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Mind Over Money

claudia-hammond-4

Interview Summary

  • We often don’t make the most rational decisions with money
  • Some problems are solved by money
  • We’re very pleased to save $10 on a $40 purchase- vs a bigger purchase – $10 is $10
  • Relative thinking is what this is called
  • People are usually buying the mid-priced option
  • Loss aversion- we hate losses more than the chance of gaining things
  • Materialism can make people lonely if they want things for the wrong reason
  • But loneliness can lead to materialism
  • One experiments is that people who spent money on other people vs self, made them happier
  • You’re less likely to get money out of an account that seems further away
  • The easterlin paradox- the richer countries are not much happier than the poor ones

Society Has A Strange Relationship With Money - @claudiahammond via @PedramShojai

Interview Notes From The Show

Pedram:

Hey, welcome back to ‘The Urban Monk.’ We are here talking about something that keeps coming up for our community, and it’s money. There’s so much scarcity consciousness out in the spiritual world, and people who have to touch money all the time, but don’t know what to do. They’re always stressed about it, and all that.

I thought it would be really important to open up this topic. My guest today, Claudia Hammond, she has studied psychology. She’s looked at this, and she’s really done a lot of work as a journalist, as an investigator, in this psychological overlay of our relationship with money. Thank you for being here, this is great. A lot of my listeners can use some help in this subject.

Claudia:

Yeah, a lot of people do say that.

Pedram:

Yeah, so what got you to start looking at this?

Claudia:

Essentially, actually, my last book was about the topic of time perception and why time sometimes feels as if it goes at different speeds, and how people conceive of the future. When I was looking at experiments on the future, I noticed that a lot of them had to do with money. There were lots of experiments … ‘Would you rather have $10 now or $20 in a month’s time.’ Lots of people would choose the money now rather than have more later on. I got interested in looking at this, and just thinking this, and really curious decisions we make about money that aren’t always that logical … That money can really cause people a lot of distress in different ways, and that we have a very strange relationship with it. Then I started looking into it, and realizing actually, there’s masses and masses of studies from all over the world that have been done on this.

Pedram:

Great, because there’s a lot of people that are stuck on this. A lot of people are constantly in this one-down position, ‘If only I had money. If only I could afford the things that I would want in life, or want to do in life, then my life would be complete.’ Where’s the disconnect? Where do you see most people getting stuck on this money issue?

Claudia:

I think that we make quite a lot of strange decisions about money. We have a curious relationship with it, and so we often don’t make the most rational decisions. We often don’t make the decisions that would actually save us the most money in the long run, if that’s what people want to do. I think also, people are convinced that often if they have more money, that they would be happier, and that all their other problems would go away.

Now of course, some problems are solved by money. If you’ve got nowhere to live, then if you have some money, you have somewhere to live. There’s no point in pretending that some problems aren’t eased by that, and that the lack of it isn’t very stressful when you need it. That debt, of course, can be very stressful, and all sorts of mental health problems can be associated with having gone into debt. There is no doubt that we need to know how to use it, and how to use it better.

When you start looking some of the mistakes that we all make, they’re quite straightforward things. One thing that people will do, and that experiments have shown that most of us do, is we’ll go to a lot of effort to say, save $10 on something that costs $40, or $50. We’re very pleased with saving $10 on that. We think that’s really good. When it comes to buying something bigger, like a car, or on a loan on a house, or something like that, we don’t go to the trouble of saving $10. If a secondhand car costs a $1,000, we don’t worry about saving $10. We just think, “Oh yeah, I’ll have that one, that’s fine.” We constantly look at what discounts we get in proportion to the whole price, when $10 is $10, is $10. If you’re going to try and save it, you need to try and save it on everything you do.

Pedram:

That’s interesting. Is that just some weird psychological blip where because of the scale, suddenly the $10 does not.

Claudia:

Yeah.

Pedram:

Perceptually come in the same way?

