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There’s a great amount of research being done on the emotional and psychological impact that money has in our lives. Any day now, Barnes & Noble will announce their “Money & Happiness” section. We’ll see the different ways that we are affected, but first let’s get some basic facts out of the way.

Investor psychology

Psychology affects investor returns, more than any other factor. Studies have shown that losing a dollar bothers us 2.5 times as much as making a dollar.

It’s the reason that during a five - year run, when the market averaged 12.5%, the average investor earned only 2.5%. Why? Buying high (comfort) vs. selling low (fear).

Brain Damage study

A recent study evaluated individuals with a certain kind of brain damage. Affected was the portion of their brain that experienced fear. This study determined that these individuals made far better investors than those without this damage. They didn’t make decisions based on fear, or comfort…their feelings were effectively taken out of the equation.

But there are things that we don’t see about value and money. Here’s a cross-section of scenarios.

The thought that counts…

I always thought that perfume, or a nice piece of jewelry, would make my wife happy on that special occasion. I was wrong. One year I finally got it, and bought her 10 greeting cards for her birthday, each special in a different way. The value was in the meaning, not the money.

A friend indeed…

I recently made the mistake of offering money to a friend who’d helped me move my office. It was a brutal day, and I felt guilty. But I offended him. He did this out of friendship. I reduced it to a cash transaction. I should have just told him how much I appreciated it, and that he could always count on me. The value was his friendship.

Attachment…

I went to the theatre not long ago, and realized that I had lost the tickets. Very frustrated, I couldn’t bring myself to buy additional seats to the show. Now, I’ve lost $100 before (and more), but I was attached to those tickets. It’s the same mindset that causes investors to hold onto losing stocks, and throw good money after bad in casinos.

An Experiment

A study asked participants to do a simple task - drag a circle across a computer screen as many times as they could in five minutes (Heyman & Ariely, 2004). The experiment compared three different groups in which the payment for this mind-numbing task was as follows:

1. Given $5 for participating
2. Given 50 cents for participating
3. Asked to participate 'as a favor'

Professors Heyman and Ariely wanted to determine whether money would be a motivator, and it was. The participants who were paid $5 averaged 159 circles, while those paid 50 cents, averaged 101 circles.

The interesting result comes with those who were asked to participate 'as a favor.’ This group dragged an average of 168 circles into the box. That means the group asked to participate as a favor did more 'work' than those paid $5.

Why?

Obviously, different rules apply, depending on whether people are trading in hard currency - or in friendships, trust, or other social connections.

What does this tell us? How can we apply this information?

Recently, I interviewed Milt Moskowitz, who developed the concept of the 100 Best Companies to Work For, over 30 years ago. This list is published in Fortune Magazine each year. The survey used to develop this list is comprehensive, and measures employee satisfaction on a number of levels.

Now, were these employees paid more? No. Better benefits packages? Not necessarily. There was a difference in the relationship. Employees felt valued.

According to survey responses, treatment of these employees was different. There was more effective communication with management and employees were included in the decision-making process on a number of levels.

What does this mean to us?
An investment in these companies has outperformed the S&P 500 by 300%!