Alice, a 28-year-old healthcare manager from London, sat down a couple of years ago with some researchers to explain how her personal finances really worked. It might have made an economist’s head spin.
Alice, whose name has been changed, earned £80,000 a year and was highly educated. But she seemed to act like a child with money.
“She found it very easy to spend all the money on her credit card on nights out but diligently transferred money to her parents for safekeeping each month,” researchers at ReD, a consultancy, observed, noting that while Alice viewed her pension as a “back-up” plan, she also insisted that she did not trust it.
Instead, she presumed that her home was a reliable store of wealth — even though there had been turmoil in house prices a few years earlier. “For Alice, her mortgage was useful, productive debt,” the researchers said. “But her credit facility was negligent, indulgent debt.”
Does this make any sense? Not if you take a classic financial industry view, which might focus on concepts of portfolio risk, the time value of money or rational expectations. After all, modern economic models are created on the assumption that money is a consistent, fungible item that should operate with the same logic as the laws of Newtonian physics. On that basis, what Alice does is weird.
But one dirty secret haunting the personal finance world today is that there are numerous consumers just like her. Most humans have peculiarly contradictory attitudes towards money.
What the researchers from ReD — along with others in similar fields — have recently been trying to do is to find a framework to explain this “weird” behaviour, using not economics, or even psychology, but by looking instead at the type of cultural patterns that are studied in anthropology.
That might seem odd. Anthropologists used to be best known for studying far-flung tribes in places such as Papua New Guinea or Samoa. Asking them to study credit cards and mortgages is not something that would occur to most mainstream financial services organisations.
“I can’t think of any investment manager who would have spent any time before thinking about anthropology or psychology,” observes Holly Mackay, a UK personal finance expert whose website, Boring Money, is read by about 1m people.
But the ReD researchers are convinced that thinking about cultural patterns among the modern Western tribes of savers is crucial to make sense of modern money, since it is not just what people like Alice say about money — but also what they do not say.
Silence can be crucial. And Mackay is apt to agree. “The retail investment industry is not fit for purpose because [financial companies] treat [it] as a dumbed down version of institutional investment, served up to retail investors. But real people don’t think or behave like that.” Culture can be baffling — but it matters.
To understand the contradictions in personal finance, one place to start is the idea that “money” has undergone a revolution in recent centuries. Before the 20th century, money was viewed as a social construct, embedded in concepts of trust and morality, not impersonal maths. Thus, when Adam Smith, the 18th century intellect, developed his theories about the political economy he wrote both about free-market competition (in his book The Wealth of Nations) and the ethical contract behind commerce (in The Theory of Moral Sentiments).
But in the last century, the perception of money became so detached from social context that phrases such as “money has no colour” emerged (meaning that a dollar or pound exists in its own right, outside race, culture or social ties). Money was presented as an object which was so culture-free that financiers became used to modelling it with equations drawn from physics.
Such approaches can often provide useful navigation tools. However, it is dangerous to rely on them alone, without any awareness of cultural context, since humans are not molecules in a test-tube, or bytes in a computer program. And in the wake of the 2008 financial crisis, even mainstream economists are grappling to find new frameworks to describe money.
One is Lord Mervyn King, the former governor of the Bank of England. He points out, for example, that there are at least three problems with relying too excessively on a classic model-based approach to illuminate the behaviour of savers.
First, individuals do not act in isolation from each other but in groups. This shapes their expectations in a way that “rational” theories may not capture. Second, individuals are not well equipped to judge risk since they are grappling with uncertainties that cloud their vision — and minds. Some economists have tried to cope with this by using ideas from psychology to explain seemingly “irrational” behaviour. But King thinks this also misses the point.
“Behavioural finance looks at irrational behaviour, but people’s behaviour may not be irrational at all given the problem of uncertainty,” he notes.
Third, while economists tend to think that “wealth” is just about money, “in reality people have a much broader concept of wealth, that includes issues like the environment and social capital,” King adds. That is tough to measure with models, not least because this broader vision of money can shift.
Observers trained in anthropology (like me) might highlight two further issues. One is that people’s concept of the passage of time is not as consistent as economists assume.
Frank Dubinskas, an anthropologist, showed four decades ago after studying professional communities in America, that time — or times — mean different things to scientists, engineers, doctors and executives. Sometimes we understand time as running in a cyclical pattern, or see the speed of time moving differently in different contexts. Our vision of a calendar — and its key points — varies between professional subcultures.
Second, while economists think that “money” is a single, consistent category in the minds of modern consumers, there is cultural compartmentalisation too. And the ReD team suspects that this issue of compartmentalisation helps explain the behaviour of people such as Alice.
Anthropologists know from research that many non-Western societies, such as the Tiv in Nigeria, embrace different types of money (or tokens) for different parts of life. Among the Tiv, say, exchanges that revolve around low-status subsistence items such as yams are treated differently from those linked to sacred artefacts.
At first glance, Western society seems completely different, since intellectual consistency is prized: a £5 note is supposed to be the same in any context. But in practice, people such as Alice often act as if their money was compartmentalised, treating it differently in various spheres of their lives. Models are consistent; humans are not.
To explore this idea, the ReD researchers tracked a diverse group of consumers in the UK, Germany, Denmark and the US, talking to them and watching their interactions with financial institutions. That led them to think that consumers had two main buckets of activity, which they described as “fast” and “slow” money spheres, echoing the framework developed by Daniel Kahneman, the psychologist. The former refers to money used for everyday purchases; the latter long-term wealth.
