Psychology Of Money Research Paper

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1. Introduction

As a major tool for exchanging goods and services, money plays a crucial role in economic and social life. It serves as a legal tender and a unit for calculation, and allows values to be maintained over time. Tied to these economic functions, money has a large influence on human experience and behavior, delimiting consumer options, life styles, access to education, and even chances on the marriage market. Societies differ considerably regarding the distribution of income among their members and in the extent to which individual economic resources determine access to cultural goods such as education and health care. But individual differences in income almost invariably provide a major indicator of social inequalities. Being one of the multiple markers of social stratification, money carries social prestige and may affect social relations as well as people’s self-concepts not only due to its economic function but also through the symbolic value attached to it.

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Despite the trend of increasing globalization which is particularly evident in international finances and the increasing importance of stock holdings among private investors in many nations, societies still differ beyond their financial systems in cultural norms and the collective rationale which shape attitudes towards money. Collective experiences with money can affect whole nations, as was evident in the fear of inflation in Germany which followed experiences after World War I. This points to the importance of socialization not only in attitudes towards money but also for expectations concerning the larger economic system. Furthermore, cultural norms guide the display of one’s financial resources in public. General financial issues such as prices and the tax system are frequently discussed. However, in many cultures—except for materialistic cultures as, for example, in south Asia— personal financial assets are mostly considered a private issue which is not discussed even with parents or friends. This lack of openness may serve to prevent social envy in the case of personal affluence or help to protect one’s social image if personal resources are scarce. However, other social symbols such as clothing and cars are allowed to undermine this social norm.

Given the importance of cultural factors, the research available on psychological aspects of money and finances suffers from a focus on Western systems. Furthermore, psychologists have paid surprisingly little attention to money as a research topic (for an overview see Furnham and Argyle 1998) leaving this domain largely to sociologists and economists. Drawing on relevant research from different disciplines, we will first address the significance of money for personal well-being and social relations. Next, we will turn to beliefs and values connected with money. Thereafter we will address issues concerning the handling of money, looking at correlates and predictors of spending, saving, and donating money, as well as evading taxes. In a final section, selected research on effects of poverty will be summarized.

2. What Money Can Buy: The Personal And Social Significance Of Money

Although folk wisdom claims that money does not make happy, findings point to an overall low, but significantly positive relationship (about r = .15 to r = .20, see Furnham and Argyle 1998). Not surprisingly, the prediction of happiness from economic resources improves if other indicators of wealth besides income are also considered. Pointing to the importance of social comparison processes, relative income is more important than its absolute level, because people define themselves as wealthy or poor with regard to others. In countries with high poverty rates and extreme income differences like India or Brazil, the relation between happiness and income is substantially stronger. Across 55 nations, the correlation between income and happiness reaches about r = .50 (Diener et al. 1995). Finally, increases in income during prosperous periods have a positive influence on citizens’ well-being, whereas income loss during depression periods have the opposite effect. However, the effects of changes in income on changes in satisfaction do not seem to be long-term. People adapt to higher as well as lower levels of income (for an overview see Furnham and Argyle 1998).

Much attention has been paid to the significance of money in family formation and family life (see White and Rogers 2000). Economic assets play a considerable role in marriage decisions, not only among women, who have traditionally been assumed to consider their partner’s bread-winning potential, but also among men. Men’s earning and employment have consistently been found to increase the likelihood of marriage, and even women’s increasing participation in the labor force does not seem to render male income less important. Furthermore, the income of both men and women, particularly the income differential between husbands and wives, affects the division of household labor between marital partners beyond the time restrictions due to their employment. There is more sharing of household tasks between spouses if wives contribute more to family income (Coltrane 2000). Economic resources also affect family relations. Conflict over financial affairs seems to be among the most important sources of discord in partnerships and family violence has often been linked to the lack of financial resources. As to divorce, findings demonstrate a positive correlation between men’s earnings and marital stability (e.g., Hoffman and Duncan 1995). Benefits from women’s higher earnings are less clear, because the stabilizing effect may be counteracted by the higher economic independence of the woman which contributes to greater dangers of divorce (the ‘independence effect’). Furthermore, the causal link between women’s income and marital quality stability may be bi-directional: Marital discord was found not only to be affected by women’s earnings, but also to instigate women’s higher labor force participation, thus leading to higher earnings (see White and Rogers 2000).

