20 July 2015

Is it Wrong to Take the Elevator to the Gym?

When I go to the gym, unconsciously (habitually) I take the elevator. My usual work-out is around 35 minutes (+/- 5) and the main purpose is to burn some calories (I’m not into body building).

Quite recently I realized that my habitual / mindless behaviour is, in a way, awkward. I live on the 10th floor and the gym is in the opposite building (just across an alley) on the 12th floor.

If I would be a perfectly (economically) rational  creature, I would go down the stairs from the 10th floor to the ground floor, go out of the building and then go up the stairs 12 floors.

Since I am going to burn calories by means of making physical effort, subsequently sweating, several potential reasons for taking the elevator are automatically excluded. I’m taking the elevator not because I want to preserve energy – avoid effort. For sure I’m not trying to preserve my good looks (i.e. avoid sweating) since I am going to sweat at the gym.

Saving time could be a plausible explanation for my irrational behaviour, but I seriously doubt it. I could simply take the stairs (both down and up) and cut my gym work-out time by 10 minutes. I assume the overall calorie burn-out would be similar. Moreover, I don’t count (monitor) burned calories, so, for sure, this is not the reason.

The more realistic reason for me taking the elevator to the gym is that I formed a habit: go out of the apartment to the elevators. This is because of convenience – going with the elevator is easy and rather fast.

Moreover, the elevators in the building are very salient: there are four of them positioned in the very centre of the building, in a spacious hall. On the other hand, the stairwells are almost hidden and the doors are grey – taking the stairs is clearly not the natural thing to do.

Beyond the habit explanation, there is, I believe, a more profound explanation.

In psychology of money there is the phenomenon of mental accounting – discovered by Richard Thaler. In a nutshell, mental accounting means that we associate different amounts of money with various expenses and we label “this” money for “this expense”… we have “holiday money”, “retirement fund”, “beer money” etc.

Moreover, it is very hard for us humans to shift money from one account to another, or to integrate accounts. If you want to learn more on mental account check out this post

I believe that we think using mental accounting when it comes to any type of fungible resource. In my case of taking the elevator to the gym, I do not find it natural to use my energy (effort) to get to the gym, but I have no problem in spending lots of effort in pointless weight-lifting and pedalling on a fixed bike.

In other words, I find it difficult to spend the gym effort on climbing stairs.

This type of automatic thinking goes beyond awkward getting to the gym behaviour.

I remember that a few years ago, I asked someone for a favour that would have taken about 20-30 minutes of work. As a reply I received a long email telling me how he was too busy to make the effort. The answer (probably) took at least 15 minutes to write…

16 July 2015

Psychology of Money at Action Design Meetup

On the evening of July 15 I gave a talk on psychology of money. It was a brief summary of the Thinking Money (2 days) training I give.

We talked about relativity, loss aversion and mental accounting and why they make sense from an evolutionary psychology point of view. We also talked about how these effects manifest themselves in real-life and how they could be used to design better services.

Here are some pics I got via twitter from some participants:

Here's a tweet from Tina Safaie:

Loved "The Psychology of Money" with @NicholasNaumof @ActionDesignDC! I'll never think the same way about my money...

For me it was a pleasure and Thank you to everyone who showed up. 

Special thanks to Kate and Zarak who organized this very nice event!

Looking forwards to the next Action Design Meetups.

9 July 2015

Why our Judgment Shortcomings about Money Aren’t Irrational

The field of Behavioral Economics / science pointed out how much of human judgment and decision making does not conform to models of economic rationality.

Oversimplifying, we could say that behavioral science gathered mountains of evidence on our own irrational thinking and behavior.

Many introductory materials such as lectures or presentations use a very popular illustration:

We like to think that we are like Mr. Spok, but in reality we are more like Homer Simpson.

This is a very catchy illustration, but it is utterly wrong because in order to understand human judgment and decision making we shouldn’t use fictional characters as references.

In order to deeply understand how Homo Sapiens thinks, we need to look back to our very distant evolutionary ancestors (early Homo Sapiens and pre-Homo Sapiens species).

Simply put, in order to understand how modern humans think, we need to look back at cave-people.

Loss aversion is probably the best known psychological effect (some would call it a judgment bias) when it comes to thinking and decision-making about money.