Claudia:

Yeah, so it’s called relative thinking. There have been lots of experiments done on this, and it’s very … Daniel Kahneman the psychologist, has done experiments on this. It’s very robust, and it happens again and again that we see it in the context of the whole thing, rather than the little bit, the thing that we could save. People will find themselves doing it, say if they’re buying an apartment, or something like that. Then, they don’t tend, often, to look and see what the solicitor’s going to cost, and check that out. They don’t shop around for that in the same way as they shop around for the flat in the first place, and make sure that the apartment is good value. There are little things like that that we do.

Another one is people are very often tempted to buy mid-priced items, shops, and a line. They will spend a lot of time laying out things in threes. You’ll often seen that there is a cheap one, a medium priced one, and then a really expensive one. If you take something like buying a new laptop, you might have decided you just want a cheap laptop. You just need something basic. You go to the shop, or you look online, and they’re often in these threes. You see the cheap one, you think, “Oh, that will be fine.” Then, you see a middle one that’s a bit more expensive, but not that different. Then next to it is a really, really fancy beautiful one that you’d really like to have, but you’re not going to spend that much money.

You can’t afford that much money, but when there’s three like that, twice as many people suddenly choose the mid-priced one. As previously, in other experiments, where they only have two of them there, people will choose the cheap one. As soon as an expensive one’s there, we’re swayed towards that mid-priced one. We are sometimes buying things we don’t want because we’re persuaded by the way things are laid out in the store. Of course, once you get things home, you’ll only have that one. You won’t have the others to compare it with, so you’ll probably like it when you get it home. In the store, we see all these beautiful things, and people want to have the lovely, fine things.

We Often Don't Make Decisions That'll Benefit Us In The Future - @claudiahammond via @PedramShojai

Pedram:

Let’s dissect the psychology of that a little bit, because the marketers are real good with that. I understand that I’m going to beat you into the Bentley, knowing that you’re going to upgrade a little bit further. What does that do? Obviously everyone wants the best thing, because the best thing is the best thing. Who doesn’t want the fastest laptop that can brush your teeth for you, whatever the heck the promise is there. Then, by pulling someone into the aspirational item, then what it does is it creates some sort of distress, or some dissonance. Then you say, “Well, you know what? I deserve more than the base item.” Have they looked at this?

Claudia:

Yeah. It’s all about disadvantages. We hate disadvantages of things, and we hate losses. There’s this really strong psychological effect called ‘loss aversion,’ which is that we hate losses more than we hate the chance of gaining things. We hate it if we have something, and it’s taken away. People say if you’re booking budget flights, and they add stuff on at the last minute, that’s when you’d already thought it was cheaper than that, people really, really hate that. We don’t like to feel we’re suddenly being charged some extra. We hate disadvantages.

When we look at each of these laptops, we’re looking for the disadvantages in each one. We may be thinking, “Well, the cheap one has the disadvantage of being the cheapest. Maybe it’s not very good. The very, very expensive beautiful, sleek, shiny one has the disadvantage of being really, really expensive.” The thing with the fewest disadvantages appears to be the middle one, and yet we’ve only been swayed to that because that big one is there. I think for a moment, we wanted to be that person … We are often aspirational, that we wanted to be the person who had the really fancy one. We can’t afford that, so we’re thinking, “I know. I’ll have the half fancy one instead,” when we wouldn’t have done that if we hadn’t seen that bigger one.

Pedram:

It’s interesting, because now you see that with luxury cars as well. It’s like before, only rich people could afford a Mercedes. Now Mercedes has this entry level Mercedes where you can say you drive a Mercedes, but it’s not really a Mercedes.

Claudia:

Yeah.

Pedram:

You know what I mean? It’s not quite there.

Claudia:

Yeah.

Pedram:

But allows you to feel that way.

Claudia:

Yeah, and lots of designer clothes shops now do … I won’t say ‘budget,’ because they’re not cheap, but the cheaper ranges as well. They’ll have their main really expensive designer range, but still use the name on something cheaper. That plays into the materialism, which is around and difficult to escape these days.

Pedram:

It certainly is. Let’s talk about Maslow’s hierarchy of needs, quickly. I think it’s a good foundational part of the conversation to then move up from there, which is basically you need certain things. You need air, water, food, your certain creature comforts for survival. Then, moving up into what was it? Love, and relationships, and social interactions, and all that. Then, those things all … it was like a pyramid. It goes up from there.

