Thursday, October 8, 2009

Book Giveaway: The Secret Language of Money

We attach all sorts of emotional meanings to earning and spending money according to The Secret Language of Money, by David Krueger and John David Mann. The authors seek to help you rewrite your money story to improve your life, but it is much more than just a self-help book. The publisher, McGraw Hill, has graciously offered four giveaway copies for my readers (but the draw is now over).

To enter the draw, send an email with the subject “Book” to the address shown on the upper right corner of this blog. The draw will close Tuesday October 13 at noon. I will contact the winners to get postal addresses. This time, McGraw Hill has agreed to send books to winners even if they live outside Canada and the U.S.

When it comes to investing, spending, debt, and financial scams, many of our decisions are driven by emotions. Because I see myself as a rational person, I didn’t expect much of what was said in the book to apply to me, but I did see myself in some of the examples. More often Krueger and Mann helped me understand the baffling actions of other people.

Even if you aren’t interested in having a financial emotions makeover, the book contains many well-written personal stories that are entertaining in addition to making a point. In some cases, I think the authors go a little overboard in attributing all actions to emotions. Surely, we make rational choices sometimes.

The rest of this review is a list of some of the interesting parts of the book and some parts I disagreed with.

The Right Brain

In studies of human brains, EEG readings show that when we have strong emotional stimulation our left brain shuts down and the right brain takes over. When we get a big fat bonus or the stock market crashes, “we may suddenly abandon our best strategies and most carefully thought-out game plans.” At the very moments when we most need to be rational, the rational part of our brains takes a break.

The Financial Crisis

The authors say that the financial crisis was caused by many house-buyers losing their heads at once, and that the “$700 billion bailout’s principal goal was to restore public confidence” and that this is “quite a price tag for a PR campaign aimed at changing an emotion.”

While I believe that emotions were an important part of the crisis, this characterization is misleading. The fundamental problem was that some very rational people figured out how to get rich by selling risky assets to other people who didn’t understand the risks. Selling mortgages to people who can’t pay them back isn’t a problem for the person who passes the risk along to someone else.

Once house prices began to fall the number of mortgage defaults exploded and this began to take down big financial institutions that couldn’t pay their huge debts. The bailout was needed to contain this very real problem. The authors make it seem that if we were all simply told that the bailout was taking place (but no money actually printed), the restored confidence would have solved the problem. This is not true.

A Tricky Auction

The authors describe a scenario where someone auctions off a $100 bill to investment specialists and investment gurus, and the winning bid is much more than $100. In a previous post, I explained how this is a trick rather than evidence that the bidders were irrational about money.

Slot Machines

What motivates us to take risks is the rush of dopamine that we get when the risk pays off. “The less predictable the reward is, the longer and stronger our dopamine neurons fire, giving us more of that natural high.” This effect is thoroughly researched by slot machine makers who exploit it as much as possible.

Credit Card Experiment

MIT students set up a sealed bid auction for Boston Celtics tickets. Half the bidders were told that they’d have to pay in cash (and would be given time to get the money). The other half had to pay by credit card. The average bid from the cash group was only half that of the credit card group. Apparently, money isn’t very real to us when we pay with plastic.

That’s enough for now. I’ll add a few more interesting parts when I announce the winners of the draw.


  1. Perhaps related to the random payoffs of slot machines, Charlie Munger says:

    "Some slot machine creators are vicious in exploiting this weakness [deprival superreaction tendency] of man. Electronic machines enable these creators to produce a lot of
    meaningless bar-bar-lemon results that greatly increase play by fools who think they have very nearly won large rewards."

    Here's the transcript to his great speech: "The Psychology of Human Misjudgment".

  2. Gene: This idea is in "The Secret Language of Money" as well. They say that the Wheel of Fortune slot machine is designed to land just one click past "250 times bet".