Is greed good? No, it’s seriously bad for your wealth
Avarice, the love of money, is one of the seven deadly sins. Throughout world cultures, the belief is deep that avarice is an evil, to be avoided.
But there is also a noble intellectual tradition that holds that it is good for the economy. For the Scottish enlightenment thinker David Hume, it was “the spur of industry” — which helped to drive the “invisible hand” of the market as discovered by his fellow countryman Adam Smith.
More recently, and bluntly, Michael Douglas’ character Gordon Gekko in the film Wall Street, declared that “greed is good”.
The opposing views of the priests, and of the founding fathers of free-market capitalism, are clear enough. God and Mammon have often been in conflict. But now, armed with the tools of behavioural finance, which applies behavioural psychology to finance, it is possible to choose between the two. And fresh international research, produced under the auspices of State Street’s centre for applied research, suggests that greed is not good after all. In fact, avarice can be seriously bad for our wealth.
Psychologists now have a clear definition for love of money. It is not about any instrumental need for money to fulfil our other goals, which all of us have, but rather about a love or need of money for its own sake.
Using the Money Ethic Scale developed by Thomas Li-Ping Tang in 1992, State Street developed an Investor Love of Money Scale (ILOMS). Researchers asked interviewees in 20 countries a series of questions designed to find out how important money was to their self-esteem. They also tested how they would respond in a series of financial situations. For example, they would ask if money was a symbol of success, if they talked about it a lot, or if they wanted to be rich.
The results were clear. The more someone had an emotional attachment to money, the more likely they were to make mistakes with money. A series of behavioural biases that lead investors into predictable mistakes have been diagnosed over the years. Avarice exacerbates all those biases.
The avaricious were more likely to buy at the top and sell at the bottom — which for investors is the cardinal sin, worse than all others. They also had shorter time horizons and were more inclined to hyperactive investing behaviour. Trade frequently and you are guaranteed to pay more in trading fees, but you are highly unlikely to produce any extra returns.
Money lovers were also more likely to believe that they could wait until later in life to save — a belief which has grown even more wrong-headed as lower bond yields make it harder to buy a retirement income. And in consequence they were less likely to contribute to any retirement plan and less likely to contribute even as much as 6 per cent of their income if they had one. Hence, they ironically appear to be on course for becoming a burden on their more prudent peers.
Those who cared less about money were more likely to adopt a far better strategy and pay regular amounts into diversified retirement plans with constant allocations. Such plans effectively require taking some profits at the top and buying when securities are cheap. To use other psychological terms, they showed greater self-control or emotional intelligence. If there is any clear message from the research, it is that governments need to prod everyone ever more clearly in that direction; giving people the choice not to save, or to trade too heavily, is a recipe for disaster.
Avarice is universal, but it plainly differs according to economic development. Prosperous nations, where people have less need to worry about money, are also the least covetous of it. Switzerland and the Netherlands had the lowest ILOM scores, with the British — unsurprisingly given national embarrassment at talking about money — not far behind. The top of the list is dominated by the growing economies of the emerging world — China, India and Brazil.
There is, however, one big outlier. Despite its wealth, and despite its deep religiousness, the US is near the top of the avarice league.
This result is striking but not surprising. Money matters to people far more in the US. Look no further than the presidential campaign. One of the few things that unites two deeply disliked candidates is an Achilles heel when it comes to money. Donald Trump is plainly desperate for everyone to believe that he is rich; and Hillary Clinton often makes obvious and baffling political mistakes — such as taking a fat speaking fee from Goldman Sachs as she prepared her candidacy — because she seems to want and desire money.
Nevertheless, America built the most successful capitalist economy. So maybe David Hume was right all along. But look at the success of Wall Street. State Street’s survey suggests that to profit from people’s avarice, you should give them ample opportunity to trade too heavily and convince them they can make an easy buck. Wall Street has been built on doing just that. Those who paint the world’s biggest financial centre as profiting from greed have a point.
Avarice, indeed, is the vital ingredient for any financial industry. The market often behaves as though it is efficient. It is through irrational behaviour, indulged in by many, that the possibility of making money is created. Those who love money not wisely but too well have created the opportunity for great investors, in control of their own emotions and less in love with money, to build their fortunes.