Claudia:

Yeah.

Pedram:

We need a house, we need food. Now, in that, do we need the biggest house on the block? Do we need caviar or do we need pasta? How do you look at that when you’re looking at how people are being a little loose with their money, and help them corral in a bit?

Claudia:

Yeah, it’s really interesting when you look at the research on materialism and why people want those things. If you think of the pyramid of needs, then at the top is self actualization, and finding meaning, and having fulfilled your whole potential, which doesn’t sound the same as having a fancy car. Yet, some people will think that they will get that from having the fancy car. There’s been really interesting research on materialism, showing that if people want to buy things just because they want the things … because they think the things are nice, and that they’ll enjoy those things. That is fine, and doesn’t make them more or less happy. But, if people want to have the things because they want to generate envy in others, or to be more powerful and appear more powerful by having those things, then in fact, that materialism doesn’t make them any happier in the end. The evidence shows it makes them less happy in the end.

There’s an interesting relationship, as well, between loneliness and materialism. Rik Pieters, who’s a Dutch psychologist, has done fascinating work on this where he has found that materialism can make people lonely, if they want the things for the wrong reasons. Also, loneliness can turn people towards materialism. Everyone will have the experience sometime where they felt miserable on the way home from work. Thought they’d go shopping, and possibly buy some things they don’t really want, thinking it will make them feel better. Actually, what they were feeling was lonely. It doesn’t make them feel better because things don’t stop loneliness, people stop loneliness. It is a complicated relationship.

Pedram:

Well, it is, and we’re complicated creatures. There’s obviously the spending side, and we keep an eye on this, obviously. If you’re spending more than you’re making, that’s probably bad math. If you’re spending and not saving, that’s probably bad math. What would be your advice? You could always make more money, and in some instances, people are in a position to do so. If you’re in a sales position, if you’re in some sort of motivational position where you can step up. You can do so, and that’s great. We could talk about that after.

Let’s talk about tightening the belt, and making sure the money is going to the right places, first, for someone who wants to have a healthier relationship with said money.

Loneliness Leads To Materialism - @claudiahammond via @PedramShojai

Claudia:

Yeah. I think what people need to do there is when they … is to think about the money that they are spending, and whether they are spending it in ways that are going to make them feel happier, or not feel happier. There was an set of experiments that I really liked done by Elizabeth Dunn, an American psychologist. She got people at nine in the morning. She stopped a load of people in the street, and gave them an envelope. In the envelope was either $5, or $20, and a note. Half of the notes said on it, “You’ve got until 5 p.m. today to spend this money. You can spend it on yourself, on anything you like.”

The other half of the people, their note said, “You’ve got until 5 p.m. today to spend this money. It’s free money. You can have it, but you have to spend it on somebody else, or give it to charity.” They also gave people a mood questionnaire at the beginning of the day. Then people went off, spent the money. The people who were allowed to spend it on themselves bought things like earrings, and coffees, and some bought sushi, and things like that. The people who were spending it on other people bought toys for relatives, or they put it into charity boxes, or bought a present for a friend. At 5 p.m., when they got everyone to fill in the mood questionnaires again, they found that the people who had spent their money on other people were significantly happier, and their mood was significantly better than the people who had spent it on themselves.

One lesson we can learn is that if you have got some money to spend, then one thing you can do is to spend it on other people, or give it away. That will make you happier. Another is to spend money on experiences, rather than things. Now one reason for this is experiences often take place with other people, and it connects you more with other people. Also, there’s evidence that people anticipate buying experiences going on holiday, or away for the weekend, or just doing a particular activity for a day, the weekend. They anticipate that much more than they anticipate owning a thing.

You don’t sit around thinking, “Oh, I’m going to get a wide screen telly, and isn’t it going to be amazing when I have my wide screen telly? I’m going to imagine what it’s like.” You don’t imagine what the experience will be like in the same way. People don’t get so much pleasure from the anticipation. They also don’t get the memories from it, either.

