The Love of Money: What Your Relationship with Money Says About Your Investment Potential
The truth is that the emotional relationship we have with money influences our behavior. If we love money too much, we tend to make bad investment decisions, taking the short-term approach and falling victim to 'buying high and selling low' —not a formula for long-term investment success.
But how do you measure love of money, and how do you define the problematic tipping point?
Using the Money Ethic Scale developed by Thomas Li-Ping Tan and behavioral scientists in 1992 as a starting point, State Street's Center for Applied Research (CAR) developed the Investor Love of Money Scale (ILOMS). Investors' rankings on the scale provide insight into their relationship with money and how that relationship might affect their decision making and investment outcomes.
We surveyed 3,600 consumers in 20 countries, rating how strongly they agreed or disagreed with statements such as "I want to be rich" and "Money is a symbol of my success." Our research showed that 58 percent of the individual investors surveyed scored high on the "love of money" scale. Interestingly, that same group also had the worst financial outcomes. It is the emotional attachment to money that actually exacerbates behavioral biases and leads to poor financial decisions and worse financial outcomes.
If we love money too much, we tend to make bad investment decisions.
Answer this – Would you choose to receive $1,000 now or $1,900 five years from now? Well, if you have a high love of money, it’s likely that you chose the former because you reap your reward here and now. Humans are notoriously bad at waiting for something, we want the reward (and all that goes with it) right now because our brains crave that feel-good feeling. The opportunity to have cash in hand right now is certainly going to trigger a lot of behavioral biases.
Respondents with a high love of money are also more likely to believe they can start saving later in life. Consequently they typically delay making retirement plan contributions and, when they finally do start saving, save less than 6 percent of their income.
Unlike investors with a strong love of money, investors demonstrating a more detached relationship tend to make better investment decisions that produce better financial outcomes, especially in the long-term. There is also an element of willpower at play. The 1972 Stanford marshmallow experiment remains a touchstone for research about qualities such as patience and willpower – and I admit that I have conducted this experiment with my five year old daughter since the age of two. Those who are better at delaying gratification (the experiment told kids, if you don’t eat this first marshmallow for 15 minutes we will give you a second) end up being more successful in various aspects of their life, including their financial situation.
The good news is that love of money isn’t permanent. The study found that while 67 percent of Generation Y respondents scored high on the ILOMS scale, only 62 percent of the Generation X consumers surveyed were high lovers of money. The percentage decreases further for Baby Boomers, who report 48 percent, while only 35 percent of Traditionalists demonstrated a high love of money. As we age, our priorities change and we learn that maybe money really doesn’t buy happiness.
What's my advice to investors with a high love of money?
While investors who score high on the love of money scale can’t inherently change their relationship with money, they can adjust their mindset. Money is a means to an end, but it is not the end itself. Envision your long-term goals, whether it’s your child’s future education or a comfortable retirement. By doing so, an abstract goal becomes more tangible and motivation to think long-term increases. Focus on the second marshmallow and how good you’ll feel then.
Share your motivations with your financial advisor, trusted friend, or family member. We’re all human, and someone who understands your biases can better steer you toward long-term reward rather than short-term gain.
Topics: Investment Approach
Suzanne Duncan is responsible for research and thought leadership for the investment management industry at State Street’s Center for Applied Research. She is the author of a series of whitepapers and has appeared in more than 250 media outlets. An experienced equestrian, Suzanne is listening to her horse’s movements as they show jump on the weekends.