Few management topics have attracted as much discussion as the relationship between money and motivation. On the one hand, most people, not just investment bankers, would not work for free. On the other hand, financial rewards often don't increase job satisfaction or performance. Indeed, the relationship between pay and performance is weaker than most people think, but perhaps stronger than spiritual individuals would wish.
Unsurprisingly, a great deal of research exists in this area, and much of this work has highlighted the irrational relationship people have with money. In this article, we look at some key findings in the hope of debunking the common myths surrounding the psychology of money.
A brief history of money
In the beginning there was gold. Then notes emerged from bank receipts for gold, as it was much more convenient to carry and swap pieces of paper than lumps of precious metal. However, since the abandonment in the UK of the gold standard in 1931, the value of money is mostly intangible.
Today, money is more abstract than ever. UK consumers spend more in debit and credit cards than in cash transactions, and the recent introduction of mobile and contactless payments has made spending money more instant and effortless than ever. Furthermore, consumers are now able to make a living buying and selling virtual goods, or investing in virtual currencies, such as Bitcoin.
Yet, despite these changes, our psychological relationship with money has remained more or less unchanged over time. Although it is clear that people's attitudes and behaviours vis-a-vis money are much more irrational than economists used to think, there are robust psychological reasons for these irrationalities. To borrow the behavioural economist Dan Ariely's term, our relationship with money is predictably irrational. In other words, we may not act as creatures of logic, but there is still a logical explanation for what we do.
How much does money motivate us at work?
Money, it seems, is not a great motivator at work. Hundreds of studies have shown that the highest-earning 1% of the population tend to be only marginally more satisfied than people who earn average salaries.
Furthermore, under some circumstances, money may even demotivate. The main reason is overjustification, the tendency for extrinsic incentives (such as financial rewards) to extinguish or crowd out intrinsic motivations (such as engagement and job satisfaction). Thus, if you pay people for doing what they love, they will end up loving it less and, in turn, performing more poorly, because they are 'just doing it for the money'. Likewise, if you don't pay people for doing what they dislike, they will hate doing it or end up not doing it.
This finding has important implications for managers. It suggests that before incentivising their employees with external rewards – money, promotions or titles - they must first work out to what degree the job or task is meaningful or interesting for employees. And just as money can compensate for drearier jobs, it may also dilute employees' passion and joy in doing something that they love – like the artist who is offended by questions about the price of his work.
Gaining money or losing it – which motivates more?
Amos Tversky and Daniel Kahneman were awarded the Nobel Prize in Economics for their seminal research on loss aversion, which demonstrated that people are more sensitive to losses than gains - in fact, about twice as sensitive. One experiment asked half of the subjects how much they would pay for a jar, while the other half were given the jar and asked how much they would sell it for. Participants would buy the jar for an average of $2.25, but they would sell it for $5.75.
More recently, psychologists have tracked the levels of income and life satisfaction of thousands of participants over time, showing not only that an increase in income resulted in an increase in life satisfaction, but also that the negative impact of a decrease in income was twice as strong. Thus, while a pay rise will not necessarily make people happy, a pay cut will surely make them miserable.
Sex differences and the evolutionary meaning of money
The Greek shipping magnate Aristotle Onassis once noted: 'If women didn't exist, all the money in the world would have no meaning.' This view is shared by many evolutionary psychologists, who see money mainly as a status-enhancing tool, and thus expect men to be more interested in money than are women.
One study examined how attitudes towards money (such as believing that it can solve all of one's problems) varied across 20 countries, and it did find that money was significantly more important to men. What's more, income is usually a much stronger predictor of life satisfaction for men than it is for women.
Furthermore, as anyone who has seen Donald Trump's wives may have guessed, research suggests that money enhances sexual attractiveness, particularly in males. There are even examples in nature of males providing females with gifts in order to enhance their reproductive success. Some species are particularly cunning. Male dance flies appear to endorse the idea that 'it's the thought that counts': a gift of a worthless piece of fluff induces the same amount of loving as a piece of food of similar size. In fact, some male flies often sneak away with the worthless gift, to reuse it later.
This may go some way to explaining our Valentine's Day tradition of exchanging essentially useless gifts such as teddy bears and flowers.