You could say, “Oh, but if you spend your money on going away for a weekend, that’s over, and then you haven’t got it. If you buy something nice for your house, you’ve got that forever.” In fact, the evidence just doesn’t show that. Spending money on experiences is better value for money, if you’re looking for an increase in well-being, and happiness, because you then have those nice memories that you’ve made afterwards. That’s what I would advise, in terms of spending money.

In terms of spending less money, it is things like being aware of being wary of looking for the middle … buying the middle item. Looking to see where you can make savings, regardless of how big the thing you’re buying is, to try and make those savings. To try to work out ways that you can do that. You could also trick yourself into saving up more money, if you’re trying to save money for a rainy day, or save money for when you’re older, and will need it.

Then things like, if you put your money in an account, even an online account that’s easily accessible, if it’s geographically further away … like if the name sounds like it’s further away, you’re less likely … the evidence shows you’re less likely to get that money out and spend it. We still have this attachment to money as a concrete thing. I think that even though we know that money in the bank, I know I can’t go into the bank and say, “I’d like to see my money in a box now, please,” because it’s not mine. It’s mixed up. It’s numbers on a screen. We know we can’t all have our cash at once. That’s the problem with runs on banks.

It’s not like that, but we still have this idea that somewhere is my money locked away in a savings account, my account somewhere. We actually believe if it’s further away. In the UK, I’ll give the example of, if you live in the South of England, then you want to keep your money in the … put it in the Royal Bank of Scotland, even though you can get just as easily, really. The banks are down here, too. Vice-versa, you should choose a Southern bank if you live up North. I’m sure there’s equivalents in the states of that. Little things like that can trick us into spending less.

There was a really clever scheme called ‘Save More Tomorrow,’ that a psychologist in the states started, where people don’t want to save more of their money now because we all think we need to buy everything we buy now. We think, ‘Oh, I haven’t got any spare money. So how can I save that?’ They got people to commit to if they had a pay rise in the future, that they would save say, 2% more, and that they would commit to doing that. It would come from their salary, and go into an account for them. They could still spend it, but that they would commit to more in the future.

We all think, ‘In the future, that will be okay, because we actually all think erroneously that we’ll have more money in the future. Which, we probably might not. Actually, committing to it in the future seems so much easier than saving it now, and that was really successful in getting people to save more money.

Pedram:

Because they were willing to offset that, and say “I will take out it future funds for that, because that makes sense. But right now, I need what I got.”

Claudia:

Yeah. They think, “Right now, I need it.” They think in the future, it will all be all right, because they’ll be excited by their pay rise anyway. The trouble is that you get a pay rise, and people just start becoming accustomed to that. You buy slightly nicer things. You slightly start trading up. You go and stay somewhere, and you have somewhere a little bit nicer this time. Or, you go for a slightly more expensive meal. We gradually trade up without necessarily noticing it. Yeah, if you commit to it for the future instead, then it’s at the same time as you get your pay rise. That’s still exciting. You still get to keep some of it. You still get to spend it on nicer things, but you’re saving some of it as well.

Pedram:

What’s your take on where this money should go? Say you’ve gotten decent at saving it, you lock it away in a Northern bank, or somewhere else, and you’ve finally started siphoning off some of the flow to a bucket where it’s getting saved. CDs, investments, mutual funds, does it matter? This is a big can of worms, but a lot of people save their money, and it doesn’t really appreciate. If you leave it in the bank alone, you’re barely making 1% in America.

Claudia:

Yeah, I mean of course, yeah. Interest rates are so low at the moment, but it’s hard to … They’re often not barely beating inflation, if at all, and so the money is depreciating, really. Then, people will always need to make those decisions about how much risk they’re prepared to take. Are they prepared to invest it in some kind of fund where there is going to be a risk? Or, are they determined to keep it, and to have it there. Then, I think it depends on how much you can afford to lose it. Whether you can, or whether that would be devastating if you were going to lose it. Anything with a risk, people should only be investing an amount where they don’t mind it going down a bit, where they can’t cope with that if that happens.

If this is your only rainy day money, then the rainy day might happen. Maybe you need to keep that money. Other people will try buying things, like buying art, or buying different things. Then of course, it all depends on whether … how skilled you are at spotting what it is that people are going to want in the future. How skilled you are at working those things out, and whether you actually will be prepared to sell those things in the future. If you buy a picture, and you really love it, then even if it goes, are you really going to sell it?

