Money & mind · Module 1 of 4
What money does to your head
Emotional spending, the stress of having too little, and how to spend on what you value without guilt.
Key terms in What money does to your head
- Loss aversion
Loss aversion is a pattern in behavioral economics in which people weigh potential losses more heavily than gains of the same size. It is a central idea in prospect theory, developed by Daniel Kahneman and Amos Tversky. The pattern helps explain why people tend to avoid risk when choices are framed as gains and may accept risk when choices are framed as ways to avoid a loss.
- Mental accounting
Mental accounting is the habit of sorting money into separate mental categories, such as rent, food, fun, or savings, and treating each category as its own budget. The idea comes from economist Richard Thaler. People often limit spending in each category to the amount set aside for it, even though money is interchangeable, and the habit can lead to choices that look inconsistent when viewed across all of a person's finances.
- Scarcity (behavioral economics)
In behavioral economics, scarcity refers to the way a shortage of money, time, or other resources captures attention and uses up mental bandwidth. Research summarized by the World Bank suggests that limited resources can narrow focus on pressing needs and leave less capacity for other decisions, so people may rely on mental shortcuts. This effect is described as a feature of the situation, not a personal flaw.
Source: World Bank, The Story of the 2015 World Development Report: Mind, Society, and Behavior
- Financial well-being
Financial well-being is a measure of how well a person's current money situation provides financial security and freedom of choice, both today and in the future. The Consumer Financial Protection Bureau created a questionnaire to measure it. The concept looks at a person's own sense of security and control, not only at income or net worth.
Source: Consumer Financial Protection Bureau, Find out your financial well-being
Every term on Lever is in the money glossary.
About this module
What money does to your head is part of Money & mind, one of 15 subjects in Lever. It’s a short run of 10 lessons, about 25 minutes in all, so you can finish it in one sitting.
Every lesson takes one idea at a time. You read it with the math worked out step by step, answer a question that puts it to use, then see why the right answer is right and why the others aren’t.
It’s for anyone who was never taught this, and you don’t need to know anything first. Every lesson is free. Lever works out what you already know, so you can start here or let your path bring you to it.
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Try this module
It’s part of Money & mind. Lever will bring it to you when you’re ready, or you can go straight there.