From a normative economics point of view, the fact that we hate losses roughly twice as much as we enjoy equivalent gains makes no sense – is irrational. We should be willing to put in the same amount of effort for both avoiding a loss of 100 dollars (euros) and gaining 100 dollars (euros). Yet, we know that things do not happen like this… people put in more effort to avoid a loss than they do to achieve an equivalent gain (i.e. 100 dollars).

However, this phenomenon – this way of thinking – made perfect sense for our evolutionary ancestors. In other words, it was (is) evolutionary rational to hate losing what you have more than you enjoy gaining some more.

By evolutionary rational I mean anything that enhances an individual’s chances of survival till reproductive maturity, achieving reproductive success (having offspring) and investing in heirs till they reach reproductive age.

To oversimplify, anything that allows an organism (person) to become a grand-parent can be seen as evolutionary rational.

Just as a note: evolution favors “metabolically cheap” solutions. Anything that brings a cost without providing an advantage in sending one’s genes into future generation(s) will be eliminated in the evolutionary process.

Let’s return to why loss aversion was, in fact, very (evolutionary) rational for our very distant ancestors.

These individuals lived in resource scarce environments. This is not to say that they were starving on a permanent basis, rather it is to say that the available (and accessible) resources were matching the minimal needs of our very distant ancestors.

In such an environment, it is more important to not lose the resources one has than to acquire additional resources. This is from an evolutionary point of view.

Putting things differently, holding on to the few resources one had offered evolutionary benefits (sending one’s genes into future generations) that were higher than the evolutionary benefits of acquiring additional (new) resources.

I am aware that I have simplified things quite a bit, but I guess you get the main idea.

What some call judgment biases such as loss aversion, mental accounting, relativity (contrast effect) etc. might very well be part of what made our generations’ existence possible.

Next week I will present (live) the three major psychological effects on thinking about money and their evolutionary explanations. Most importantly we will explore how Loss aversion, Mental accounting and Relativity influence our decision making about money in real-life situations.

Moreover, I will present some illustrations on how these so called judgment biases can be harnessed for designing better services that improve people’s lives.

The talk we be on July 15th in Washington DC and it is part of the Action Design Meetup events

If you are in the area, join themeetup

5 July 2015

Fairness and the Greek Government Decisions

In the past weeks the Situation of Greece and its debts have been on the forefront of the main news channels in the world.

Of course, there is a lot of room for discussion and debate… mainly on macro-economic terms, but this is a blog dedicated to behavioural science, so I will restrict my comment on the topic of “Fairness”- which is a highly important behavioural element.

At least on the main European news channels, there is this oversimplification that developed, rather rich and more stable countries lend money to Greece (a lesser developed and competitive country). Oversimplifying even further, it is said that Germany (EU’s flagship) / German tax payers is / are lending money at very low interest rates to  Greece (kind of the problem child of the EU).

Things aren’t all that straight forwards as they are presented on TV. Greece received (and hopefully will continue to receive, though not unconditionally) money from three sources – (1) The EU commission mainly the Countries who use the Euro as a currency (aka. Euro-Group), (2) The European Central Bank and the (3) International Monetary Fund (IMF).

What is less known, is that among the countries contributing to the funds received by Greece there are countries such as Slovakia, Lithuania and Estonia. All of these countries are using the Euro as their currency. However, these countries are below Greece when it comes to GDP per Capita (per person) and the overall standard of living is worse in Slovakia, Lithuania and Estonia. Moreover, other countries have contributed indirectly to the funds received by Greece. For example, my country of birth – Romania – which does not use the Euro as currency, has increased its participation in the IMF so that the IMF would have additional funds to lend to Greece.

Unfortunately, Romania is way behind Greece in terms of standard of living and GDP per capita. Moreover, in 2010 Romania took some drastic and painful measures (e.g. 25% cut in all public servants pay, a VAT increase from 19% to 24%) in order to tackle the effects of the global recession.

Since we are talking about fairness, I have to be fair and say that the bulk of the funds allocated to Greece came from Europe’s most developed economies (e.g. France, Germany, The Netherlands, Belgium, Austria), but also from other large countries facing difficulties (e.g. Spain and Italy).

I am fully aware that the Greek Government and the Greek people have their arguments. Nonetheless, I wonder: how fair is it for Greece to reject the reforms for loans program and to take money from countries which are, overall, worse off?

How fair is it for the poor to support the middle class? Or is that happening already at other levels of society?