the resulting suffering is almost unbearable. On the contrary, the area of pleasure involved in our brain is more or less the same when we win. If we come third in the neighborhood race, we are satisfied and happy; if we win the jackpot in the New Year’s lottery, our joy is not as overwhelming as we would expect from the exponentially more significant win.
The study also showed that there are situations in which we perceive spending as a loss, even when we act consciously. For example, we feel that we are robbed when we pay taxes. Taxation is perceived as a loss. This is not the place to delve into the topic, but if I were a politician, I would question why people think that taxes are money lost, despite we use public services.
The helper’s high
A surprising result of this research shows that we can feel the same happiness as a win if we spend for some special reasons: we feel that we are winning some money when we do an act of charity. Giving a sum to someone in need makes us feel as if we won the same amount.
In fact, another survey indicates that donating can significantly improve the donor’s well-being, increasing both their wellness and self-esteem. Actually, this study shows a rise in the donor’s longevity. These wonderful effects are known as the helper’s high which is the feeling of strong motivation that comforts whomever offers an act of kindness or charity.
The phrase “I receive more than I give” finds correspondence in our brain biochemistry. However, there’s a slight nuance: we feel rewarded from two perspectives — the sensation of victory and the experience of spiritual growth.
To perceive the benefits of volunteering, however, we must adhere to one condition. To explain this, I have to share a personal experience of mine, even though I’m aware that every benevolent action should remain anonymous.
A couple of days ago it was a public charity day in my hometown; it’s the day we collect food for the poor. Every grocery store displays long-time foods, such as canned fruits, biscuits, baby food… already packed in shopping bags sold at ten euros. While shopping for myself, I joined the initiative and bought a pre-packed bag. I immediately felt happy but sensed that something was missing. When I arrived home and began filling in the Advent calendar for my son, I realized what had been lacking. I hadn’t been personally involved. The helper’s high is connected to our level of commitment. Giving money is beneficial, but when we also dedicate our time and energy, we create a deeper bond with others. And it’s the sensation of entering someone else’s life for the better, that boosts our spirit.
Altruism is everywhere
There are infinite ways to be altruistic. Beyond just giving money, we can support initiatives like our church’s collection of warm clothes in anticipation of winter, or join our local municipality during food drives. What’s more, sharing these moments with our kids can be incredibly rewarding. I felt like a proud mom when my son spent a morning at the hospital as a blood donor. While I’m not suggesting we bleed ourselves dry, the point is that there are truly countless ways to make a difference.
When we take time out of our busy schedules to volunteer or engage in acts of charity, we’re not just giving to others — we’re also giving to ourselves. We’re creating a sense of time affluence, a richness of experience that money can’t buy. It’s this feeling of abundance — of time, of connection, of purpose, and of money of course — that truly enriches our lives.
But how does this tie in with psycho-economics? Well, it goes back to the idea that our economic decisions are not rational, but are heavily influenced by our emotions and perceptions. When we perceive ourselves as affluent, we’re more likely to make economic decisions that align with our values and contribute to our overall happiness.
Feeling a better person encourages us to repeat the acts of charity. As Thaler clearly explained, our emotions influence our behavior at all times, and this includes when we spend money. Sometimes, spending time and money makes us feel richer.