The Science of Spending (Are you frugal or just a cheapskate?)

What does it mean to be cheap? When are you just frugal, versus miserly, versus profligate? It’s been said time and again that the terms “frugal” and “thrifty” have positive connotations as admirable traits, whereas the terms “tightwad”, “miserly”, “scrooge-like”, “stingy” or “cheap” mean you’re a grumpy old sourpuss who won’t share.

Here’s an example of how these words look in actual use:

  • Cheap people care about the cost of something. Frugal people care about the value of something.
  • Cheap people try to get the lowest price on everything. Frugal people try to get the lowest price on most things, but spend a lot on items they really care about.
  • Frugal is going to a buffet and eating enough to get full and satisfied. Cheap is getting full and satisfied, then filling your pockets and bags before leaving
  • Frugal is being satisfied with only spending a dollar on a kids meal for your child. Cheap is ordering an extra kids meal for your self to avoid the regular price.

But even if being frugal and being cheap don’t exactly mean the same thing, these characteristics are closely related enough that they are easy to confuse. One is the euphemistic form of the other, which you can tactfully use in defense of yourself once somebody complains of your lack of generosity. What you may not possibly have heard before was that there have been studies and scientific evidence that reveal more about how our minds influence our money mindsets. What does the research tell us?

Scientists and economists decided to band together to prove this point: that your brain has
something to do with your money profile. Behind the tendency to save, squirrel stuff away
and hoard, is the reality that your genetic makeup can have something to do with it all! Similarly, this works for the opposite side of the spectrum as well, so your urges to spend, squander or gamble your money away can also be explained by the internal workings of your mind.

Does that mean you can blame your parents or ancestors for your overly conscientious
behavior or on the other hand, for being so careless about your money? Maybe… but you’ll probably have to take responsibility at some point for your own actions… at any rate, at least now you know where all that angst comes from.

Your brain and genetics can be held at least partially responsible for your saving or
spending habits. Behavioral economists also came up with a way to measure how people’s money attitudes affected their overall happiness.

The following money profiles that were studied:

Spendthrifts spend without thought and control such that they often get into money
trouble. Their biggest complaint? Lack of money… not enough dough.

Tightwads refuse to spend on anything, period, and will even avoid buying stuff that they actually need.

Frugalists are value conscious and are more careful about their finances than the
average person. They usually do spend, albeit in a controlled fashion or when it


These scientists determined that the subjects of saving and consuming evoke different levels of happiness in people. This finding came out of a few studies, including one that involved a questionnaire taken by more than 2,600 subjects. Here are some details:

The Unhappy and The Miserable

Even though they love to spend, spendthrifts aren’t happy when they do. That sounds pretty ironic, but that’s because after the short-term excitement associated with the spending spree, the spendthrift’s guilt over their behavior eventually takes over and ruins their mood.

So does it follow that those who refuse to spend would feel greater happiness and satisfaction over their ability to hoard money? Not in the case of scrooges. Surprisingly enough, tightwads are more miserable than spendthrifts, since according to a Carnegie-Mellon scientist, a spendthrift suffers after he buys something, but a tightwad suffers while he buys something and then again afterwards. Sounds like twice the pain for a tightwad. They suffer because their need to be cheap is driven not by practical sense but rather by painful emotions of not wanting to part with their money. Imagine how tortured such an existence could be where every purchase feels like punishment.

The Happier Than Average

Meanwhile, frugalists are considered happier than average since they derive pleasure out
of saving money and putting their budgets to good use. And since they’re able to spend
prudently, they don’t feel the frustration brought about by repressive budgetary constraints and self-imposed shopping boycotts.

The Happiest Of All

Now for those who don’t fall under any of these categories, they are considered  “unconflicted”. To me, financially unconflicted individuals take the middle road by spending and saving with ease and without stress. These are probably the most relaxed money types out there who have successfully brought balance and sense into how they manage their finances. This would explain why they are the happiest of all money types.

The bottom line? If you want to be happy, you’ll need to relax about your money and find some middle ground between saving and spending so you’re not “conflicted”.


But… this kind of survey reveals only what shoppers choose to confess. To find out more, the economists teamed with psychologists at Stanford to turn an MRI machine into a shopping mall. They gave each experimental subject $40 in cash and offered the chance to buy dozens of gadgets, appliances, books, DVDs and assorted tchotchkes. Lying inside the scanner, first subjects would see a picture of a product. Next they’d see its price, which was about 75% below retail. Then they would choose whether or not they wanted a chance to buy it.

Afterward, the researchers randomly chose a couple of items from their mall, and if subjects had said yes to either one, they bought it; otherwise they went home with the cash. The good news, for behavioral science, was that the researchers saw telltale patterns, “We were frankly shocked at how clear the results were,” said Brian Knutson, the Stanford psychologist who led the experiment. “It was amazing to be able to see brain activity seconds before a decision and predict whether the person would buy it or not.”

The first indicator that lit up on the scans was the nucleus accumbens, a region of the brain with dopamine receptors that are activated when someone experiences or anticipates something pleasant, like making money or drinking something tasty. It is the center of lust and desire, activated by the possibility of making money that drives excessive financial risk taking.

In the experimental subjects at Stanford, this region was activated when they first saw pictures of things they wanted to buy. Knutson said, “My nucleus accumbens just happened to respond more strongly than the typical subject’s, so what else could I do? If it feels good, buy it.”

The other culprit — the main villain, really — was insula. This region of the brain is activated when you smell something bad, see a disgusting picture or anticipate a painful shock. It is the most important driver of risk aversion. It was typically activated in the brains of the experimental shoppers when they saw a price that seemed too high. The lazy insula is a rarer affliction than you’d guess by looking at Americans’ indebtedness. Tightwads slightly outnumber spendthrifts, according to surveys by George Loewenstein and his colleagues at Carnegie Mellon, Scott Rick and Cynthia Cryder.

These behavioral economists think tightwads aren’t any more rational than spendthrifts,
because neither group is carefully weighing the long-term benefits of a Foreman grill versus college tuition. Dr. Loewenstein says the brain scans demonstrate that both kinds of shoppers are guided by instant emotions.

“We developed this propensity to experience direct pain when we spend money,” Dr.
Loewenstein said. “This explains why tightwads won’t spend money even when they should. It also helps to explain why we overspend on credit cards, and why people prefer all-you-can-eat buffets instead of paying for each item they order. We like schemes that remove the immediate pain of paying.”

These schemes are a blessing for pathological tightwads, but they leave spendthrifts worse
off. Paying cash is the usual cure suggested, bu there are other ways to combat the woes of either extreme money personalities.

Dealing with emotions that underlie so much of the problem thoughts, behaviors and perceptions, that are largely unconscious is the first step to changing your money profile. Revalue and specifically define your money goals and find out what is important to you so you can focus on what you want to change. Replace the emotion of joy or pain with a plan. Joy for a tightwad is not spending at all. Joy for a spendthrift spending uncontrollably. But both are followed by pain… do something different to get different results, right? Make a spending plan an stick to it.

What money personality type are you? How o you try to strike balance in your spending?

About Your Money and Your Life

Behavioral psychologists have demonstrated in countless studies that intrinsic motivation leads to extrinsic goal attainment. To begin something as important as the wealth management plan without a clear picture of what is important to you is like trying to put a jigsaw puzzle together without the picture on the box.
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