Pedram:

Right.

Claudia:

You possibly aren’t.

Pedram:

No, you’re attached. Yeah, I know people with really amazing collections that they can never part with, so now that money is out of the flow.

Claudia:

Yeah.

Pedram:

They’re not going to spend it, so that’s not really realized savings.

Claudia:

Yeah.

Pedram:

Maybe their grandchildren will unload it at some point, kind of thing. Okay, so then what about the other side? How do we look at generating more? How do we look at bringing up the flow of said money so that we can not live in as much scarcities. If we got better at this, then there is opulence. There are yachts. There are really cool things you could do with more money.

Claudia:

Yeah. Yeah, I think here is the question of whether people definitely do want more money or not, and whether it’s worth … what it’s worth doing to get that more money. Some people will decide from scratch that they are going to go into a career that will make them money, and that this is what they are aiming for. For them, this is their meaning, and that’s what they want to do, and they measure success by how much money they make.

Many other people will decide that they would rather trade some of that money for doing something more interesting, and something that feels meaningful to them. Of course, there is plenty of evidence, if you look at the evidence on well-being, that if people do something that they feel is meaningful, that they feel is worthwhile … then they are happier and their well-being is higher in the long run.

Are You Spending Money On Things That'll Make You Happy? - @claudiahammond via @PedramShojai

I think it’s a tricky balance to decide, to set out to decide, “I’m going to make lots of money.” I think it possibly won’t bring you the result that you want. I think that if when young people are looking what careers to have, I think that at the moment, because people are nervous about the future and what will happen, there is a tendency for some people to say, “Well, I’m just going to go into something that might be boring, but it’s kind of boring, but safe. At least it will be a steady job.”

I think that steady jobs are things that are gradually disappearing anyway. What matters is the different skills people have, and the way they get on with people, and how they can put those things into practice and flexible, to move around, possibly doing lots of different jobs, different kinds of work. I think if somebody does the thing they really, really want to do, then chances are, they will be better at it than the thing that they don’t want to do. If you’re the person who’s better at it, then the chances are, you will get higher up in that, and then earn more money doing that.

I think people need to be very careful about making whole life decisions based on just on trying to make money, if they’re trying to be happy. The whole research on money and happiness is fascinating, because there is this thing … for a long time, that was thought to hold, called the Easterlin paradox, after the researcher, Richard Easterlin. This is the paradox is that within a given country, on average, the people with more money, are on average, happier than the people with less money. When you look around the world, it’s not the case that the richer countries are, on average, loads happier than countries with lower incomes. There’s this strange paradox there.

It used to be thought that happiness levels rose until there was a basic income of maybe $20,000 a year. Once a country had an average income of that, the happiness wouldn’t go up anymore. Now, within the last couple of years, with much bigger data sets, with people followed over much longer lengths of time, it seems that maybe average happiness levels will go up to people possibly earning as much as $75,000 a year, quite a lot more. It is true that within an individual country, the people are happier if they have more money. Of course, that doesn’t mean that there aren’t plenty of miserable rich people, and plenty of poor happy people as well. It’s only something that tips the balance a bit, rather than something that’s changes it completely.

If you look at stories of lottery winners, then lottery winners, on average, will report that they get a little bit happier, but not as much happier as they expected. Interestingly, lottery winners are really interesting people to study, actually. We tend to like this idea, and it’s partly because they’d won it and we didn’t, people tend to like this idea that they’re wasting their money and that they’ve spent it all in a year. You see stories in the papers of people who wasted the whole lotto, or things that went really, really wrong for people. We slightly like seeing those stories.

In fact, research with lottery winners shows that people are actually very sensible about it, and that most lottery winners, pay off their mortgage, possibly buy a nicer house, pay off their family’s mortgages, go on a really nice holiday, buy a nice car, and then they invest it quite sensibly after that. Most of them actually make it last quite a long time, rather than just splurging the whole lot.

