Wednesday, April 29, 2009

Chairman Of The Board

Which one of these people do you suppose is Chairman?

A religious person ought, in respect to all the things that he uses, be like a statue which one may drape with clothing, but which feels no grief and makes no resistance when one strips it again. It is in this way that you should feel towards your clothes, your books, your cell and everything else you make use of.
---St. Alphonsus Rodriguez

I must consider myself as a corpse which has neither intelligence nor will: be like a mass of matter which without resistance lets itself be placed wherever it may please anyone;like a stick in the hand of an old man, who uses it according to his needs and places it wherever it suits him.
---St. Ignatius Loyola
Zen is a matter of character, not a matter of intellect.

---D.T. Suzuki
Sometime in the last several years, I came to realize that my sturdy education in representational government wasn't doing me much good in the contemporary United States. My generation had been taught that there may be the occasional corrupt politician, but overall our federal system of checks and balances is the best there is...and the bad apples get discovered and thrown out. They have to be...or the whole barrel rots.

But a quarter of a century or so ago a faded Hollywood actor, who had ended up selling 20 Mule Team Boraxo on TV before General Electric gave him his big commercial break, convinced us that government is the enemy. The marketplace is a better governor and the corporate businessperson always will provide for our families with jobs and trickling wealth. Government legislation and contracts were best devised through the work of specially trained experts, known rather cheaply as lobbyists. Maybe they did make their contacts at first in lobbies, but eventually luxury resorts became the normal scene. There was nothing wrong with a congressperson bought and paid for, as long as he provided treats for his constituency.
I decided those few years ago that reform in Congress was hopeless. Now our only chance would have to be at stockholder meetings. There the average citizen still could get to his feet and speak his mind about what companies should be doing. The boards of directors would have to listen to those average citizens, because it was hard-earned savings that bought those shares of stock. And of course the directors would tell management what had to be done.

I don't own stock myself, so I've never been to one of the meetings I dreamed existed. And I never bothered to research them. So it was with eagerness that I read a newspaper column in our local Athens Messenger the other day about this very thing. Its author is no less than a cultural treasure around here. Guido H. Stempel III is a distinguished professor emeritus in the E. W. Scripps School of journalism at Ohio University, and we are privileged that sometimes he still writes a letter or column. I say "privileged" even though the writing you are about to read completely dashed my hopes for corporate reform through the boardroom. Through Professor Stempel's kind permission, here is his view~~~
It's Spring, and all over America stockholders are being reminded how little control they have over the companies in which they have invested and how little say they over over the compensation of CEOs.
The enlightenment comes from the annual reports issued by companies inpreparation for their annual meetings of stockholders.

If you work your way through the report you eventually will come to the information on the CEO's compensation. You probably have learned that the company's revenue and profits are down, and you know that the stock price is down. It hasn't been a good year, so you are surprised to see the CEO is getting a bonus and some other incidental compensation besides his salary.

Do the stockholders decide what the CEO's compensation will be? Don'tbe silly. What do stockholders know? It's the board of directors who decide.

And what do the members of the board of directors know? Most know they are getting paid more than $100,000 a year to attend a few meetings and give a little advice. Naturally they want the CEO to be well paid.
It is also the board of directors that devises the wonderful goldenparachutes you read about--that payment of millions of dollars in retirement or termination benefits. You probably will be amazed, as I have been, when your read of an apparently unsuccessful CEO getting $20 million in exchange for his or her resignation.

Members of the board supposedly are elected by the stockholders, but you are in for a surprise there. There are no contests. If there are 12 positions on the board, then there are 12 candidates.

Of course, you are free to vote against any or all candidates.However, if you have been paying attention as you have read through thereport you have come to the statement of share owned by the officers and board members. The total is well in the millions, and voting is not oneperson one vote but one share one vote. If you own 100 shares, will yourvote matter?

You have one other matter to vote on. You can vote for or against the auditing firm the CEO and the board recommends. This is no small matter--audits can easily cost a million dollars. Your vote, however, is a small matter.

You may also get to vote on proposals presented by stockholders.Whatever the proposal is, you can count on the board of directors being unanimously and strongly opposed.
There is also a cover letter from the CEO urging you to vote because the company values your vote.

