The Psychology and Future of Money: Stephen Dubner

As we recounted here, the Money Experience Summit — a digital event with 60+ speakers — wrapped up last week.

We’ll be featuring summaries and highlights of the speakers here on MoneySummit, starting with “The Psychology and Future of Money” by Stephen Dubner. This presentation consists of a speech and a Q&A session, both of which are full actionable insights. 

In his presentation, journalist Stephen Dubner talks about three topics:

1. Financial literacy, which he says is “pathetically low” in the United States
2. The psychology of money, which he calls “incredibly complicated”
3. The digital revolution, which he says, “decreases the risks that come with poor money behavior”

To illustrate just how abysmal financial literacy in the United States is, Dubner tells about a survey wherein Americans aged 50 and older were asked three simple questions about savings accounts, inflation, and stocks. Alarmingly, only a third of respondents got all three questions right, signifying poor financial literacy. 

Dubner then explores the complicated psychology of money by telling a story about Steven Spielberg bidding in an auction for rare Tiffany lamps. Spielberg had his eye on one particular lamp, and with a net worth of $2 billion dollars he could have easily afforded it. However, Spielberg soon discovered that the lamp was owned by one of his closest friends, and he couldn’t stand the thought of this friend ribbing him about paying so much for the lamp. So Spielberg refused to bid high enough to get it, even though the expense would have been the equivalent of a few dollars for the average American.

Dubner says the story portrays just how complex the psychology of finances can be. “Any element of money is complicated because there's a lot of emotion in it,” he says. Then he adds, “A lot of decision-making you think is rational, but it's often not. The reason that so many people make poor decisions around money is basically because of fear of one kind or another. … There is a vast gap between our declared preferences (what we say we'll do) and our revealed preferences (what we actually do).” 

Finally, Dubner talks about the digital revolution. He says this revolution helps people “set it and forget it” and “tell the difference between uncertainty and risk” when it comes to money. He gives the example of a system that, instead of requiring people to fill out pages of paperwork to sign up for a 401k, automatically enrolls them in the program thereby helping them make better long-term financial decisions. 

The presentation is followed by a question and answer session wherein Dubner explains, among other things, why the government deserves more credit for bringing innovation to financial services. 

“I think the government often gets short shrifted as being nothing but an impediment to innovation,” he says.” I don't think that's at all true. The government has historically funded a lot of what looks to be in retrospect like private and market-based innovations. ... The biggest knock to make on the government as a funder of innovators is that it does a bad job of capturing a return on its investment. A lot of the innovation goes private eventually, and the government's left holding the bag, thinking it will recapture its fair share through the tax system. The government tax system isn't set up very well to recapture that back.”

In conclusion, Dubner shows that innovation in financial services must come from a mix of market forces, academic theories, and government agencies. One thing is clear: it’s going to take a collective effort to bring about the future of banking.