I mean, there have been some stories of lottery winners where everything goes completely wrong. There was this guy in the states in 2006, Abraham Shakesphere, and he won 31 million dollars. It went wrong. Colleagues said that the ticket had been stolen from his wallet, and then he met a woman who was going to run his affairs for him. She said she wanted to write a book about how everyone was trying to take his money, but that she would run his financial affairs for him. Then, he was found dead, buried under concrete, and she went to prison for his murder. It all went very, very wrong. Yeah, there are occasions like that where it all goes really wrong. I think it’s interesting that people sort of are interested in those stories. We almost don’t want what we feel are undeserved riches just sort of appearing with people.

Pedram:

Yet, we buy lottery tickets.

Claudia:

Yeah, we buy lottery tickets, and we also expect the winners to be nice, even though the word … the clue is in the title. It’s called a lottery, and people are horrified when it turns that a convicted … someone convicted of some terrible crime later wins the lottery. People will say, “Oh, but that’s not fair.” Of course, it is a lottery. That’s the idea.

Pedram:

Yeah. Yup, the whole lottery thing is a hail Mary, like completely senseless way of putting your money into anything. The psychology of lottery, that’s probably volumes of books written about that alone.

Claudia:

Yeah.

Pedram:

It’s insane.

Claudia:

Yeah.

Pedram:

The fact that people feel like they have a chance, and that’s going to be there way out.

Claudia:

Yeah.

Pedram:

Of misery, is crazy.

Claudia:

Yeah.

Pedram:

People who do it.

Claudia:

That’s one tip I do have. Another tip I do have is if you are ever going to play the lottery, not to use the same lottery numbers every week. If you do always pick the same numbers, then you have to go in for it, in case you find out that you’d lost. That regret would be too much to bear. There’s the sting of regret aversion, in psychology, we really hate regretting things. We will spend all sorts of money in the hope of not regretting things. Insurance does very well from people hoping not to regret things later. With lottery tickets, you need to not keep buying the same number.

Some places, like in Holland, there’s a really clever lottery. Which is clever from the lottery runners point of view, where it’s people’s post codes go in for it. You can know whether you would have won or not from your … whether your zip code won. You can always know, but you only win, obviously, if you bother paying for the ticket, but you’ll know that you lost. All your neighbors will win, too, and you won’t.

Pedram:

Wow. Wow, talk about feeling excluded.

Claudia:

Exactly. Yes, then you’d really regret that.

Pedram:

Yeah.

Claudia:

It’s quite popular, that lottery. It does well.

Pedram:

How different is it over there. You all invented mercantilism, but I feel like America has run with it. Where everyone over here … I think someone just quoted this on this on the show, it was like a Steinbeck quote. It’s like, “Every poor person in America feels like they’re a millionaire with bad luck.” Everyone here thinks that they’re just one quick turn away from having riches, and so they just have to make a couple different decisions. Maybe buy a lottery ticket, maybe think of some new patented thing. There’s this hysteria around that, too. It’s not reality-based, so then they’ll spend $27 on junk food, and then they won’t have any savings.

Claudia:

Yes. I think it is slightly … less so in the UK. I think they’re slightly … Unfortunately, in one way, sort of less of an idea that anyone can make it, and more of an idea that … particularly at the moment, social mobility is decreasing, really. It’s getting harder for different people to make it. It will be interesting to see whether or not that does change.

I think there’s always people hoping, but I think there’s less of an idea that “Oh, it’s just around the corner.” I think there’s more of an idea that it’s going to be a longer, harder, slog to try and get it. More of an idea that things are set up unfairly, and that that will be really hard to get, if you don’t know the right people, per se.

Pedram:

A lot of people work hard. A lot of people put in long, hard hours. There’s plenty of good work ethic out there. People, for the most part, show up to work on time, park their asses in a chair, whatever they’re doing, and do what’s asked of them throughout the day. Yet, they don’t really have financial security, and they’re constantly worried about money. Where is the disconnect? Is it financial literacy? Is it understanding how the flow of money is supposed to work? For people who have a fixed income, that can’t seem to get ahead?