It is worth noting that, besides gender, a whole host of other personal variables has been found to influence attitudes towards money. One particularly important one is personality. For example, income is a much bigger factor in life satisfaction for individuals with low emotional stability.
Does money buy happiness?
This question has been asked countless times, but hoping for a definitive answer is unrealistic. We can only estimate how strongly money leads to wellbeing, and under what circumstances this happens.
Generally, there does indeed appear to be an association between money and happiness, but it is weaker than most people might think. For example, a review of 111 studies from 54 different countries reported a significant and positive (but relatively weak) correlation between income and subjective wellbeing.
Another study, using data from the British Household Panel Survey (BHPS) found exactly the same size correlation between income and life satisfaction. The correlation size suggests a mere 4% overlap between money and happiness.
One study looked at whether financial windfalls, such as a lottery win or an inheritance, had an effect on mental wellbeing a year later. They found that the sum needed to move someone from one extreme of the wellbeing scale to the other is no less than £1m.
So money can buy happiness, but at a very high price. And many psychologists have also noted that even when money does buy happiness, it does so only for a relatively short time. Lottery winners revert to their original levels of happiness shortly after winning, because the psychological gains conveyed by money are quickly 'spent'.
That is, people are quick to habituate to their changes in fortune, which effectively makes money an addictive psychological substance.
There is also a lot of evidence suggesting that comparison – how much money we have relative to others – is key. Keeping up with the Joneses, and outpacing them, makes us happier than having more money than we used to. One study found that income itself had no effect on life satisfaction, but one's income rank among a social group had a significant positive effect.
So lottery winners might feel elated but only for a short time. It would likely not be long before they started comparing their luxury yacht with Roman Abramovich's £266m mega-yacht, Eclipse. Abramovich himself may even be feeling inadequate since his yacht was last year outdone by an even grander £390m specimen owned by the president of the UAE.
A final caveat to the money-happiness relationship may be that there is a law of diminishing returns. A popular paper co-authored by Daniel Kahneman suggested that money only enhances life satisfaction up to a point (that is, once certain needs and wants are fulfilled). The paper found that, for Americans, emotional wellbeing increased with salary levels only up to earnings of $75,000 (around £50,000).
As Arnold Schwarzenegger once said: 'Money doesn't make you happy. I now have $50m but I was just as happy when I had $48m.'
The dark side of money
Psychological research has also examined negative or counterproductive outcomes associated with money. One paper demonstrated that merely thinking about money was sufficient to suppress positive emotions. Half of the participants were subliminally primed with money, whereas the other half was not. Then, they all watched a clip from Adam Sandler's feelgood comedy Happy Gilmore and wrote a description of the video and the feelings it aroused. Those primed with money exhibited significantly less positive emotion. The explanation is that money elicits cold and logical thinking while reducing feelings of warmth.
A different paper also primed some participants to think of money, before presenting them with a series of unethical scenarios, such as stealing a ream of paper from the office, and asking how likely they would be to do this. Those primed by money were 13% more likely to behave unethically – a significant difference.
These two reports are supported by a third, excellent paper in which nine experiments demonstrated how being primed by money causes people to act in a more individualistic way. Compared with controls, those primed with money were less likely to ask for help or to offer it to others, less likely to want to play or work with other people, and more likely to put physical space between themselves and another person.
This may go some way towards explaining how the so-called '1%' are so unaffected by the plight of the '99%', and how the richest among us so often seem to have no qualms about paying as little tax as possible.
Despite these gloomy findings, there is a ray of optimism provided by some recent findings: spending money on other people appears to be good for you. So-called prosocial spending activates the reward pathways in the brain, an effect that is to some degree biological and has been replicated in rich and poor countries alike.
So maybe at least part of the reason that Bill Gates has already donated more than $28bn to good causes (and is leaving the vast majority of the rest of his $80bn fortune to charity) is that doing so makes him feel good. There is, it seems, a bright side to money too.
Tomas Chamorro-Premuzic is a professor of business psychology at UCL. Patrick Fagan is an associate lecturer in consumer psychology at Goldsmiths, University of London, and a behavioural scientist at CrowdEmotion