The Psychology of Money: Why Smart People Make Bad Financial Decisions
Most money problems don’t come from a lack of knowledge - they come from human psychology. Our brains weren't built for planning 40 years ahead, understanding compounding, or calmly navigating rising living costs. They were built for survival. Short-term rewards, emotional reactions, and mental shortcuts drive more of our behaviour than spreadsheets ever will.
Once you understand these patterns, money becomes less about discipline - and more about working with your brain, not against it.
You’re not bad with money - you’re human.
Present Bias: Why “Future You” Feels Like a Stranger
Present bias is the tendency to prioritise what feels good right now, even if it hurts us later.
It's the reason saving for retirement feels less urgent than booking a holiday or upgrading your phone.
The science: Behavioral economists call this ‘hyperbolic discounting’ - we dramatically undervalue future rewards compared to immediate ones.[1]
Even more striking: MRI brain scans show that when you think about your future self, your brain activates the same regions used for thinking about strangers.[2] Your brain literally treats "future you" like a different person.
So no wonder “saving more into a pension” often loses to “ordering a takeaway after a long day.”
How to beat it:
Automate what you can. Remove willpower from the equation. Make future-you the default winner.
Loss Aversion: Why Losing £20 Hurts More Than Gaining £20
Nobel Prize-winning research proved that losses feel roughly twice as painful as equivalent gains feel good. [3] This is why people often avoid investing, delay consolidating old pension pots, or stick with poor financial habits - not because the maths is wrong, but because the emotion feels safer.
The cost: Approximately £26.6 billion sits in lost and forgotten UK pension pots,[4] much of it because people fear making the "wrong" consolidation decision.
How to beat it:
Reframe decisions: focus on the risk of not taking action.
‘What do I lose by doing nothing?’ is often the important question.
Emotional Spending: Money as a Stress Response
Money and emotion are inseparable. Stress, boredom, loneliness, and even excitement can trigger spending that has nothing to do with what we actually value.
Neuroscience shows that anticipating a purchase activates your brain's reward system, releasing dopamine - the same chemical involved in addiction.[5]
You're not undisciplined - you're just responding to emotional cues your brain has linked with quick rewards.
How to beat it:
Notice the pattern.
Take a pause - “Am I buying this or soothing something?” - create space for better choices.
The Sunk Cost Fallacy: Why We Stick With Bad Decisions
We hate the feeling of “wasting” money, so we double down instead.
People stay with old pension providers, unused subscriptions (costing UK households £400-600 annually [8]), or bad savings habits simply because they've already invested time or money.
But past effort is a receipt, not a reason to continue.
How to beat it:
Ask: “If I hadn’t already spent money on this, would I choose it today?”
The 24-Hour Rule: A Small Delay That Saves You Thousands
One of the simplest psychological hacks:
If you want something non-essential, wait 24 hours.
Backed by research on delayed gratification - creating distance between impulse and action improves decision-making.
You’re not restricting yourself - you’re giving your brain time to make a decision your wallet will thank you for.
The Big Picture: You’re Not Broken - The System Is
The financial system is full of jargon, complexity, and tools that were never designed for the way young people live today. It’s no wonder 15 million working-age adults in the UK are undersaving for their future.
Psychology isn’t the enemy - it’s the key to finally getting ahead.
At Chest, we’re building tools that work with human behaviour, not against it. Simple visuals. Automation. Rewards. A clearer picture of your future.
Because when money feels understandable and actionable, better decisions follow naturally.
Key Takeaway
You're not bad with money.
You're human.
Once you understand the psychological patterns shaping your decisions, you finally have the power to change them.
Join the Chest waitlist and be among the first to experience pensions designed for how we actually live today.
Disclaimer: Pensions are an investment product and your capital is at risk.
References
[1] Laibson, D. (1997). "Golden Eggs and Hyperbolic Discounting." Quarterly Journal of Economics, 112(2), 443-478.
[2] Hershfield, H. E., et al. (2011). "Increasing Saving Behavior Through Age-Progressed Renderings of the Future Self." Journal of Marketing Research, 48(SPL), S23-S37.
[3] Kahneman, D., & Tversky, A. (1979). "Prospect Theory: An Analysis of Decision under Risk." Econometrica, 47(2), 263-291.
[4] Association of British Insurers / Pensions Policy Institute estimates (2022).
[5] Knutson, B., et al. (2007). "Neural Predictors of Purchases." Neuron, 53(1), 147-156.
[6] Money and Mental Health Policy Institute (2019). Reports on financial capability and mental health.
[7] Arkes, H. R., & Blumer, C. (1985). "The psychology of sunk cost." Organizational Behavior and Human Decision Processes, 35(1), 124-140.
[8] Citizens Advice and consumer research organizations (2020-2023).
[9] Mischel, W., et al. (1989). "Delay of gratification in children." Science, 244(4907), 933-938.