Some say 'greed is good' but is it?
I HAVE to admit that two of my favourite movies are Wall Street and Wolf of Wall Street, it's hilarious.
third is the recent The Big Short, based on the book of the same name. The book was written by Michael Lewis who has had quite a number of mentions in this column over the years. In my view, Lewis is a genius and his books can make a seemingly dry topic incredibly interesting, entertaining even.
I say all of that somewhat guiltily because in most people's eyes, it has never been good to love money and movies and books on high finance would seem to indicate a love of just that.
As Michael Douglas' character, Gordon Gekko, famously says in Wall Street, 'greed is good'. But it isn't, is it? There is a reason why avarice is one of the seven deadly sins. Greed is not good, no matter what way you slice it.
Having said that, John Authers, writer of the The Long View column in the Financial Times pointed out this past weekend, one of the great Scottish enlightenment philosophers David Hume taught us that avarice is good for the economy.
He described it as the 'spur of industry' which helped to drive the market's 'invisible hand', the crucial economic concept which provides a cornerstone of the writings of arguably the world's most important economist and Hume's fellow Scot, Adam Smith.
So, if it has been accepted since the dawn of economics that greed is important to make an economy work, you might be surprised to hear that now it seems, according to a major international study from a respected financial research institute, State Street, greed can be seriously bad for our wealth.
The State Street Centre for Applied Research recently surveyed 3,600 consumers across 20 countries and found that money lovers' emotional attachment to money exacerbates their behavioural biases, leading to worse financial decisions and likely worse financial outcomes. In other words, the bigger the love of money, the bigger the losses.
Using the Money Ethic developed by a US academic called Thomas Li-Ping Tang in 1992, State Street has developed an "investor love of money scale" or Ilom scale.
The researchers asked questions aimed at finding out how important money was to people's self esteem and they were also tested on how they would respond to various financial situations.
The results were interesting and very clear. As Authers says, the more someone has an emotional attachment to money, the more likely they were to lose money with their investments. More than half of retail investors surveyed who scored high on the State Street's "love of money" scale actually have worse financial outcomes.
According to the survey, so-called money-lovers are less likely to contribute even 6 per cent to a pension plan and much more likely to agree to the notion that saving is "something they can do later in life."
They also tend to suffer from greater levels of "short-termism." For example, they would rather take a smaller amount of cash now than a larger amount later. From a policy perspective, that short-termism finding points towards the wisdom of governments forcing or inducing people to save.
The introduction of the compulsory workplace pension scheme in the UK being a good example. My little company's scheme has started this summer and while it could be looked at as an added cost of doing business, I think it is a good and very worthwhile thing to do.
Getting back to the research, money-lovers are more prone to fear-based motives and greed-based motives for buying and selling investments. They are also more prone to hyperactive behaviour, for instance, they trade more frequently and they check their mobile phones approximately twice as many times as those further down the Ilom scale, according to the research.
In national terms, it seems that people in developing economies love money most. India, China, Brazil and Mexico top the league. The US is near the top also. Given the tendency on these islands to be embarrassed about talking about money, the UK is low down the scale. The Republic doesn't seem to have been measured but I think it is probably safe to assume it is similar to the UK.
The scale varies also with age, older people love money less.
"It's not because they have more money, it's because as individuals age they become much more aware that there are more important things in life than money," Suzanne Duncan, global head of research at State Street, was quoted as saying on Bloomberg News.
And interestingly, wealth levels don't seem to overly affect love of money scores. According to the findings, it is not about how much money you have, it is about your emotional connection to money itself.
"In order to make better financial decisions, people need to focus on a goal such as college or retirement, as opposed to the money itself. By focusing on a future goal it enables people to overcome their behavioural biases like greed and short-termism in order to make better financial decisions," said Duncan.
So there you have it, financial lesson number one before we all go back to school. Don't think you can do all it all later and don't be greedy in how you invest your profits or savings. If you care less about money, you are likely to adopt a better financial strategy for later life. Though I have to add, if you are looking for a laugh, I still recommend Wolf of Wall Street.
:: Paul McErlean (paul @mcepublicrelations.com) is managing director of MCE Public Relations Ltd
:: Next week: Richard Ramsey