Some companies respect shareholders more than this scenario suggests.Some, for example, inform stockholders of what CEOs are being paid this year and ask stockholders whether or not they think the compensation isappropriate. This is a fairly recently development, and a majority of companies oppose this. Furthermore, those that do it do not promise tochange the compensation if the stockholders don't like it.

When you take all this in, you understand part of the reason for our current recession. It's not all because of bankers and Wall Street. Boardsof directors are part of the problem, and stockholders are virtually powerless to stop them.
The original article can be found here but it is necessary to be a paid subscriber to read it in this format.

Sunday, April 05, 2009

Regulating The Money Changers

Regulate this! Albert J. Dunlap, also known as Chainsaw Al, graduated from West Point before becoming CEO of Lily Tulip Cup and Scott Paper. By firing thousands of employees at once and closing plants and factories, he forced up the share price of his companies and made billions. When shareholders were left holding an empty cup, he sometimes got fined a few million. Overall, toxicity's been profitable.

To be able to spit in their eye and do what you think is right and report the news and have enough readers to make some impact is such a pleasure that you forget, you forget what you are writing about. It becomes, you know, it like, you are like a journalistic Nero fiddling while Rome burns and having a hell of a good time or like a small boy covering a hell of a big fire. It's just wonderful and exciting. You are a cub reporter and God has given you big fire to cover. And you forget, you forget it is really burning.

---I.F. Stone

And when I was brought into the convention center to tell this story (of her arrest) to the networks, one of the reporters for the network said, "How come I didn't get arrested?" And I said, "Oh, were you out covering the protests?" And he said, "No."... You got to get out there. And if the problem with this... It's not just a violation of freedom of the press... It's a violation of the public's right to know. If they're just inside the convention, they get one message. The orchestrated message. And that's important to cover. You got to get into the corporate suites. Who's funding all of this? And you have to get into the streets. Democracy's a messy thing. And all of these voices must be heard.

---Amy Goodman

Watching the news over the over the last two days, while Obama, President Obama, is in London. Watching all of the demonstrators there, some of them violent and militant, but thousands of them not. Marching to a bank, and protesting. I thought of something you wrote recently. You said that for the magnitude of this financial crisis, there should be a lot more popular rage in this country. Why do you think there isn't? Because the taxi driver this morning, coming down here, to me, was angry as hell.

---Bill Moyers, on his PBS Journal, April 3, 2009

Obama's financial policy is coming under closer scrutiny in the media and on the Internet. The suspicion and anger on Main Street, to which supposedly this President listens and responds, is getting louder. Not a day goes by that some American doesn't walk into an office or factory somewhere and just start shooting. Are they all just nutcases, or is there a war starting? Are we going postal? It's time to take a closer look.

Who are these bankers and bosses who have emerged since Reagan? What is the free market like since Poppy Bush declared globalization, and Junior encouraged credit cards without limit and told us all to go shopping. It's your patriotic duty to go shopping. Under Obama, apparently it still is. The same guy seems to be running the show.

The 3 quotations above are from the transcript of Friday's Moyers Journal. I don't know about you, but here in Athens I can't find the show anymore. Our PBS station, with dozens of digital channels and one remaining analog, seems to broadcast it sometime...but between pledge drives and shifting schedules I have no idea where it is. Fortunately I still can go to and find out what happened. Apparently Friday's show was all about journalism and economic regulation. Since Amy Goodman is on a 70 city tour, promoting a new book, and coming here Thursday (broadcasting from a station that doesn't carry Democracy Now!), maybe we need a crash course in cash meltdown.

The first part of the Journal was given over to an interview with William J. Black, author of a book titled The Best Way To Rob A Bank Is To Own One. You get the idea. Mr. Black was a government regulator during the savings and loan scandal of the 1980s. Moyers introduced him thus~~~