3. Attitudes Towards Money

Attitudes towards money may be understood within a larger system of values which has been broadly distinguished as materialistic or postmaterialistic. Based on Maslow’s hierarchy of values, Inglehart (1977) claims that materialistic needs, related to stable economic resources and physical security, are basic and will be foregrounded in a person’s value system if they are not sufficiently fulfilled, specifically—coined in a socialization hypothesis—if they were lacking during childhood and adolescence. Conversely, postmaterialistic values, including political participation, the freedom of speech, and self-realization should develop primarily as materialistic needs are satisfied. In line with this assumption, research shows that materialistic values are less foregrounded among the well-educated and those with higher income, and that postmaterialistic values have become increasingly evident among younger generations.

It is remarkable that money is associated with ambivalent characteristics and paradoxical meanings. Money is associated with positive values like security, independence, freedom, prestige, and possessions as well as with negative associations like anxiety, anger, greed, envy, and conflict. People owning much money are likely to be seen as hard-working, successful, and even beneficent, but are also at risk of being regarded as superior, selfish, capitalistic, and hostile. Given these complexities, research has focused on understanding the basic structure of attitudes towards money.

Several different questionnaires have been constructed and psychometrically examined in order to investigate the fundamental dimensions underlying attitudes to money (Furnham and Argyle 1998). For example, the Money Attitude Scale (MAS) differentiates between the factors of power/prestige, retention time, distrust, quality and anxiety, whereas the Money Belief and Behavior Scale (MBBS) measures the factors: obsession, power/spending, retention, security /conservative, inadequacy, and effort/ability. The short version of the Money Ethic Scale (MES) summarizes three factors: budget, evil and success. All the different approaches to the measurement of attitudes to money illustrate that the attitude structure is complex and multidimensional with clearly differentiated factors, reflecting the ambivalence of money. Some of those factors are linked to clinical traits, such as anxiety or obsession, whereas others are related to the retention factor, like saving and investing money. Other factors like power, prestige and spending show that money can also be a means to influence and impress others.

Affected by parental income, education, social class, beliefs, parenting practices, and money habits, attitudes to money are formed early in childhood and remain fairly consistent throughout one’s life. Empirical studies show that high-income people tend to think money is less evil and rather reflects one’s achievement. Participants with a High Protestant ethic are more likely to budget money properly and tend to see money as evil and representing power. Highly leisure-oriented individuals see money more frequently as good, representing achievement and power/freedom. In contrast to students with credit cards, those without are more likely to score higher on money attitudes of obsession and retention. Other findings illustrate that compulsive spenders have relatively lower self-esteem than normal consumers, believe more that self-esteem can be enhanced by money, and are more convinced that money solves problems.

There are also attitudes towards the notes and coins as the actual currency. Bruner and Goodman (1947) show the influence of subjective values and objective needs on the perception of currencies by asking rich and poor 10 year-old children to match circles of light corresponding to a range of coins. The results illustrate that the size of socially-valued objects such as coins are judged larger than neutral objects like grey discs. Moreover, the greater the value of the coin, the more biased the estimation. This overestimation effect occurs more strongly for poor than for rich children.

4. Handling Money

4.1 Saving, Consuming And Investing Money

The decision to save money or to spend it for consumption is partly based on rational economic considerations. However, saving is also a socially accepted goal, formed during socialization and by norms of the social environment. To predict people’s saving behavior, economists focus on factors such as the increase of income which leads to a disproportional increase of savings, social comparisons with other people which influence habits of consumption and saving, and saving as postponing consumption in order to guarantee a constant level of lifelong consumption. The framing approach of the ‘behavioral life cycling’-hypothesis by Shefrin and Thaler (1988) stresses the importance of individual self-control, self-imposed rules, and prior commitments for explaining saving. Different forms of money, e.g., regular income, assets or windfalls, are subjectively categorized and assigned to different ‘mental accounts.’ The propensity to save all or part of one’s income is assumed to depend on which mental account the income is referred to.