When people talk about “fast” money, the researchers noticed, they tend to be direct, practical, logical and happy to adopt innovations, such as those in digital tech.
“[My current account] is like electricity — it just comes out of the socket,” said Anita, a 45-year-old mother of two and lawyer at a publishing firm in Munich. “I want my money to come out of the machine when I need it. That is it.”
However, “slow” money was shrouded with shame, secrecy, confusion and silence. “What often happened was that people would spend a huge amount of time talking to us about one tiny part of their finances, like a few sustainable investments that they had made, or their credit card or house,” says Martin Gronemann, a former economist turned anthropologist who led the ReD group. “But then they totally forgot to mention something much more significant in their overall asset position, like a retirement account.”
The results could be peculiar, if not comical. Take Linda, a 54-year-old Los Angeles events consultant. She said she only used two different credit cards. Yet when she turned out her wallet she produced 14 pieces of plastic. Then, she revealed she also had a plethora of different savings accounts she barely remembered. She was reluctant to close any down or even take a detailed overview. Silence ruled.
Why? One reason might be moral ambivalence. Western consumers in the 21st century are told that profit-maximisation drives modern life but also that “money is the root of all evil”. Shame around ignorance in personal finance is another factor. As Christian, a 68-year old astrophysicist, told the team: “I might be good at nuclear and atomic physics but I simply do not understand my pension.”
Another issue is cognitive dissonance. Consumers know that money is supposed to be consistent and rational, but they also know they do not live like that.
Is there any solution? ReD has been advising some financial companies on how to bridge this gap by focusing on education, removing any sense of judgment and importing the sense of consumer convenience associated with “fast” money into the “slow” money sphere.
Danica, a Danish life insurance and pension group, has embraced the idea. A few years ago it launched a quasi-anthropological study of its consumers, which prompted it to bring “fast” money online tools to help customers track the value of their long-term portfolios. That has significantly increased customer satisfaction, says John Glostrup, head of business development at Danica.
“The life and pension business is probably the only consumer business where companies hardly seem aware they have consumers — we think we have insurance policies instead,” he says. “Why? Because the activities we have today will only show in the book in five to 10 years and there is so much inertia. But when we think about how consumers see the world, it makes a difference.”
Other financial groups are following suit. Mackay says that UK high street bank Santander, for example, has created a robo-adviser product that draws on advice from psychologists about how to simplify pensions and investment products for a younger audience. This uses the type of transparency and simplicity normally found with “fast” money (though without using this tag).
But observers such as King argue that what is really needed now is not so much a focus on the “fast-slow” dichotomy — which he regards as far too crude — but an emphasis on the problems of grappling with uncertainty.
Mackay agrees. “The investment industry thinks that risk means one thing, like volatility, but retail investors have another idea. They think it’s about skiing down a black run or going down the motorway too fast, with bad consequences,” she says. “There is a gap.” Or, as anthropologists might say, there is an issue of “culture” — one which might yet turn into an opportunity for the company that succeeds in resolving it.
If you want to see how culture interacts with personal finance, consider the life insurance industry. Today this is a pillar of the financial services industry, organised by an army of actuaries who are supposed to measure and price risk in a seemingly “rational” way, like any other branch of insurance.
However, as Paula Jarzabkowski, a professor at the Cass Business School in London, has shown, the way that insurance companies make decisions is shaped by all manner of half-stated cultural assumptions that can produce some perverse results. Daniel Kahneman, the psychologist, makes a similar point in his new book, Noise, which was inspired by his discovery that insurance companies can offer vastly differing prices for the same risks — in unpredictable ways.
Judgments in the life insurance sector are particularly interesting, having changed markedly over the centuries. The concept of betting on the longevity of humans — and their death — used to be utterly taboo. One of the first efforts to do this emerged in England as far back as the 17th century, when the British government created so-called “tontine” bonds for pools of people, priced to gain value for the members of the syndicate who lived longest.
The idea spread in the 18th century. But it did not turn into a fully fledged financial sector, since in most of Europe and the US the idea of betting on life was considered unacceptable, as Viviana Zelizer, a sociologist, notes in a fascinating book, Morals and Markets.
However, in the mid 19th century, some canny financial companies started to present life assurance to US consumers as a quasi-spiritual duty to protect their families. Those early life insurance salespeople never tossed numbers around, since it was considered abhorrent to “price” someone’s life.
In the early 20th century, attitudes changed again, when it became more acceptable to present life assurance in monetary terms, Zelizer says. And recently the sense of stigma around hard maths has declined further.
Companies such as MetLife used to market their products using warm, fuzzy — indirect — images, such as pictures of Snoopy, the cartoon character, to spare consumers any sense of anxiety. However, as Kieran Healy, a sociologist, notes, MetLife recently removed Snoopy — and took a more direct approach to marketing, since it thinks consumers will accept the “truth” behind its products today.
“Snoopy served an important role at the time . . . [but] it’s important [now] that we associate our brand directly with the work we do,” Healy quotes a MetLife representative as saying. Culture, in other words, is not just important; it can also change.
Gillian Tett is FT chair of the editorial board and editor-at-large, US. Her forthcoming book, ‘Anthro-Vision’, is published by Penguin in the UK.