Your Money Personality: Tightwads or Spendthrift?
|April 9, 2012||Posted by Roshawn Watson under Uncategorized|
By: Roshawn Watson
Were you clenching your wallet or purse strings straight from the crib? It is interesting how some people are characterized as being naturally gifted with money whereas others appear challenged from the beginning. I always stress that most of personal finance is behavior; however, we often ignore what drives that behavior. Surprisingly, it is not all about discipline. There are reasons frugality comes easier to some. Over the years, numerous publications have shed light on the origins of financial behavior. In this article, we will discuss some of the biological etiologies of our spending orientations.
Could Biology Explain Your Spending Tendencies?
It turns out that most of us are relatively unconflicted about many purchases; however, some of us are either super-sensitive (tightwads) or distinctively blunt (spendthrifts) to spending money. Recent research has indicated that insula, a neural substrate involved in conscious urges, may hold the key to explaining some of this variability. Insula determines the amount of pleasure (too little insula) or pain (too much insula) derived from events, such as spending money or smoking. Tightwads have too much of it resulting in pain, and spendthrifts have too little and consequently experience pleasure.
A recent study looked at the brain scans of volunteers after they were shown an item and then the item’s price. About 30% of the volunteers had elevated insula (tightwads) and 20% had reduced insula (spendthrifts). In both cases, there was regret. Spendthrifts became regretful because they were more likely to overspend. Tightwads experienced regret for not spending enough and were relatively less happy than their unconflicted and spendthrift counterparts.
More Than Just Feelings
The implications of our spending orientations go beyond feelings. For example, spendthrifts are three times more likely to be in debt than tightwads regardless of income (Scott Rick, George Loewenstein, and Cynthia Cryder, 2008). This highlights perhaps the biggest limitation of focusing solely on increasing income: you cannot outearn bad spending decisions, which is why some degree of frugality is important. This creates a perplexing situation: what’s one to do when his or her biology is warring against common sense?
Some people counterbalance their natural spending orientations by selecting partners who differ in their spending habits. This is a true case of where opposites attract. Both spendthrifts and tightwads tend to marry spouses’ with the opposite spending orientations. In such unions, the partners tend to balance each other out initially, so they don’t go to either extreme. The tightwad may like the spendthrift’s sense of adventure and fun whereas the spendthrift may like the tightwad’s dependability and stability. Moreover, spendthrifts that marry tightwads generally do better financially than couples made up of two spendthrifts. However, as time progresses, important conflicts arise, particularly with larger purchases, such as homes and vehicles. Obviously, these purchases have a much greater impact on long-term financial goals compared with simply choosing a recreational activity. Accordingly, such purchases can result in marital discord when spouses can not get on the same page. Ironically, the very spending differences that initially attracted them to each other become the source of contention.
Incidentally, when two people of the same spending orientation marry (two spendthrifts or two tightwads), they generally have a much happier marriage. Not surprisingly, couples comprised of two tightwads are the best off, financially speaking.
Pain of Paying Cash
One of the first things that came to mind when reading these studies was the pain of paying with cash. Recall, one study indicated that participants spend 12-18% more when spending plastic money compared with paying with cash. The data from the fast food restaurants suggests the number may be as high as 50%. It is no wonder why debit and credit card machines are so ubiquitous now. Clearly, the ability to use plastic money affects our spending behavior. In exploring the mechanism behind this, researchers found that some individuals actually experience pain when they are forced to part with dollars and that this pain is diminished (blunted) when using plastic money.
In light of the insula research, I now suspect that the operative phrase is “some people.” I wouldn’t be surprised if they performed a subgroup analysis, they would possibly find that a disproportionately high number of people that experienced pain when paying for purchases with cash are tightwads. That certainly is in line with what the insula research has shown thus far: tightwads derive some degree of pain from spending. Moreover, the potential implications of the insula research are particularly interesting for the spendthrifts: suppose aberrant insula response predisposes spendthrifts to not experience the “pain of paying cash.” Obviously, they have little to no qualms utilizing debt (recall they are indeed three times more likely to be in debt than tightwads), so it is not a stretch that perhaps they may not have the same apprehension to spending their paper money either. If this is true, what other contrived checks and balances commonly used to keep our finances in order are not particularly suited spendthrifts? The possibilities are truly endless. This is why in 4 things to stop doing with your finances, we discussed the importance of recognizing the biological etiologies for poor financial behavior.
Of course, it is unclear whether the pain experienced when paying with cash is indeed the result of insula.
Perhaps the biggest challenge in reviewing this literature is my concern that spendthrifts will disavow all responsibility for their financial decisions because of purported biological predispositions. Clearly, the origins of our behavior are multifactorial, so there is no one cause for all misbehavior, regardless of whether exploring biological, psychological, or other origins implicated in spending orientation. For instance, research has also shown that smokers with damage to insula have disrupted addiction to smoking: they can “quit smoking easily, immediately, without relapse, and without persistence of the urge to smoke.” Clearly, this finding doesn’t mean that smokers with normal insula have an inability to quit. Likewise, spendthrifts with low insula must similarly find means to reign in their spending too, regardless of their biologic proclivities.
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Reader Questions: Given what we have just discussed, should tightwads be celebrated for what comes naturally? In contrast, should spendthrifts be vilified when they are suffering from an insula deficiency?