"The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L's in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating — after whom the senate's so-called 'Keating Five' were named — he sent a memo that read, in part, 'get Black — kill him dead.' Metaphorically, of course. Of course.
"Now Black is focused on an even greater scandal, and he spares no one — not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname 'banksters.'"
You need to see or read the whole interview, but here's an excerpt~~~
WILLIAM K. BLACK: AIG all by itself, cost the same as the entire Savings and Loan debacle.
BILL MOYERS: What did AIG contribute? What did they do wrong?
WILLIAM K. BLACK: They made bad loans. Their type of loan was to sell a guarantee, right? And they charged a lot of fees up front. So, they booked a lot of income. Paid enormous bonuses. The bonuses we're thinking about now, they're much smaller than these bonuses that were also the product of accounting fraud. And they got very, very rich. But, of course, then they had guaranteed this toxic waste. These liars' loans. Well, we've just gone through why those toxic waste, those liars' loans, are going to have enormous losses. And so, you have to pay the guarantee on those enormous losses. And you go bankrupt. Except that you don't in the modern world, because you've come to the United States, and the taxpayers play the fool. Under Secretary Geithner and under Secretary Paulson before him... we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?
BILL MOYERS: And why...
WILLIAM K. BLACK: How mad is this?
BILL MOYERS: What is your explanation for why the bankers who created this mess are still calling the shots?
WILLIAM K. BLACK: Well, that, especially after what's just happened at G.M., that's... it's scandalous.
BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?
WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, รข€˜contracts, sacred.' But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.
BILL MOYERS: The cover up?
WILLIAM K. BLACK: Sure. The cover up.
BILL MOYERS: That's a serious charge.
WILLIAM K. BLACK: Of course.
BILL MOYERS: Who's covering up?
WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.
These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.
Frank Rich comes at it from a different angle this morning, but essentially he's covering the same story. Like Moyers, he's wondering why Rick Wagoner got singled out...but the bankers and brokers still are under cover~~~
"Sure, Rick Wagoner deserved his fate. He did too little too late to save an iconic American institution from devolving into a government charity case. He embraced the Hummer. G.M.’s share price fell from above $70 to under $3 on his watch. Yet few disputed the judgment of the Michigan governor, Jennifer Granholm, that Wagoner was a 'sacrificial lamb,' a symbolic concession to public rage ordered by a president who had to look tough after being blindsided by the A.I.G. bonuses. Detroit’s chief executive had to be beheaded so that the masters of the universe at the top of Wall Street’s bailed-out behemoths might survive.
"On this point even the left and the right could agree. The union leader Andy Stern publicly wondered why the administration didn’t also dethrone Ken Lewis of Bank of America. Thaddeus McCotter, a conservative Republican congressman from suburban Detroit, asked, 'When will the Wall Street C.E.O.’s receiving TARP funds summon the honor to resign? Will this White House ever bother to raise the issue?'
"When reporters did raise the issue of a double standard to the White House press secretary, Robert Gibbs, they got double talk: 'I don’t have anything specific on Bank of America.'
"But even as that unanswered question hangs in the air, a more revealing inquiry might be this: Why is there any sympathy whatsoever for a Detroit C.E.O. who helped wreck his company, ruined investors and cost thousands of hard-working underlings their jobs, when there is no mercy for those who did the same on Wall Street? Might we, too, have a double standard? Could we still be in denial of the reality that greed and irresponsibility were not an exclusive Wall Street franchise during our national bender?"
But the most devastating writing I came across on this whole mess is at the Forum section of---sorry, The writer is named Mark Ames, and I guess he maintains a column there called Backstabber. This article is called "Class War 101," and sets forth they hypothesis that the "economic elite" are not the same kind of human like you and me. Their reptilian brains work differently...and so do the hormones that create their hunger. Sound too cynical for you? Maybe. Born in California in 1965, Ames went to a private Episcopalian school, then the University of California. During the Reagan, both Bushes, and the Clinton years, he became more and more disillusioned with the United States. So why didn't he move to Russia if he didn't like it here. He did. He started a newspaper there called The Exiled, but the government shut him down when he was critical of the Georgian invasion. He's written a book with Rolling Stones' Matt Taibbi, if that gives you an idea of his flavor. See if any of this makes sense to you~~~
"If we’d cared to look around us at any time since the Reagan Revolution, we’d realize that the CEOs, billionaires and finance stars are behaving no differently today than they have been for nearly three decades. When we look back, what will pain us most is the way we admired the billionaires even as they brought about our ruin, turning them into TV celebrities and magazine-cover heroes, worshipping them like rock stars right up to the end.
"A perfect example of the kind of person who benefited from the Reagan Revolution is Al 'Chainsaw' Dunlap, a corporate superstar during the peak Clinton years, when Reaganomics accelerated under the guiding hands of Alan Greenspan, Larry Summers, and Robert Rubin. It was during Clinton’s centrist pro-business presidency that innovations like the like mass-layoff (rebranded as 'downsizing') became a regular feature of economic booms, rather than of economic busts, as they had been in the past. Layoffs expanded right with the economy for the simple reason that each mass firing freed up millions or billions of dollars that had gone to workers, but now could be divided up between executives and major shareholders. The problem was finding people cold-blooded enough to do the job—which is to say, there was no problem whatsoever. As Dunlap himself boasted in a 1998 interview with Fortune magazine, 'Mickey Mouse could do the cost cutting.'...
"This same arc has been repeated all over the American economy—what we once thought were isolated cases turned out to be a pattern, and the pattern repeated so much up down corporate America that it finally became clear: These things are the rule. No wonder the SEC never came down hard on anyone: it would have meant shutting down the entire economy and starting from scratch. "In the past, when downsizings and payouts happened, they were seen as a necessary evil in the overall march to a free-market utopia. Now we understand that what really happened wasn’t as complicated or theoretical as it was made out to be. It was a straight-forward transfer of wealth out of the pockets of, say, 11,200 employees at Scott Paper into the pockets of Wall Street bankers and their CEO henchmen. No matter how many words like 'efficiency' and 'restructuring' you gloss it with, it’s still taking money that formerly went into one group’s pocket, and giving to another, much smaller group.
"What’s so strange, looking back, isn’t just the blatant, shameless plundering of thousands of American families for a few individual’s excessive profit, but the way we all adored them while they were in mid-plunder. They didn’t even try to pretend to be likeable or even human, and we still licked their boots."
Like Taibbi, Mark Ames writes graphically. Visits to the sites of Rolling Stone and Playboy, like purchasing the magazines, can be risky business if you seek to avoid cussing and the sight of flesh. But this is muckraking time...and it's not pretty.
During the Obama campaign there were the same concerns, from Left and Right, about his Chicago connections, and beyond, to wealthy backers and financial interests. Is he just another front man? Except for this area...and maybe Afghanistan...he has stepped forward with answers when questions were raised. Hello Grassroots, do you have any questions?

