Blogs | June 20, 2018

How self-image can hurt your finances

Your perception of yourself can affect how you manage money, as Tobias Nasgarde explains.


Is your performance at work or your finances affected by how you see yourself? It might be tempting to say no, but research suggests otherwise.

Karla Hoff, an economist at the World Bank, explains that we are “enculturated actors”; in other words, we are heavily influenced by our overall culture, social circles and experiences.

In this working paper, she talks about how lower-caste boys in India performed 23% worse than before, after their caste was made public. In particular, before their caste was made public, the boys performed just as well as their peers from a higher-status caste.

Hoff shows that thinking of yourself in a negative way can hurt your performance. And obviously how you perform can affect your finances – for example, in terms of how you do at work. Especially, for instance, if you’re paid on commission.

Risky when you pay – or play
This can carry through to the risks we all might take with our money and savings – our financial wellbeing in general. One example is if we think of ourselves as independent from our social group. This can make us less inclined to take on risk when making financial decisions. And, conversely, it can also make us more inclined to seek risk in social settings.

Thinking of yourself in a negative way can hurt your performance. And obviously how you perform can affect your finances.

Meanwhile, MIT and Harvard researchers have found a link between financial decision making and religion.

They found that Catholics who had been put in a religious mindset by “unscrambling” religious sentences such as “give thanks to God” beforehand chose to take more financial risks immediately afterwards. In the experiment, these “primed” participants tended to bet on the possibility of a potentially larger reward rather than a higher chance of a smaller one.

This situation can be likened to how you might choose to allocate retirement savings.

Avoiding the identity trap
It is not only your own identity that counts; the social identity and norms of the group you are part of seem to steer decisions too. Group norms typically influence risk-taking, as explained in this paper from the University of Edinburgh, Scotland.

For example, if your peers are doing a lot of skydiving, you are more likely to engage in such activity than if you are part of a group that would much rather watch people skydiving on YouTube instead. This can play out in money choices as well: if peers are likely to place their funds in risky investments, you may be more likely to take risks with your own financial assets.

Furthermore, how we spend and make money is about more than risk – there’s an ethical dimension. How we see ourselves can extend into whether we like to buy “fair-trade” goods or invest in “environmentally friendly” shares.

What it means for your money
It might therefore pay to consider where you make financial decisions and who you have around you when you do. Do the people in your social group see you as a risk taker? Do you have a job in which you take a lot of risks, financial or otherwise? It may be as simple as examining whether you see yourself as trustworthy.

It might be that you simply think you are bad at money choices, when actually you are OK. Are you giving yourself a fair chance and properly evaluating your alternatives?

So think slower, not fast
There will never be a magical way to avoid falling into these traps, but there may be ways to side-step them. For example, by thinking more slowly and carefully about your surroundings, your place in them, and how you see yourself.

As psychologist Daniel Kahneman has noted, this “thinking slow” can often be very helpful. Taking time seemingly makes us less prone to biases when making decisions – and that can have a knock-on effect that improves how we manage money.

Peer effectsPsychology

eZonomics team
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