More evidence that evolution ensures we are not as smart as we think we are
This is a quick follow up on my last post about research showing we’re hardwired by 35 million years of evolution to stuff up in some aspects of our financial decision making.
My friends the behavioural economists believe “the money illusion”, that is our inability to tell the difference between real value (the bundle of goods that money can buy) and nominal value (the actual amount of money needed to buy the goods), explains a hell of a lot of the world’s financial and social stuff ups.
The effect of inflation is a classic. We get most unhappy about a 2% cut in our nominal wages (our actual pay packet), but are less bothered with the idea of a 2% pay rise at a time of 4% inflation.
You are of course equally worse off in both situations.
The standard economic assumption is that we can differentiate between nominal and real values.
A study, “The medial prefrontal cortex exhibits money illusion”, published by the Proceedings of the National Academy of Sciences, shows our brain reward circuitry is being fooled by this money illusion.
Warning the report is a bit hard work, but the abstract gives a good snap shot.
The brain surgeons among you will know that the medial prefrontal cortex is the region of the brain that involves complex thinking, personality, decision making and moderating correct social behaviour.
Hat tip – Nudges.org
A comment passed on to me by a friend – “I vaguely recall reading of a study of Harvard graduates that showed that they were less interested in the quantum of their remuneration than how it compared with their colleagues. They would prefer (say) 70k when their colleagues earn 60k, than earning 80k when their colleagues were earning 100k. In other words it was more important for them to be on top of the heap, rather than earning a larger salary…. hmmm, must be all that education they received.”
admin, August 13, 2010 at 1:42 pm