Thursday, April 02, 2009

Money Meltdown: The Psychologists Speak

Christ Driving the Money Changers out of the Temple
Valentin de Boulogne
(b. 1591, Coulommier-en-Brie, d. 1632, Roma)

Shake off this sadness, and recover your spirit;
sluggish you will never see the wheel of fate
that brushes your heel as it turns going by,
the man who wants to live is the man in whom life is abundant.

---Miguel de Unamuno

We must learn to see the world anew.

---Albert Einstein

It is said that Mahatma Gandhi (1869-1948) considered the seven deadly sins to be

Wealth without works

Pleasure without conscience

Knowledge without character

Commerce without morality

Science without humanity

Worship without sacrifice

Politics without principle

Maybe I've been reading the wrong guys. Something about the way economists talk and write just clashes with the truths of the poets that first hit me in college. I had planned to go into international law and diplomacy. But then a required English course brought Gerard Manley Hopkins and Dylan Thomas into my life. By the time Gary Snyder hit me a decade later, I was nowhere near a judge's bench...except as an occasional defendant. I love to give the poem the works at the lectern, on the stage. Krugman writes well, but I'm not sure I'd relish performing him...even lately, as he seems to be trying to teach Obama the basics.

I don't like to read psychologists either. They give me the willies...and they possibly worship statistics even more than economists do. I'm sure both are guilty of manipulating the numbers. But this morning, for the first time, I read a psychological view of the current financial crisis...and the urges that overcame unregulated capitalists---again. It made more sense to me than any of the stuff I hear and read everyday. So, for your approaching tax day, Earth Day, Passover, Holy Week, and what-have-you, allow me to share it---and don‘t miss the advice at the end about freezing your credit card~~~

