If you need money, the natural inclination for most of us is to figure out how to earn more money. Writing for Scientific American, behavioural economist Dan Ariely, Kristen Berman and Wendy De La Rosa take a look at why that is and how that’s not always a good option.
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When we think about financial security, it’s not particularly surprising that we are more attracted to new earning opportunities than saving opportunities, even when the maths doesn’t actually favour it. To test this theory, the researchers asked participants to choose a preference between two financial situations, one where participants would save more money, another where they’d earn more but at the cost of a higher interest rate. Most people counterintuitively preferred the one where they were earning more money, even if that meant they were paying a higher interest rate on their debt. At the end of the day, here’s what the researchers decided:
All of this research indicates that we have a natural bias towards “earning” rather than “saving” when we’re in financial distress — not because we don’t know how to save money or we aren’t trying to save money but because we perceive earning money as a more productive way to increase financial well-being.
And while in some cases it may be beneficial to prioritise earning opportunities (such as when we are looking for a new job or investing in the market) it can also be a hindrance to asset building, and to financial well-being.
Of course, none of this is a universal truth, but it’s also not particularly surprising. Making more money means we’ll have more money, which seems like the best way to get out of any type of financial distress. But perhaps that’s not always the case, and the next time you’re trying to figure out how the heck to manage a budget when you’re broke, consider that your initial gut reaction to try and earn more money might be leading you astray.
This 1 Weird Trick Can Help People Grow Their Savings [Scientific American]
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