Claudia:

Yeah. There is some evidence that straightforward financial literacy can make a difference, but if people are better at numeracy, then they can make better decisions about it. I think also, I think that sometimes people … There’s a tendency for other people to think well, “Oh, how can people make such stupid decisions, and take out … why would they take out a payday loan when it’s going to have exorbitant interest rates. You’re never going to be able to pay that back, and you’re going to get more and more into debt. It’s clearly a ridiculous thing to do.”

I think it isn’t, and I think that there’s been really interesting research on this. Again, from the states, actually, on the whole idea of scarcity. When money is scarce, when anything is scarce, we become very focused on it, and our thinking narrows. Even in games, if you make things temporarily scarce, people will get worse at those games. They’re actually suggesting that there’s some evidence that people will … the scarcity and the stress of that actually causes people to make worse decisions.

If you think about something like payday loans, then people never think that they’re going to be racking up those interest rates, because they really think they’re going to pay it back the next week. The short term thing has happened, like say, there’s something wrong with their car. They need their car to get to their job, and they need the money until payday. It makes sense to borrow the money now, and pay it back next week so you can get the car mended, you can still go to your job, and you don’t lose your job. That’s not a stupid decision. The problem comes that then the next week, something else happens and you can’t pay the money; and because you can’t pay the money back, you’re then stuck with these really high interest rates.

Then in a way, it’s the loan systems that’s a problem, because what people really want … often there’s things about how you can put all your loans together, and people will work that out for you. Actually the evidence shows that what people want is to be able to borrow money short term. They don’t actually want to put it into some really long term debt, because many people don’t like the idea of having debts at all. There’s this kind of exception made, and we make a mental exception for mortgages, and don’t quite count those as normal debts. Obviously, they’re the only way to get a house, but we don’t like the idea. Most people don’t like the idea of just having general debts. They want something short that they can pay off. What you need is more community mutual type schemes, where you can borrow on a short term basis at a sensible interest rate instead. 

Pedram:

… Access the capital is huge, right?

Claudia:

Yeah.

More Meaning = More Happiness - @claudiahammond via @PedramShojai

Pedram:

In small businesses, that’s been a big issue here in the states with small businesses.

Claudia:

Yeah.

Pedram:

Ever since the economy crashed, is the small individual mom and pop businesses … especially if you just have a ‘job-job.’ Access to capital, and available credit, has been there for some and they’ve abused it, and they messed it up, or they got into trouble, they got upside down, they lost their credit. Without that, capital is oxygen in the economy. You need it to survive in a lot of ways.

Claudia:

Yeah.

Pedram:

You need your car to get to work. If not, then the real money dries up, and then you’re in big trouble.

Claudia:

Yeah, and there … have been, as you say, since the crash, plenty of really sad stories where people only needed a little bit more to tide them over from the bank, and the bank said no. When you just look the story on paper, yeah, that doesn’t seem to make any sense. It doesn’t seem to be that irresponsible, with that lending, but that things just had tightened up so much. I think that is then really difficult for people, because as you say, capital is what you need, and lending … being able to borrow, and that money is what you need.

That’s why I say in low income countries, in sub-Saharan African countries, micro-credits and so on, have been successful because they’re allowing people, for the first time, a way of getting credit where there never was that. You can’t expand and get bigger until … credit is what helps businesses go. It just is money is a kind of form of trust on paper, or figures on a screen. Then, that allows strangers to trust each other, which has allowed strangers to trade each other in loads of different ways.

Later on, I’m going to go and see a gig, a concert, and I know that I don’t know them. but a load of strangers, we’re all going to turn up at this place. We all know that we’ve handed over one piece of paper and got another piece of paper in exchange. We all trust that this meant something. That this money meant something, so that we could all be there for this thing to happen. You can then do things with strangers, rather than with really [tiny communities 00:32:38].

It’s really striking that there’s no … societies in the world that have, once they’ve invented currency, have gone back to not having it. It does allow us to do extraordinary things. Money can cause an enormous amount of problems, but it does allow us to trade and to cooperate in ways you could never cooperate normally.

Pedram:

Sure. We did one of our interviews for our next movie, which is on conscious capitalism, was with Whole Foods. Then, we went upstairs and interviewed the Whole Planet foundation, which is a separate foundation that they’ve launched, and all that. A big part of what they were doing was micro-lending in the third world. They’re taking these funds and it’s like, “Hey, you need $250 to get another goat, which will get you over the hump, or whatever.” Majority of the lending happened to women.