Why money messes with your mind

Dough, wonga, greenbacks, cash. Just words, you might say, but they carry an eerie psychological force. Chew them over for a few moments, and you will become a different person. Simply thinking about words associated with money seems to makes us more self-reliant and less inclined to help others. And it gets weirder: just handling cash can take the sting out of social rejection and even diminish physical pain.
This is all the stranger when you consider what money is supposed to be. For economists, it is nothing more than a tool of exchange that makes economic life more efficient. Just as an axe allows us to chop down trees, money allows us to have markets that, traditional economists tell us, dispassionately set the price of anything from a loaf of bread to a painting by Picasso. Yet money stirs up more passion, stress and envy than any axe or hammer ever could. We just can't seem to deal with it rationally... but why?
Our relationship with money has many facets. Some people seem addicted to accumulating it, while others can't help maxing out their credit cards and find it impossible to save for a rainy day. As we come to understand more about money's effect on us, it is emerging that some people's brains can react to it as they would to a drug, while to others it is like a friend. Some studies even suggest that the desire for money gets cross-wired with our appetite for food. And, of course, because having a pile of money means that you can buy more things, it is virtually synonymous with status - so much so that losing it can lead to depression and even suicide. In these cash-strapped times, perhaps an insight into the psychology of money can improve the way we deal with it.

Relative values

Even as a simple medium of exchange, money can take a bewildering variety of forms, from the strips of bark and feathers of old, through gold coins, pound notes and dollar bills to data in a bank's computer - mostly cold, unemotional stuff. The value of £100 is supposed to lie in how much beer or fuel it can purchase and nothing else. You should care no more about being short-changed £5 at the supermarket checkout than losing the same amount when borrowing money to buy a £300,000 house. Similarly, you should value £10 in loose change the same as £10 in your bank account that you've mentally set aside for your niece's birthday.
In reality we are not that rational. Instead of treating cash simply as a tool to be wielded with objective precision, we allow money to reach inside our heads and tap into the ancient emotional parts of our brain, often with unpredictable results. To understand how this affects our behaviour, some economists are starting to think more like evolutionary anthropologists.
Daniel Ariely of the Massachusetts Institute of Technology is one of them. He suggests that modern society presents us with two distinct sets of behavioural rules. There are the social norms, which are "warm and fuzzy" and designed to foster long-term relationships, trust and cooperation. Then there is a set of market norms, which revolve around money and competition, and encourage individuals to put their own interests first.
Economic exchange has been going on throughout human history, so it is possible that our ancestors evolved an instinctive capacity for recognising the difference between situations suited to social or market norms, and that this could have developed well before the invention of money. Alternatively, we may learn the distinction.
Either way, we appear immediately and subconsciously to recognise the cues associated with the realm of market norms. Experiments published in 2007 reveal that even a passing contact with concepts linked to money puts us into a market-oriented mentality, making us think and behave in characteristic ways.
Kathleen Vohs in the department of marketing at the University of Minnesota, Minneapolis, and colleagues, first got student volunteers to complete a task in which they had to make sensible phrases either from a set of words that had nothing to do with money (such as "cold", "desk" or "outside") or from money-related words (including "salary", "cost" or "paying"). Then they asked individuals from the two groups to arrange a set of discs into a particular pattern.
The researchers found that the volunteers who had been primed with the money-related words worked on the task for longer before asking for help. In a related experiment, people in the money-word group were also significantly less likely to help a fellow student who asked for assistance than were people in the group primed with non-money words (Science, vol 314, p 1154).

