The Psychology of Money, Part 1: 4 Ways Your Brain is Working Against You

If you are human, you likely have some hang-ups around money. Our brains are wired in ways that make money management difficult. In order to take control of your finances, it helps to understand the unconscious beliefs that underly your decisions. In the financial realm, there are four psychological phenomena that heavily weigh into our money making decisions and our overall happiness.

The Hedonic Treadmill

“If I could only have a one-wheel/a supportive partner/a better job,” you think to yourself, “Then I will truly be happy.” (okay, I might be the only one hankering after a motorized skateboard…) Hedonic adaptation is the idea that you have a set baseline for happiness, and no matter what happens to you, your state of happiness will generally recover to the same level. Whether you win the lottery or lose a limb– researchers found that although you may be struck with temporary ups or downs, ultimately you will return to the same level of happiness after some time passes.

Watterson, B. Calvin and Hobbes

We are hardwired to strive.

It can be a boon– we constantly look for ways to improve and things to accomplish, but the problem with constant striving is that there is less space for contentment. We end up on a hedonic treadmill, always chasing the next high. There will always be another goal, another race, another carrot that keeps us toiling on. The trick is to realize that the things we desire will only boost our happiness for a short time.

Ultimately our energy should not be spent chasing those highs but instead learning to stop and appreciate, enjoying our natural “set level” of happiness. We can stop striving for material possessions like a new car or big house (or a one-wheel) because we realize that the happiness from them will be fleeting.

The Hungry Ghost

A friend recently told me about the Buddhist legend of the hungry ghost– an ephemeral creature that moans for food, never able to satiate its protruding gut. The hungry ghost is another version of the hedonic treadmill, except rather than always chasing the next high, the hungry ghost is more about avoiding the next low. “I realized I kept trying to feed my hungry ghost,” she said, “and maybe you do too.”

In Chinese Buddhism, the hungry ghost has a long neck, constricted throat, and a large stomach that is nearly impossible to fill

Her perceptiveness struck me, as I definitely have been feeding a hungry ghost– saving money without a reason why and never feeling like it was enough. The desire for more is unsatiable. I realized that these dissatisfied ghosts would only drift away by feeding them something else: gratitude. So I take time throughout the day, especially in moments of discontentment, to pause and ignore the clamoring ghosts. I consider the aspects of life I am grateful for and imagine them drift away when they realize I have nothing more to feed them.

The Worm’s Waking

      This is how a human being can change:

there’s a worm addicted to eating
grape leaves.
Suddenly he wakes up,
call it grace, whatever, something
wakes him, and he’s no longer
a worm.
He’s the entire vineyard,
and the orchard too, the fruit, the trunks,
a growing wisdom and joy
that doesn’t need
to devour.


Scarcity Mindset

Focusing on abundance– being the entire vineyard, and the orchard too– also can help with our third phenomena. The scarcity mindset causes people to focus on immediate needs at the expense of the future. The problem is that scarcity perpetuates scarcity— the necessity of tunnel vision in the short term means that everything beyond the horizon is ignored. A pattern emerges; while you are busy putting out fires, new ones flare up around you. You don’t have time to prepare for the future if you are focused on getting through today.

Scarcity captures our minds automatically. And when it does, we do not make trade-offs using a careful cost-benefit calculus. We tunnel on managing scarcity both to our benefit and to our detriment. – Scarcity: Why Having Too Little Means So Much

The consequences of scarcity means that one must constantly exercise willpower, over-and-over saying, “No, I can’t buy that right now,” or for someone on a diet, “No, I can’t eat that right now,” or someone trying to quit an addiction, “No, I can’t do that right now.” The mind’s constant demand for more while we continually say no wears on our willpower. The problem with constantly taxing our self-control is that when there is a windfall, or a scrumptious treat, or a perfect storm of stress, resolve dissolves into a “yes,” and we splurge, gorge, or indulge in our addiction.

