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MONEY and the MIND
Broadcast starting week of August 21, 2007

In this hour, we explore Money and the Mind. Guests include: behavioral economists Dr. Eldar Shafir, Professor of Psychology and Public Affairs at Princeton University, Dr. Robert Frank, Professor of Economics, Ethics and Public Policy at Cornell University, and Dr. Andrew Oswald, Professor of Economics at the University of Warwick in England; James Cramer, co-founder of TheStreet.com and SmartMoney magazine; and writer Sandra Cisneros.

Host Dr. Fred Goodwin begins with an essay in which he considers the importance of money in our self-definition and self-esteem. Then, we hear from Larry Ross, the winner of the largest lottery jackpot in North American history. He and one other winner split a Big Game jackpot of $363.5 million; he took his winnings as a lump sum, and, after taxes, ended up with $61.5 million. He talks about the ups and downs of seeing his bank account skyrocket. He and his wife bought -- among other things -- a pool hall, a yacht, two houses, and several cars. The main downside has been he's lost a lot of friends -- he says they have expectations he can't meet, such as that he'll repeatedly bail them out of credit card debt.

He has given about $10 million away to family members and charities, including the Karmanos Cancer Institute and the Beat the Odds Scholarship Fund.

Then, Dr. Goodwin is joined by behavioral economist Dr. Eldar Shafir, Professor of Psychology and Public Affairs at Princeton University, and James Cramer - a man who's name is practically synonymous with Wall Street. He's the cofounder of TheStreet.com and SmartMoney magazine, co-host of CNBC's "Kudlow and Cramer," a regular on CNBC's "Squawk Box," and host of a nationally syndicated radio talk show called "Jim Cramer's Real Money." He formerly ran Cramer, Berkowitz & Co., a private hedge fund, and he's just published a memoir entitled Confessions of a Street Addict.

Dr. Shafir begins with an explanation of behavioral economics. Unlike standard economics, which relies on ideal models, behavioral economics takes into account psychological factors, including the often irrational ways that people handle money.

He says people basically have a defective understanding of money. For one thing, we tend to think about a dollar as a fixed amount, when really the value is constantly changing. So, for example, if you ask people what they would think of getting a 3% raise in a year of 5% of inflation, they say it wouldn't be great, but they'd be fine with it. If you ask them what they'd think of getting a 2% pay cut in a year of zero inflation, they say they'd be extremely upset. In reality, these two situations are identical, but - despite what standard economics would predict - people do not react to them in the same way. This is called "money illusion."

Other irrational behaviors we engage in when dealing with money are mental accounting -- treating different categories of money, such as checking and savings, as if they were actually different -- and loss aversion -- feeling losses much more strongly than we feel gains.

Mr. Cramer says loss-aversion rings true for him. In his last year at his hedge fund, he realized losses of $425 million and gains of $575 million, which meant he was net to the good $150 million. Still, even though it was his best year, all he could think about were the losses.

Mr. Cramer then describes his extreme obsession with money and the stock market. With markets open around the clock, he would trade at all hours, and saw it as his mission to beat whatever market happened to be open at any given time. No matter how much he made, it was never enough -- he just kept moving up his goals. Eventually, he became so impossible to deal with that his wife, his father, his business partner, and several friends staged an intervention. He quit the business the next day.

To contact Dr. Shafir, please write to: Dr. Eldar Shafir, Professor of Psychology and Public Affairs, Department of Psychology, Green Hall, Princeton University, Princeton, NJ 08544. Or visit: http://www.princeton.edu

To contact James Cramer, please write to: Mr. James Cramer, TheStreet.com, 14 Wall Street, New York, NY 10005. Or visit: http://www.thestreet.com

Next, The Infinite Mind's Marit Haahr speaks with writer Sandra Cisneros about growing up poor. She reads a story "Salvador Late or Early" from Woman Hollering Creek

Ms. Cisneros discusses how growing up poor made her value what she has and gave her compassion for other people in need. However, the fear of living in poverty again haunts her every day. For her, poverty means being in an environment you can't control -- where rats and mice invade you home, garbage isn't collected regularly, and so on. She says she has to remind herself every day that she is a successful writer, and if she experiences losses, she can make up for them by writing again.

Ms. Cisneros was anthologized in the book Growing Up Poor: A Literary Anthology edited by Robert Coles. Her books include The House on Mango Street, Woman Hollering Creek and Caramelo.

To contact Ms. Cisneros, please write to: Ms. Sandra Cisneros, c/o Susan Bergholz, Susan Bergholz Literary Services, 17 West 10th St., #5, New York, NY 10011.

Finally, Dr. Goodwin discusses the relationship between money and happiness with two behavioral economists. Dr. Robert Frank is Professor of Economics, Ethics and Public Policy at Cornell University and the author of Luxury Fever: Money and Happiness in an Era of Excess and co-author of The Winner Take-All Society. Professor Andrew Oswald is Professor of Economics at the University of Warwick in England.

Dr. Oswald begins by describing a longitudinal study he conducted that found that after receiving a windfall (such as winning the lottery), people do feel happier in the following year. Some of this affect wears off after a year or two, but he says there's no doubt in his mind that money can buy happiness and better mental health. He says that this holds true across people, but not necessarily across countries or over time. In other words, even though the United States has become much wealthier over the past few decades, overall happiness has not increased.

Dr. Frank then talks about some of the ways in which the incredible gains that have been experienced by those at the very top are squeezing those in the middle. He describes what he calls a "spending cascade." For example, when those at the top start building much bigger mansions, the result is that those just below them in the income scale also start building bigger houses, and so on and so on. As a result, since the 1970s, the size of the average middle-class home has grown much larger, without a commensurate increase in middle-class families' purchasing power. Thus, people end up working longer hours, having less time with their families, spending more, and saving less. He says buying bigger houses is not really an issue of envy -- there's a frame of reference for every time and place, and if what you have stands out conspicuously on the low side, you become uncomfortable. In additional to the psychological cost of feeling you're not keeping up, there are also concrete costs -- for example, people want to live in neighborhoods with good schools, which now requires buying a bigger home than it used to. In other words, people buy what they think they need; the problem is, what they "need" depends on what other people are spending.

To contact Dr. Frank, please write to: Dr. Robert Frank, 327 Sage Hall, Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853-6201. Or visit: http://www.johnson.cornell.edu

To contact Professor Andrew Oswald, please visit: http://www.andrewoswald.com

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