Split personalities

Vohs suggests there is a simple dynamic at work here. "Money makes people feel self-sufficient," she says. "They are more likely to put forth effort to attain personal goals, and they also prefer to be separate from others." The touchy-feely social side of us may disapprove of such behaviour but it is useful for survival. This ability to assess which set of norms applies in a particular situation is important in guiding our behaviour, Ariely says. It allows you to avoid expecting too much trust in the midst of a competitive business negotiation, for example, or making the mistake of offering to pay your mother-in-law after she has cooked you a nice meal. "When we keep social norms and market norms on separate paths, life hums along pretty well," says Ariely. "But when they collide, trouble sets in."
The trick is to get the correct balance between these two mindsets. Numerous psychological studies have found a general trade-off between the pursuit of so-called extrinsic aspirations - such as wealth, but also fame and image - and intrinsic aspirations, such as building and maintaining strong personal relationships. People who report a focus on the former score low on indicators of mental health, and those strongly motivated by money are also more likely to find their marriage ending in divorce.
This is not to say that we shouldn't focus at all on extrinsic aspirations. Everyone needs money for those parts of their lives governed by market norms, and it's well known that financial strain can bring depression, perceived loss of control and reduced life expectancy (see "Buy into happiness").
Now that the days of easy credit and rampant consumerism appear to be over, for the time being at least, it would be nice to think that we might acquire a more balanced relationship with money. Unfortunately, it's unlikely to be that simple. One reason why is exposed by Vohs's latest findings, which reveal another peculiar aspect of our mental relationship with money.
In a study to be published soon in the journal Psychological Science, Vohs and psychologists Xinyue Zhou of Sun Yat-Sen University in Guangzhou, China, and Roy Baumeister of Florida State University, Tallahassee, found that people who felt rejected by others, or were subjected to physical pain, were subsequently less likely to give a monetary gift in a game situation. The researchers then went on to show that just handling paper money could reduce the distress associated with social exclusion, and also diminish the physical pain caused by touching very hot water.
"Money seems to have symbolic power as a social resource," says Vohs. "It enables people to manipulate the social system to give them what they want, regardless of whether they are liked." Put bluntly, it looks as if money is acting as a surrogate friend. Could that explain why some people focus on extrinsic aspirations at the expense of real social relationships?
Psychologists Stephen Lea at the University of Exeter, UK, and Paul Webley at the School of Oriental and African Studies, University of London, have suggested another reason for unhealthy and obsessive attitudes to money. They believe that it acts on our minds rather like an addictive drug, giving it the power to drive some of us to compulsive gambling, overwork or obsessive spending (Behavioral and Brain Sciences, vol 29, p 161). "It is an interesting possibility that all these are manifestations of a broader addiction to money," says Lea. Compulsion appears to be a problem for people with several money-related disorders which are increasingly being identified by psychologists (see "Money problems").
Lea and Webley propose that money, like nicotine or cocaine, can activate the brain's pleasure centres, the neurological pathways that make biologically beneficial activities such as sex feel so rewarding. Of course, money does not physically enter the brain but it might work in a similar way to pornographic text, argue Lea and Webley, which can cause arousal not by giving any biochemical or physiological stimuli, but by acting through the mind and emotions.
Some evidence for the notion of "addiction" to money comes from brain imaging studies. In one experiment, for example, a team led by Samuel McClure, a psychologist at Princeton University, asked volunteers to choose between receiving a voucher for right then, or a higher-value one a few weeks later. Those who chose the instant reward showed brain activity in the areas linked with emotion, especially the limbic system, which is known to be involved in much impulsive behaviour and drug addiction. Those choosing the delayed reward showed activity in areas such as the prefrontal cortex known to be involved in rational planning (Science, vol 306, p 503).
The idea that money taps into brain circuits evolved to make biologically important activities rewarding is given a further boost by another strange discovery. In an attempt to provide an evolutionary explanation for our motivation to strive for money in present-day societies, Barbara Briers of the HEC business school in Paris, France, and colleagues decided to test whether our appetite for cash is directly related to our appetite for food.
They made three discoveries: hungry volunteers were less likely to donate to charity than those who were satiated; those primed to have a high desire for money, by having imagined winning a big lottery, went on to eat the most candy in a taste test; and people whose appetites had been piqued by sitting in a room with a delicious smell, gave less money in a game situation than those who played in a normal-smelling room (Psychological Science, vol 17, p 939). Briers reckons this indicates that our brain processes ideas about money using the same pathways evolved to think about food, so that in our minds the two are synonymous. If she is correct, it puts a whole new spin on the term "greedy bankers".
Hungry people are less likely to donate money to charity than those who are satiated
We are still a long from knowing why some people appear to go crazy over money, while others seem to pay it so little attention. Those chasing after it to the exclusion of almost everything else aren't necessarily "addictive". Some may be greedy, and others just needy - thirsty for status or using money to compensate for social shortcomings. What is clear is that money - supposedly a dispassionate tool of exchange - stirs up big emotions and mental strife. It's time economists' models took this into account.

