New research in behavioral finance from Money Anxiety gives us greater insight into our financial mind. The research shows that our fear of losing money is much greater than our desire to gain during times of high money anxiety. Therefore, in times of high financial anxiety, we desire greater return on our money as compensation for the possibility of a loss. The amount we expect to gain is four times the amount we risk during times of high money anxiety compared to only twice the amount during “normal” level of financial stress.
The research also shows that we alternate between instinctive and analytical financial decisions based on our level of money anxiety. We tend to make instinctive decisions during times of high money anxiety and analytical financial decisions when we are not financially anxious. The research also shows that our instinctive financial decisions are often wrong. During and in the aftermath of the Great Recession, consumers lost nearly $60 billion in interest income because they made an instinctive decision to shift their money from certificates of deposits to checking accounts, which yielded much lower return.
The link between our financial decisions and our level of financial anxiety has been demonstrated by the Money Anxiety Index, which shows how we tend to hoard money in savings accounts just as soon as our level of financial anxiety increases. Conversely, we tend to reduce savings and increase spending when our level of money anxiety decreases. Consumer savings and spending are the two engines of the U.S. economy as they each make up over $11 trillion each.
The Money Anxiety Index measures consumers’ level of financial worry and stress. Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s. The money anxiety Index was developed by Dr. Dan Geller, who is an expert in behavioral finance, and the author of the book Money Anxiety. The index is highly predictive. It signaled the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007.