When K Foundation burned £1 million for an art project in 1994 they faced a lot of criticism for doing so but why? People have burnt things for art before. What is the difference between burning £1 million superyachts and burning £1 million in cash?
Well, the answer may well like in what money represents and what money means to us psychologically. In Claudia Hammond book Mind Over Money, she reveals some fascinating insights into what money does within our brain.
We now know through a series of studies on people in brain scanners that we see money as a tool. This was identified by placing people in a brain scanner and showing them a video of a woman ripping the Danish equivalent of a £60 note from the top of the button. What was interesting was the part of the brain that lights up is the same part of the brain that we use to identify tools and not the part of the brain that handles feelings of pain and loss. This was further confirmed when the same people were shown a video of the same woman ripping a piece of paper the same size and shape as a banknote.
Things are not that clear cut though, as you can imagine money has other effects on us otherwise people would not be outraged at the sight of £1 million in £50 notes burning. So what else can money mean for us? To answer this studies have been carried out to look at what happens in our heads when we receive money.
When receiving money our brains release dopamine, that feel-good chemical. The same feel-good chemical our bodies produce when we take drugs, find a lost item or see our friend for the first time in years. So receiving money has the same effect as taking drugs on our brian and we identify money internally as a tool. This leads to the question of what happens when we personally stand to lose money.
I should point out the exact study referenced here was carried out on children but similar studies with the same results have been run on adults as well. The kids in the study were given 40 tokens and told they can spend 5 tokens every 10 minutes to play with toys and have fun or if they read books they will be given 3 tokens for every 10 minutes of readings. At the end of the hour, they could exchange their tokens for biscuits and snacks as long as they have more than 70 tokens but they couldn't take any tokens out of the room at the end of the hour. This boils down to having to spend at least 40 minutes of the hour doing boring things like reading to have enough money at the end to get sugary goodness. What did the kids do?
Most of the kids spent all of their tokens on playing and having fun, they can't take the money away with them so might as well spend it right. Some, however, did see the benefit of reading and passing on the fun for an hour to earn more tokens which they swapped for chocolates and sweets at the end. This shows us that even at a young age we see money as a tool, a means to get what we want and we will give it up in exchange for what we want.
The reason for bringing the children's study up here and not one of the adult studies is it stands to reason that young children should not have the drug effects of receiving money that adults have shown and we have seen this with most of the kids opting to use all of their money on play.
So money acts on our brain in two ways we are both controlled by money and its drug-like addition - money over mind - and we use money as a tool to get what we want - mind over money.
All money is not equal
Steven Lea and Paul Webley developed a psychology theory that proposed we see the value of in different forms with different levels of value. Yes, we view cash, cheques, gift vouchers and bank account balances differently. One thing Steven and Paul discovered is we are more attached to physical forms of money more than other forms.
Research has shown we also spend older money faster. The dirtying a note get the faster we want to spend it.
Logic would say £10 is ten pounds is 10 pounds but the fact is we all regard different forms of money differently.
When Britain moved from the old shilling and pounds system to a decimal system for money in 1971 people were concerned and would start and work out what they had spent in "new money" was in "old money" to make sure they weren't getting swindled. This caused so much concern that the UK government created a 5-minute public information film to explain the transition.
An experiment 5 years later asked people to guess at which coin matched a circle drawn on a piece of paper using both old and new money. What was surprising were the number of people that overestimated the size of old money. This was likely as old money bought you more but not because it was worth more. During the 5 years after the transition to new money the UK was going through a period of heightened inflation, in some circles, this came across as new money been worth less in real terms and people resenting the change.
This is not something unique to the UK and a change in currency, it is also been seen in studies around the world where we as people generally overestimate the size of physical money.
Cash or Card
So far we have focused on money in its physical form, however, we are increasingly moving into a world of virtual money by the way of debit and credit cards. In the US a study was carried out on different families to see if their family food shopping changed depending on how they were paying. The families paying with debit or credit cards would spend more on impulse purchases of cakes and chocolates compared to those that paid with physical cash.
This is not surprising then when we tend to use a card when the price is higher. Not only does it mean we don't have to carry around bulky amounts of cash but we don't have the greater feeling of loss. This was confirmed in an MIT study in which students bid in a blind auction for a pair of tickets to a sold-out baseball game. The students told they would have to pay in cash bid an average of $28 for the tickets while the students told they could pay on credit card bid over double that averaging $60 for the tickets.
So as we have cover money seen differently and treated differently depending on the form it takes and the sums we are talking about. So what the best thing we can do to make sure we don't waste our hard-earned money.
Sadly this is stuff is hard weird into our brains and we can't control a lot of it, however, knowing these differences in money we can start to think better about why we are making decisions and over time improve our decisions with money. The biggest take away here is knowing how our subconscious brain sees money so we can take conscious steps toward making better decisions in the future.