Buy into happiness

People with more money tend to be happier than those with less - but only up to a point. That is the conclusion of psychologists Ed Diener at the University of Illinois at Urbana-Champaign, and Martin Seligman of the University of Pennsylvania, Philadelphia, who have reviewed numerous studies looking at the psychological effects of wealth. They report that money's impact on happiness suffers from diminishing returns: once you have enough for food and shelter, more cash doesn't bring much extra joy (Psychological Science in the Public Interest, vol 5, p 1).
Nevertheless, unless you are already rolling in it, you might want to carry on buying the odd lottery ticket. When Andrew Oswald of the University of Warwick, UK, and Jonathan Gardner of business consultancy Watson Wyatt Worldwide quizzed a random sample of British citizens who had won lottery prizes wins of between £1000 and £120,000, they found indicators of significantly better mental health than in non-winners or those who won very small prizes (Journal of Health Economics, vol 26, p 49). The researchers believe that acquiring extra capital left people less worried about their financial lives, and so less stressed and therefore less prone to stress-related illnesses. The extra cash may not have bought happiness directly, but it certainly gave winners something to smile about.
Even without a windfall, though, you can get more joy for your buck if you are careful how you spend it. Ryan Howell of San Francisco State University and colleagues asked volunteers questions about their recent purchases. The researchers found that people reported "experiential purchases", such as trips to the theatre or travel, as bringing them more happiness than material purchases such as clothes. A concrete purchase may have cost more and lasted longer but a good experience brought more pleasure.

How to master mental accounting

Spending too much on your credit card? Try freezing it - literally. Drop it in a glass of water and put it in the freezer, then when you get the urge to splurge you will have to let the ice thaw, by which time your sanity should have prevailed. According to Richard Thaler, an economist at the University of Chicago, tricks like this are a useful way to counter our brain's irrational financial tendencies. These arise, Thaler believes, because our psychological biases cause us to put money into different "mental accounts" and to think of the contents of each in a different way.
Credit freeze
Adding £50 to a credit card bill already in the thousands seems far less extravagant than paying out £50 cash for a meal. Anyone with a credit card appreciates the truth of this. Indeed, it has been shown that people paying with plastic are less able to remember how much they spent than those paying with cash. As Thaler points out, credit cards act as "decoupling devices", separating the pleasure of the purchase from the pain of payment, which gets pushed into the foggy future. Freezing your card gives you a chance to overcome this emotional pull and act rationally.
In his book Nudge, co-authored with legal scholar Cass Sunstein, also at the University of Chicago, Thaler identifies other irrational biases that lead to distortions in our mental accounting. Almost all of us, for example, are "loss averse" - it hurts more to lose £50 than it feels good to win £50. We also value money in relative rather than absolute terms - we consider £10 irrelevant when buying a house but not when paying for a meal. Similarly, finding £100 will give many people more pleasure than having a heating bill cut from £950 to £835, even though this gains them more in real terms.
We also have a well-known bias in favour of a little money now over more money later, which makes saving so difficult. Thaler has suggested - and many companies are now using - a scheme called "Save more later" that puts this bias to work. Employees can commit themselves to putting more money into their retirement savings in future years, rather than doing it now. It seems to work for the same reason that we are lured by offers of "no payments for the first year", but in a more beneficial way.
Knowing about mental accounting offers some insight into how we might handle money difficulties and the pain that comes with them. Thaler's tip for saving is to take money from the mental category of "loose change". Instead of writing a cheque for £1000 to be deposited in a savings account, he says, it is far less painful and can be just as effective to continually round up our purchases - thinking of an item costing £22.50 as costing £30, say - and then saving the balance.
Another economist has a trick for taking the sting out of costs associated with car troubles or other unforeseen expenses. He sets aside a lump sum at the beginning of each year and mentally earmarks it "donations to charity". If any unexpected bills arise, he pays them from that fund, which in his mind is already gone, and donates whatever is left in December.
Daniel Ariely from the Massachusetts Institute of Technology has come up with a more ambitious plan. He suggests we should all be able to add categories to our credit cards to which we can apply suitable limits: no more than £50 for a meal out, say, or £300 annually on shoes. It may not come as a surprise that he has yet to persuade any bank that this is a good idea.

Mark Buchanan is a writer based in Cambridge, UK, who's written a number of articles for New Scientist lately.