Katona (1975) emphasizes the importance of differentiating between people’s ability to consume or save and their willingness to do so. He has pointed out that people’s beliefs about economic issues mediate the amount of money they save. People’s consuming or saving behavior is based on their expectations regarding the future development of the economic situation. The Index of Consumer Sentiment (ICS) developed by Katona (1975) predicts turning points in business cycles and expresses changes in optimism or pessimism about the financial future. It was found that total saving goes up when people become more uncertain and worried about the future. One-third of household saving in the USA is explained by the precautionary motive, in particular with regard to health and old age considerations. Because saved money is often used as a protection against economic risks, risk-averse subjects tend to have lower debts and save more money than risk-taking persons do.

Empirical studies show (Furnham and Argyle 1998) that age is linearly related to saving (the older the person, the higher the savings) and education has a curvilinear relation (the bestand the least-educated people save less, the better educated investing more of their money instead of saving it). Savers are more optimistic about economic circumstances and believe in personal control over finances; whereas nonsavers think themselves more as victims of external events, but also seem to blame themselves more when things go wrong. Savers get more social support from friends and relatives than nonsavers and thus more information about how to handle finances. Savers show more consistent shopping habits, like going to a few favorite shops whereas nonsavers tend more to shop around.

Psychological research on financial investments in stock markets focuses on investigating the heuristics people apply, since decisions are highly influenced by the context in which price information is presented and therefore salience and attention effects are important. For example, selective causal attributions provided by the media have a significant influence on investment decisions in financial markets (Andreassen 1987). By explaining recent changes in stock prices with good news after prices rise and with bad news after prices fall, reporters tend to focus on the sets of facts suggesting that change should have happened and omit the set of facts that suggest it should not have occurred. By these attributions expectations are formed that changes will either persist or regress to previous price levels. This can mislead investors and therefore result in wrong decisions.

4.2 Tax Compliance And Evasion

Twenty to 30 percent of taxpayers in Western industrial nations do not declare their income completely. Approximately 10–20 percent of tax is illegally evaded. The majority of people think their tax burden is too high, and that they pay more taxes than other people and even more than those with a comparable income. The lack of transparency of the tax system and people’s lack of knowledge about tax issues increases distortions in perception systematically (for overview see Jonas et al. 1999).

The economic approach suggests that paying and evading taxes is a behavior that is very rational, and is influenced only by the benefits and costs associated with tax evasion (like the subjectively-perceived probability of detection, the rates of penalties, the amount of one’s income, and the level of marginal tax rate. For an overview see Andreoni et al. 1998). However, tax evasion is not only a matter of rational calculation and utility maximization, but also involves psychological variables like an individual’s willingness to evade or comply. The more people experience money and profits in particular as an indicator of success and the more they perceive opportunities to do so, the higher the tax evasion. Negative attitudes towards the government, towards the fairness of the society’s resources allocation, towards the legislation, and towards the spending behavior of political actors are also important. Furthermore, tax evasion is lower the more important moral norms and religious values are for a person and the higher her integration in the society. Finally, perceptions of tax fairness, judged on the comparison of the individual’s tax burden and the government’s provision of public goods as well as the tax burden of other taxpayers, is also an important predictor.

