Monday, 24 May 2010


 Here’s a quick question for you:
A notepad and pen together cost £1.10.
The notepad costs £1.00 more than the pen.
How much does the pen cost?
Sixty-four percent of people say 10p. That’s the wrong answer.
The right answer is 5p. The notepad costs £1.00 more than the pen. So the notepad costs £1.05 and the pen 5p, together they cost £1.10.
‘But I can do simple maths’, I hear you cry. Of course you can but sometimes we don’t bother to stop and work things out. And in the case of the notepad and pen question the brain thinks it can take a short-cut. After all, £1.10 and £1 carve up nicely into a difference of 10p, so that’s the answer we give.
The brain is a clever, complex piece of kit. But it also doesn’t like to do more work than necessary. So it automatises lots of its processing, and relegates all kinds of decisions to the unconscious, intuitive part of the mind. That’s good most of the time. If it didn’t you’d have to work out every morning whether your socks go on before or after your shoes and whether that arrangement of features on a human head represents your partner’s face! But automatising some things gets us into trouble.
Aside from being a quirky bit of fun to catch out your mates with, this question also reveals something deeper about people. It can also tell us how good they are with money.
In a recent study I did, in conjunction with first direct, almost two-thirds of the sample got the question wrong. Those people were also more lax with their money. They had more credit card debt and fewer savings.
This study is the first to show a link between a person’s style of thinking and their personal finances. The notepad and pen question is adapted from a test of Cognitive Reflection (Frederick, 2005, Journal of Economic Perspectives). I’ve called people who give the right answer  ‘reflectors’. They use careful, logical thinking; a style linked to left-brain processes.
Those who get it wrong are ‘intuitors’ and more right-brained. They are more impulsive and go along with their gut instinct, even though it’s wrong.
Someone who  is more left-brained and able to stop and reflect can also suppress the need for immediate reward (buy now, pay later with credit) and will give more consideration to the long-term (invest now, benefit later).
Intuitive people can’t suppress the first answer that springs to mind. They’re the kind of people who live for the moment and avoid putting effort into anything that doesn’t bring short-term gain. This was linked to poor money management, such as only making the minimum repayment on a credit card.
Economists have only just begun to analyse how a person’s cognitive skills relate to their financial decisions. Irrational financial decision-making is the subject of a fascinating field of study called behavioural economics. 

This examines why people often act against self-interest. Examples might include:
  • -       having both money in savings and credit card debt (where saving get a paltry return and credit card interest rates are mammoth)
  • -       Or the strange fact that people are willing to pay more for something when buying with credit card than they would pay if they had to hand over the cash.
  • -       Or people who stay loyal to a bank yet moan about the service they receive
Right-brained people might feel dissatisfied with their bank but because they don’t stop and reflect and they’re not great at decisions involving effort, they don’t change it.
In the study 43% of intuitors had been with same bank since leaving school (for some this was thirty years or more)! This is irrational given how much choice there is now and the cash incentives for switching. For example, first direct gives a satisfaction guarantee. They’ll pay people to switch and if they’re not completely satisfied, they can leave the bank and receive a further £100 for their trouble. 
It seems a no-brainer to me.
Here are some other stats from the survey, carried out with over 500 participants:
  • ·       66% of reflectors pay off their credit card in full every month (43% of intuitors do)
  • ·       Twice as many intuitors than reflectors pay off only the minimum on their credit cards
  • ·       Almost one in four reflectors have changed where they bank at least twice (43% of intuitors have never changed bank)
  • ·       87% of reflectors have money in savings (70% of intuitors do)

When looking overall at people’s money behaviour the survey also revealed that:
  • ·       1 in 3 people over the age of 55 have always been with the same bank.
  • ·       Only 1 in 5 young people (18-25) pay off their credit card balance in full every month.
  • ·       Men are more likely than women to pay off their credit card in full each month (63% vs 48%)
  • ·       1 in 3 young people (18-25) have no savings (i.e. for non-retirement or emergency purposes)
  • ·       1 in 4 people aged 25 to 55 have no savings
  • ·       Most (92%) over 55s have savings

More info from
first direct's newsroom

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