My Friend’s Strange Spending
Do you have a friend like this? Someone who buys a luxury bag worth a million won without hesitation as a “gift to myself” on payday, but trembles over a 10,000 won taxi fare? Or someone who, despite their stock investment halving in value, can’t sell it saying, “It will go up someday,” yet easily spends small unexpected money as if it’s “money they don’t need”?
From the outside, these money decisions make you wonder, “Why is that person like that?” We often click our tongues at others or blame ourselves, thinking, “Am I really that foolish?”
But today, I want to tell a different story. The truth is, no one is crazy.
Our Brain Is Actually Poor at Calculating Money
The story goes back to ancient times when our ancestors hunted and gathered. Back then, the brain’s top priority was survival. Should you pick the fruit in front of you or avoid the predator nearby? Immediate, survival-critical decisions were key. The brain evolved to avoid danger and seize opportunities rather than perform complex calculations.
But in just a few thousand years, the very complex and abstract concept of “money” appeared. Our brains have not yet fully adapted to this new concept. So when dealing with money, it’s like trying to run the latest game on an old operating system — errors often occur.
The field studying this phenomenon is called behavioral economics. Unlike traditional economics, which assumes humans are always rational and logical, behavioral economics examines how emotions and cognitive limitations affect economic decisions through the lens of psychology. And it has uncovered some fascinating facts.
The Mental Ledger: Mental Accounting
Back to the friend’s story: why could they easily buy a million-won bag but hesitate over a 10,000 won taxi fare? It’s because inside our minds, there is a ledger called “mental accounting.”
This concept, introduced by behavioral economics pioneer Richard Thaler, suggests we attach “tags” to money and manage it in separate mental accounts.
- Salary earned through hard work: the “precious money” account
- Bonus or windfall money: the “free money” account
- Money saved for travel: the “fun money” account
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For the friend, the million won came from the “reward” account for a month of hard work, while the 10,000 won taxi fare came from the “living expenses” account that needed to be saved. Although it’s the same money, the value and usage are perceived completely differently depending on the label.
This explains why we easily spend unexpected money but fiercely protect money in savings accounts. It may seem irrational, but inside our minds, there is a logical accounting process at work.
The Pain of Losing Is Greater Than the Joy of Gaining: Loss Aversion
The stubbornness of holding onto stocks despite losses is also rooted deeply in our brain’s “loss aversion.”
Psychologists Daniel Kahneman and Amos Tversky found that people feel the pain of loss about 2.5 times more intensely than the pleasure of an equivalent gain. In other words, losing 100,000 won hurts much more than gaining 100,000 won feels good.
The moment you sell stocks, the loss becomes an irreversible reality. Our brain, unwilling to face this pain, comforts itself with thoughts like “It will go up someday” or “I haven’t sold yet, so it’s not a loss.” This is not a rational investment decision but a deeply human emotional response.
No One Is Crazy, Just Human
The many “crazy” decisions we make about money are not because we are insane. They are because we are deeply human. Our decisions are not numbers moving on a spreadsheet but the product of our experiences, emotions, and brain functions evolved over tens of thousands of years.
- My childhood experiences: Someone who grew up poor may prioritize stability, while someone from a wealthy background may handle money more boldly.
- My current emotional state: When in a good mood, impulsive purchases are easier; when anxious, rash investment decisions may occur.
- Information overload: Too much information can hinder good judgment, causing reliance on the most noticeable or recent information (anchoring effect, recency bias).
So, if you ever see a friend’s incomprehensible spending habits or blame yourself over money issues, remember this story. Think, “Ah, this is what’s going on in their mind,” or “I’m making this decision because of these feelings right now.”
Understanding our “irrationality” might ironically be the first step toward making wiser and more rational decisions about money. After all, managing money may not start with math but with a deep understanding of human nature.