Claudia:

Yeah.

Pedram:

They found that women, the default rate was much lower with women, because they just had the sensibility of not spending money that they needed to pay back or whatever. The striking part of this … it’s a huge success … There’s a number of organizations doing this. The striking part of this to me was that their default rate was lower than 3%.

Claudia:

That’s amazing, isn’t it?

Pedram:

By and large, these micro-loans are being paid back. Every dollar you’re putting in, 97 cents are still circulating and going back. There’s such a low loss level that there’s just … All these people that I was talking to, there’s all this money going into micro-lending, because it’s actually working. It’s helping good people rise up and bring up economies. There’s a lot of promise there.

Claudia:

Yeah. Yeah, there definitely is. There’s been an extraordinary idea, and that as you said, have done it absolutely grassroots level. Often the loans are to women. I think we’ll be seeing to make a real difference. That, combined with … because with mobile phones now, people can check the prices of things. People can text, and find out what the price is in the market, in the town, and what they should be being charged, et cetera. That’s made a real difference, as well, to individuals and families being able to get things at sensible rates rather than a few people creaming off everything at the top. I think the combination of that, and the combination of what mobile technology can do with the micro-credits will be really extraordinary, actually.

Pedram:

The democratization of information with access to capital.

Claudia:

Yeah.

Pedram:

Yeah.

Claudia:

Yeah.

Pedram:

Then, these barriers to entry are cut out, right?

Claudia:

Yeah.

Pedram:

If you don’t need to go to the banker, and go through jump through all these hoops as much.

Claudia:

Yeah.

Pedram:

It’s a fascinating time, and there’s a lot of promise. It’s actually renewed my faith in capitalism. I definitely grew up around a lot of spiritual communities, and hippie types, and all that. There’s a lot of anti-capitalists sentiment out there, but there are certain elements to the market, the fundamentals to the market, and access to capital that drives innovation, that I think have been very positive. If we can lean into those things, there’s abundance for everybody, and there’s plenty to go around.

I want to talk about your book, because we’re running out of time. It’s called ‘Mind Over Money,’ by Claudia Hammond. What drove you to write this? It’s a big book. It’s got a lot of fascinating stuff in it. I know that it’s a heavy lift to write a book. Why now? Why money? What was it that drove you to say, “I need to help people with this?”

Claudia:

I think it’s such a pressing topic at the moment, and it is just something that people discuss so often. It was fascinating once I had started writing the book. The moment people would say, “So what’s your next book on?”

I’d say, “The psychology of money,” and people’s eyes … you see them sort of light up.

They go, “Oh why? What is it? What is it we should do?”

I end with a whole chapter of tips, all of which are based on evidence, not just me making up my opinions. It’s all based on evidence, because I think there are straightforward things that we can do, that we can take from research. These experiments have been done. The work has been done, if you like, in doing the research. There are things that we can do. We can, if you like, have mind over money. We can control it more, and make it work better for us. That can be done.

Pedram:

Great, great. I think we could all use a healthy dose of that. The one thing that I’ve realized in my audience base, with my patients, and students, and all this, is that people … whatever your opinion is of money, unless you’re living in some hermitage, like locked away in the Hindu mountains somewhere, you have to touch it. You have to deal with it.

Claudia:

Yeah, yeah.

Pedram:

Your cell phone carrier wants it. The taxi driver wants it. If you have to touch money, you have to understand what it is, just the basic fundamentals so that your interface with it isn’t one filled with stress, and one filled with negative emotions, and stuff.

I think this is very important work. I think everyone in our world, who lives in the world where they have to touch money, should know more about it. I think your contribution to this has been really great. Thank you.

Claudia:

Thank you very much. Thanks.

Pedram:

Yeah, thanks for being on the show, and good luck.

Claudia:

Thank you.

Pedram:

Good luck with the book launch, yeah.

Claudia:

Thank you for having me. Cheers, thank you. Really nice to talk to you.

Pedram:

Yeah, cheers.

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