The focus on the short-term means people can satisfy their pressing needs. This makes sense; people who are struggling to come up with rent are not likely to be interested in real estate investing. However, once immediate needs are met, it is important to break free from the pattern of the scarcity mindset. If you focus on fear of losing what you have, you may not take the risks necessary to seek new opportunities. Take a step back to reconsider those tasks clamoring for your attention and remember to allocate energy towards the future.

The Hot and Cold Empathy Gap

man in white dress shirt talking with woman in front of him
We underestimate the influence of hot-states

In the podcast Something You Should Know, the host interviewed Laura Rowley, author of the book Money & Happiness: A Guide to Living the Good Life. She talks about the gap in our ability to predict how we will behave when we are in a different ‘state’. For example, when we are calmly sitting at home (cold-state), we overestimate our ability to avoid a shopping-spree in a frantic close-out sale at the mall (hot-state).

When we underestimate the influence of hot-states (e.g. being angry, in pain, or hungry) on our choices, we tend to overreact and overspend. It can be difficult for our cold-state selves to prepare for our hot-state selves, but if we are aware of the gap we can be more vigilant.

While calm and collected, we can prepare snacks for our future self that would hungrily stand in a concession line for an over-priced hotdog. We can make lists for Christmas shopping while at home rather than trying to wing it in a crowded department store. Though it may be hard to empathize with our other ‘states,’ the least we can do is over-prepare in anticipation.


These four phenomena reveal secret motivators that influence our decisions. We may be running on a hedonic treadmill, fruitlessly feeding hungry ghosts, living for the present at the expense of our future, or underestimating the effect of our own emotions on our behavior. Understanding the pathways of the brain enables us to identify patterns during times when our brains are working against us. With these psychological phenomena in mind, we can skillfully navigate our way to happiness and financial freedom.

What about you?

Have you ever noticed yourself on a treadmill or feeding a hungry ghost? When looking back, do you see the areas where the scarcity mindset affected your planning for the future? Lastly, have you ever been surprised by your own reactions in a ‘hot’ state? Share in the comments below!

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  1. Very interesting! I definitely have a constant struggle with the scarcity mindset. I only recently realized how childhood poverty warped my relationship to money to mean that I’ll never feel like I have enough. In college, I also studied economics which was defined as “the allocation of scarce resources” and further reinforced the idea of a limit on what we can/should have.

    Both can definitely limit my risk-taking. This can be both good and limiting. I’m actively trying to shift to the abundance mindset. It’s good to continually reflect on how we relate to money. Thanks for writing this!

    1. It has probably served you well to not take too many risks (I’m not much of a risk-taker myself), but it can be amazing to see what people do when they let go of the fear and concentrate on abundance. I agree that it is good to reflect on our relationship with money– much like we reflect on our relationships with other people! Thanks for reading!

  2. Absofreakinglutely. I used to be the hungry ghost due to personal issues that I worked through, but next, financial woes led to a pernicious scarcity mindset thet I am still trying to shed. Thankfully I’ve placed myself in a state where most basic needs are met, I can save almost all of my take-home pay, and within eight weeks should be able to breathe much easier.

    I appreciate this overview & am glad to have found your blog!

    1. Congratulations on getting yourself into a state where you can meet your needs and start saving! Thanks for reading 🙂

  3. Your psychological look at why we spend powerfully and cleverly dives deeper into the realm of what makes us happy.
    You can bet that just as you have reflected on the psychology of how we spend, advertisers have researched this also. As I sold goods at a craft fair today, I was first-hand able to observe people’s behavior. I noticed that some people purchased gifts that were priced higher even though the product at the lower price was exactly the same, perhaps due to a perception that the quality must be better. I also noticed that if someone was actively choosing to buy, then others would start buying as if to get in on the action lest they miss out.
    You are so right that it helps to know oneself so that you are not swayed by your whims or tricked by the ploys put out there in the commercial world.

    1. You bring up a great point around behavioral economics and how these psychological effects play into our buying decisions. It’s really interesting that you got to see it first hand! It’s interesting that even if we know something is a ploy that it can work on us– recently I was going to buy something online and it said there was a limited supply and my heart rate went up. I felt like I had to buy or else the offer would disappear! Usually, the reality is that there is plenty of supply to meet the demand.

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