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Credit cards, financial decision-making and elephants

by Peter Andrew

When Chase commissioned an academic to write a paper earlier this year on what makes people good or bad money managers, it got a bonus: an elephant simile. When we're carrying out routine tasks and processes (walking, showering, breathing…) our brains are in fast-thinking mode, and our minds are acting a bit like a wild elephant, ambling along in a directionless sort of way. But when we start making decisions, we use slow-thinking processes as well as fast-thinking ones. So it's as if an elephant has a human driver (a mahout) on its back: The animal is still powerful and can be willful, so the extent to which it moves in an appropriate direction is dependent upon the skill of the person in (at least nominal) charge. The point is: some of us are born with skillful mahouts, some of us teach our mahouts to be skillful, and some of us spend our whole lives clinging on helplessly to the backs of financial rogue elephants. And when those rogue elephants charge, they tend to do it on credit cards.

The fundamentals of that somewhat embroidered pachydermatous simile -- and much more in "Born to Spend?", a 34-page report -- come to you courtesy of Hersh Shefrin, Ph.D., who is not only the Mario L. Belotti Chair in the Department of Finance at Santa Clara University's Leavey School of Business, but also a contender for the world's-longest-job-title title.

The money blame game

When you think about it, Shefrin's findings, which are based on 30 years of research by neuroscientists and psychologists, are far-reaching. For centuries, many of those who were great money managers have been far from shy in condemning poor ones, often regarding them as unintelligent, immoral or feckless.

If it now turns out that none of these characteristics plays a significant role, and that it's mostly down to some genetic super-lottery, then many may have to rethink their attitudes toward people who struggle to keep on top of their finances. As the paper's title suggests, some may be "born to spend."

Learning credit

Of course, Shefrin isn't advocating that the world just shrugs its shoulders and endlessly indulges poor money managers. He sees parallels between financial and athletic prowess. Some are born ill-equipped to be athletes, and can never hope to be Olympians, no matter how hard they train. However, pretty much everyone can, given enough effort, greatly improve on the hand they were dealt by their DNA.

So it is with financial acumen, although the routes to acquiring this are less clear-cut than those that lead to athletic improvement. The 2008 Jump$tart Survey of Financial Literacy found that high-school students who had undergone five-year financial literacy classes did no better in relevant tests than those who hadn't. Shefrin sees a need for a more innovative and rounded approach.

"Smart nurturing programs, new technologies, and new educational techniques, such as using educational gaming software, are all underutilized ways to get people to make better financial decisions," he proposes in the report. "It is the time to use our knowledge and resources for a collaborative approach across public and private sectors to instill mindful spending and borrowing habits in our classrooms and beyond."

Shefrin goes on to state that everyone, from educators to members of the media, can play a role in improving financial practices.

Elephant in the room

It's perfectly possible to support such educational initiatives while questioning how effective they're going to prove in addressing a problem that seems to afflict literally millions of Americans. Maybe they'll have some measurable impact on future generations, but it's hard to see how they can help large numbers of existing adults, many of whom are in denial over their financial issues. Perhaps you can see why: If you were permanently on the back of a charging rogue elephant, you too might want to spend as much time as possible in your "happy place."

Indeed, it's not just those in deep trouble who are in denial about their financial competence. On Sept. 10, Genworth published its latest Psychology of Financial Planning research. It found that 52 percent of its survey's respondents awarded themselves an A or B grade for their own financial knowledge, while giving their average fellow citizen a failing D. You don't have to be a statistician to work out that plenty of us are kidding ourselves.

But let's end on three upbeat notes:

  1. The fact that financial literacy and competence are such hot topics (with even credit card companies commissioning studies) suggests that we as a species are increasingly recognizing the issue. And accepting that there is a problem is always the first step to solving it.
  2. Even the simplest new technologies, such as being able to check a current balance online, can help everyone keep a better grasp on their finances.
  3. If bad money managers are viewed more sympathetically in future, they may be less inclined to remain in denial, and instead find the courage to address their circumstances.

Now, anyone know a good mahout school?

Published 09/16/13

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