Many times on this blog I’ve mentioned my fascination with behavioral finance. Behavioral finance, sometimes called behavioral economics, is a field that studies how the mind and emotion impacts the economic decision making process. In other words, why feelings get in the way of making logical decisions with our money.
Behavioral finance can be broken down into sub-fields. One such field we’ll talk about frequently is Mental Accounting. As I like to call it: “When a dollar isn’t a dollar”. Mental accounting is a specific interest of mine, and I have become somewhat of an amateur in the field. Since graduating from college, I look around for evidence of mental accounting. After talking with a few PhDs on the subject, I’m now cataloging my observations.
My own mother was my first guinea pig.
Years ago, Mom had a dear aunt pass away. For whatever reason she owned a number of shares in First Union Bank (now Wachovia). The shares were divided evenly among my mother and her kin. 10 years later, not one of them has sold their shares. Why?
Of course its to honor their loved one in some way. But at the time of inheritance, my parents had two car loans and a mortgage. Mom’s brother and sisters all had similar financial situations and yet none of them sold the stock to pay off debt. No one was hurting for money, but the amounts they received would have gone a long way. Logic dictates they should sell the stock and pay off the debts. Mom would agree that logic demands a sale.
If my mother were to have some spare cash, would she invest it in Wachovia? Certainly not. That’s the argument a financial advisor would give for selling the stock. I agree. Again, why hasn’t anyone sold then? Holding on to one stock is risky, and the value could plummet at any time. Being a bank stock, Wachovia’s price has suffered in the last 6 months.
My conclusion is that no one feels its their money to spend. No one expected to receive it, so they don’t treat it as their own. There is an emotional disconnect between what is legally mine and inherently mine. From a maximizing reward vs minimizing risk standpoint, this is a bad thing. But in day to day life it might not be. My relatives are holding a piece of their ancestry. Its likely that Mom will never sell the stock. If that’s the case, someday I will inherit it. Will I sell? I don’t know. And that’s what captivates me.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