4.3 Donating Money

It is amazing that, on the one hand people are willing to take illegal action to save money by evading taxes but, on the other hand, they voluntarily give money away by donating it to charities. The figures of the Charities Aid Foundation show for Great Britain that more than two-thirds of the people donate money for charitable causes. However, the relationship between income and donations is quite low (only about r = .13; Furnham and Argyle 1998). Considering the characteristics of people who donate money, it is found that people between the age of 50 and 65 give most, women give more money than men and are also more actively involved in volunteer work. Married people give about 20–40 percent more than singles with a comparable income. Having children leads to an increased willingness to donate (about 50 percent more than people without children). People who are religious give about three times more than people to whom religion is not important. Concerning contextual factors, more money is given if the request comes from a physically attractive person, a similar person, or an expert. More money is given in reciprocal relationships and to one’s own group. Touching the potential donors and eye contact are effective strategies for raising money. Furthermore, role modeling and conformity in groups proved to be crucial factors.

5. When Money Runs Short: Perspectives On Poverty

In the past decade, the problem of poverty has become addressed increasingly by social and developmental psychologists. Relevant research dates back to the 1930s when Jahoda et al. (1975, [1938]) introduced the ethnographic approach in studying a whole community hit by unemployment due to plant closing. Showing that different ‘reaction types’ (e.g., ‘unbroken,’ ‘in despair,’) emerged as styles of coping with the increasingly desperate situation, early findings inspired later stress and coping research. Addressing family adaptations to economic loss, Elder (1974) showed that the families’ adaptive reactions, along with parents’ stress, during the Great Depression, increased the likelihood of conflict and tension within families and shaped children’s short and long-term development.

Present research focuses on relative income poverty, defined by national poverty lines or by a per capita income of less than 50 percent of the average income. In contract with former static approaches, more recent studies consider the duration of poverty, e.g., suggesting that stable poverty is experienced by only a small minority of children in the USA while a large proportion lives for at least two years in poverty. In general, findings show that long-term poverty has more negative effects on well-being and children’s behavior than short term deprivation, but the latter is often detrimental, too.

As to the effects of poverty, research pays increasing attention to children who have been pointed out as an important risk group of poverty in many countries, especially if living with a single parent, having two or more siblings, or belonging to ethnic minorities (e.g., Seccombe 2000). Most studies report deleterious effects of poverty on both children’s and adults’ well-being and health, including lower life expectancy, higher infant mortality, and more acute and chronic health problems. Disadvantages often begin during pregnancy leading to low birth-weight and undernutrition, thus increasing the risk of serious illness. In explaining these findings, impaired health among the poor has been linked to limited access to medical or prenatal care, to less healthy lifestyles, nutritional deficiencies, and low levels of education or literacy, making it difficult to use health services or follow instructions. The negative consequences for the immune system of high levels of emotional stress have also been pointed out.

Furthermore, children living in poverty have more socio-emotional and behavior problems, have more difficulties in peer relationships, and do poorly in school. Many of these effects can be linked to parental stress which results from the economic pressure they face and which spills over into the parent-child relationship leading to less nurturing, more authoritarian, and more inconsistent, harsh physical discipline. Hence, impaired parenting is important in mediating the negative effects of income loss on children. However, individual and family resources, (e.g., emotional stability, a harmonious marriage) may buffer the consequences of income loss for family life and children’s development. Increased social support from family and friends has been shown to reduce the stress and violence experienced by poor families, and to improve self-esteem. High rates of poverty in the neighborhood increase the likelihood of children’s externalizing problems even beyond the individual family income. Given the spatial segregation of poor families, problems arising from the lack of family and community resources are likely to accumulate.

Finally, it should be noted that running up debts is often used to compensate for a lack of money. Despite the risk of serious financial problems due to long-term obligations, only a few studies in psychology address such issues. Lea et al. (1995) report that debtors have fewer money management facilities than nondebtors, rate their ability at money management lower, and have shorter time horizons. Debt counseling has become an important task in social services provided to the poor.

6. Conclusion

Overall, research suggests that money is an important resource which affects many domains in life. Although much of its psychological significance seems to derive from social comparison processes, the lack of money may have far more substantial effects. Attitudes towards money are complex and often ambivalent and, somewhat similarly, determinants of handling money go beyond economic rationale. It would seem fruitful to include more genuinely psychological perspectives in studying the significance of money in people’s life.


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