Mind Over Money: The Psychology of Money

The basic premise of Mind Over Money is: We let money control our thinking, sometimes in counterproductive and even destructive ways. We need a better understanding of our psychological relationship with money.

Claudia Hammond backs her ideas with 263 scientific studies. I sometimes do not cite the references of the research in my notes. Refer to the references portion of the book for more information.

The book is dense with information and studies, and sometimes Hammond mentions one study only to share another study that disproves the previous one.

The book does not give steps in how we could control our thinking of money, rather it gives scientific studies to explain why we behave in a certain way towards money.


Where do we get our understanding of money? Parents. Children acquire most of their knowledge from their parents through observation.

As children, we are taught that bigger numbers mean higher value. When Italy converted to the euros, Italians thought that there was not much difference between one and two euros. Using Italian liras, however, Italians thought there was a big difference between 1,000 liras and 2,000 liras.

Any change in the physical manifestation of money causes some psychological disruption.

In the United States, dollar bills still exist even though the U.S. government tried to convert to dollar coins (which all of G8 leading economies have adopted) because Americans still prefer the greenback over the heavier dollar coins. When Britain transitioned from £1 notes to £1 coins, people thought that the coins were more disposable than the notes even though they have the same value.

Money illusion – a phenomenon first noticed by economist Irving Fisher in 1928, refers to the tendency of people to think of currency in nominal rather than real terms.

Cash vs. credit/debit card – we tend to pay more with a debit/credit card compared to cash. Paying with cash seems to feel real compared to plastic. Our grip on virtual money is not as strong as actual money. What would happen to children in the digital age who see their parents use cards instead of cash?

Why the more an item costs, the more careless we are with money?

Shop 1 charges bike rental for $25, shop 2 (10 minutes away from shop 1) charges $10. Most likely we will go with shop 2 to save $15. If we buy a car and shop 1 charges $10,100 while shop 2 (10 minutes away) charges $10,085, we usually disregard the $15 of savings. (This is called relative thinking).

Food for thought: We could spend hours trying to find the best deal on an airfare. If we are paid per hour, the opportunity cost of lost wages could be high (if we spend a lot of hours finding the cheapest fare).

Big idea: Loss aversion is buried deep into our evolutionary biology

We all like the chance to win, but we’ll put more effort into not losing. The thought of even a small loss holds more power over us than the prospect of a larger gain. It seems loss aversion is buried deep into our evolutionary biology. Bear in mind those investors in the economic crash of 2008 who continued gambling on the stock market, hoping for an elusive win, even as their losses grew. Or the homeowners who were not in negative equity but refused to sell their houses for less than what they had paid for them, even though they could buy a bigger house at a cheaper price during the recession.

Neuroscientist Dean Buonomano suggests loss aversion stems from the time when the main obsession of humans was to find enough food. In prehistoric times, human beings prized the food they already had over the prospect of gaining extra food. Gaining extra food was welcomed but there was no way of storing it. On the other hand, losing food could lead to starvation.

We take out insurance (home, health, car) because of loss aversion.

Why we think high price is a sign of quality

In a study by Hilke Plassmann at the California Institute of Technlogy, 20 winetasters consistently expressed a preference for the wines they were told were top end and expensive, even though half of the time they were drinking a low-price wine. The tasters’ medial orbitofrontal cortex, a part of the brain that lights up when we experience something pleasant, lit up when they think that the wine was top quality. Real pleasure can result from the assumption that a thing is expensive, even if it isn’t.

Compromise effect

Stores sometimes display a high priced, low priced, and middle-priced items in the same row for the sole purpose of convincing customers that the middle-priced item is a good deal. Realtors take their clients to expensive and moderately-priced homes in hopes of convincing the buyer that the moderately-priced home is a good deal.

Compromise effect involves loss aversion. We think a high-priced item has high quality but an expensive price tag, a low priced item to have low quality, but the middle one to be without disadvantages. We are loss averse so we chose the one without disadvantages.

Painful pricing

There’s evidence that the part of the brain called the insula is activated when we think a product is too expensive. The same part of the brain that fires up when we anticipate physical pain.

Effect of anchoring on our perception of price

A study showed that people were prepared to pay more for a meal from a restaurant called Studio 97 than one called Studio 19, the sole reason being that 97 was the anchoring number in the first case, and 19 in the second.

Researchers found that if a cheaper model of car was offered for sale immediately after a high-end model had been sold, the final price went up.

Controlling the anchor: if you are a seller, you would want to anchor on the high price, to sell at a fair price. If you are a buyer, anchor at a low figure.

Big idea: A light touch can lead to more sales or tips

In a study, when a man selling a car touched a potential male buyer, on the arm, the buyer later rated the seller to be more impressive. In another study, waiters who briefly touched a customer’s arm had higher tips.

Big idea: Rewards are not always effective in motivating people

In 2004, the Portuguese government offered to waive the fee for their National Health System if their citizens donated blood. It increased donations but once the scheme was over, donation rates went down.

Small children given money to draw pictures will put down their pencils and crayons the moment the bell rings for break time, while those who are not paid carry on drawing intently.

Big idea: Giving cash to a friend doing you a favor is not always good

When you pay a friend for a favor, they would see themselves as laborers instead of doing it out of friendship. Thus, they will compare your payment to the actual costs if a laborer/professional did it. It is better to give the friend a chocolate or a book rather than cash.

Behavioral economist Dan Ariely warns against asking for favors from friends that relate to their line of work. The problem is that the friends know exactly what they could have charged and could feel as though they are losing money by being your friend.

Big idea: Offering big rewards does not always lead to a better performance

In high-pressure or high-stakes situations, we shift from autopilot to a conscious mode of thinking. We think about the task too much, turning something simple into something difficult.

Another factor that increases pressure and lowers performance is the distraction that comes from the knowledge that other people are watching you.

The prospect of winning big money trigger increased activity in the ventral midbrain, an area of the brain associated with rewards. Increasing this part of the brain overwhelms working memory, the one responsible for holding information and procedures temporarily in mind.

Dopamine could also affect performance. Having high dopamine before beginning a task that requires concentration, causes an overdose in the striatum resulting in the participant to lose concentration.

Why do rich people seem to not get enough of money?

Because they compare their net worth to richer peers.

Big idea: Thinking about money brings less pleasure in being in the moment

In a study in Belgium, students were given a piece of chocolate, and a researcher timed how long they took to eat it. On average, the students spent 45 seconds savoring the chocolate. But if they were shown a photograph of money beforehand, this savoring time dropped to 32 seconds.

Those with higher incomes and larger savings indicated they’d take less pleasure from the experience than people on lower incomes. This is called experience-stretching hypothesis – the idea that once someone has been to a Michelin-starred restaurant and tasted the best meal in town, the simple joy of the tuna melt in their local cafe doesn’t seem quite as appealing any more.

Big idea: Worrying about money can decrease intelligence

In 2004,  a group of psychologists asked 500 sugar cane farmers to perform a series of cognitive tests. Pre-harvest, when farmers are low on money, the stress of worrying about money had a staggering impact on the farmer’s cognitive abilities. Post-harvest, their IQ scores were nine to ten points higher compared to pre-harvest. Researchers suggest that people with money worries have less “bandwidth” in their brain to focus on other things. Diminished bandwidth can lead to a decline in measurable intelligence.

The difficulty of trying to survive without enough money raises levels of the stress hormone cortisol and that this impacts the thinking of poorer people.