What's holding Kiwis back financially? Is it the Government, employers, poor wages, untrustworthy financial professionals, greedy baby-boomers who "got it all for free", youth unemployment, the recession, the dollar, immigration or a host of other excuses?
I've come to think the problem with Kiwis' personal finances isn't any of those, although some are hurdles to be overcome. The problem is a disease that inhabits the grey matter that I choose to call "wilful delusion". That's not a technical term that a psychologist or behavioural economist would use. It's my perception from digesting readers' letters and listening to those who comment on my articles.
Every week readers post a wide range of thought-provoking, insightful comments on my articles. Yet there are plenty more who will post that XYZ doesn't apply to them because their situation is "different".
Associate Professor of Psychology Marc Wilson at Victoria University in Wellington says humans need to think positively of themselves, which is why they might delude themselves.
"This means that when we make decisions we tend to think we have good reasons for them, and if they go sour we tend not only to hold off acknowledging that something has gone wrong, but to look for explanations that don't reflect on us."
This, says Wilson, is why many people who fall victim to scams
(a) Don't acknowledge they've been scammed until they have to
(b) Will throw good money after bad as a way of holding off the inevitable, and
(c) Will blame everything or everyone else for what's going on.
"The most relevant mechanism here is called cognitive dissonance - when we hold two incompatible beliefs. We rationalise away the incompatibility by, for instance, putting even more money into the failing proposition or holding off pulling the plug in the hope that things will get better."
One common wilful delusion I see is people and their spending. Everyone,it seems, are on the bones of their backsides and can't reduce spending. They delude themselves into thinking luxuries are necessities. Ask KiwiSaver providers who scrutinise the budgets of people who want to withdraw their money due to "hardship". I'm told many see their SkyTV subscription as an essential, not discretionary, spending.
People delude themselves in many ways with the assistance of a whole range of financial failings of the human brain. For example, says Mark Brighouse, chief investment officer at Fisher Funds, who has a keen interest in behavioural finance, the human brain even comes preprogrammed with defence mechanisms for when it makes the wrong financial decisions.
"Studies of financial forecasting show that people are more likely to blame some event that interfered with their forecast rather than admit that they lacked experience or had insufficient data."
Another common delusion is the belief that a bonus, tax refund, gift, or inheritance is found money to spend, not to save or use to pay off debt.
Yet studies by behavioural economists suggest again and again that if the same person had been paid a "rebate" of the same amount they'd be more likely to save it or pay debts.
"People have a tendency to place particular events into 'mental compartments'," says Brighouse, instead of looking at their overall situation. This is called "mental accounting" by academics.
The wilfully delusional think it's impossible for anyone to get ahead. "Young people nowadays are very lucky if they can get a job," said one reader. The reality is unemployment for the 15-24 age group is about 17 per cent. That means most youth (83 per cent) who want to work do. People use the minority to confirm their bias and delude themselves.
Confirmation bias is a known psychological concept. Wilson describes it as "the tendency to pay attention to things that support what we already believe (or want to believe)".
People also "frame" their conclusion according to their own starting position. If someone has been made redundant once, they might frame their decision that young people are never going to get jobs - and therefore an income - based on their own experience.
They might also assume that because the youth unemployment rate is high, it will always remain high. Looking at the figures for 20 to 24-year-olds, the unemployment rate recorded in the household labour force survey December 2012 was 13.1 per cent. Sure, that was nearly double the 6.4 per cent recorded in 2007, but the figures were higher in 1991, 1992 and 1993 and they were nearly as high in 1997 to 2000. Youth joblessness goes up and down.
Renters often use wilful delusion to convince themselves that it's impossible to buy a home in Auckland (or New Zealand) so don't try. I'm sick of hearing people say it's impossible for young people to buy their first home because the median house price is $535,000.
I would argue that it's easier to get on the housing ladder now than it was 20 years ago thanks to affordable apartments and KiwiSaver first-home withdrawals and subsidies. Sensible first-home buyers who opened KiwiSaver accounts five and a bit years ago are now getting first-home deposit subsidies of up to $10,000 a couple and are able to withdraw at least the same amount of their own savings. That's more than half a ready-made deposit on an apartment or a traditional first-home purchase in Massey or Manurewa.
Martin Dunn of real estate agency City Sales gave an example of a suitable apartment for a first-home buyer - which didn't have structural problems or a risk of huge ground rent increases. He cited a small one in the city zone building off Symonds St, which sold recently for $179,000. A first-home buyer would need about $30,000 as a deposit.
If half of that came from KiwiSaver, the other half could be put together over three years by cutting out one bottle of wine a week, a Lotto Powerball ticket, $5 a day on lunches, $4 a day on coffee and the basic SkyTV subscription. This would still leave pleasures such as clothing, music entertainment, and takeaways.
Using the same approach, a one-packet a day Winfield Blue smoker could save $24,306.64 over three years towards a house deposit by putting the money in a bank account paying 3 per cent instead of spending it on cigarettes. Assuming there are people on the minimum wage who smoke a packet a day, this could mean even they could afford to get on the property ladder.
KiwiSaver is another area where a chunk of people try hard to be wilfully delusional. The "I don't trust the Government brigade" were last week using the banking situation in Cyprus as their confirmation bias for why KiwiSaver is bad.
"Don't do it," one reader wrote this week about KiwiSaver. "The companies entrusted with your money are not guaranteed to pay out should they collapse. The Government will take it all on some pretext or another. The 'troika' that lent money to Cyprus? They lend to us too. To trust any institution/Government is to court calamity."
I've often noticed people delude themselves into thinking everyone has credit card debt. It's the norm. I read one book recently in which credit cards were described as one of the "scariest exhibits in the Museum of Mental Accounting".
Studies show that paying by credit card cheapens the money people are spending. "Credit cards disconnect the consumption decision from the financing decision and allow a delusion to take place," says Brighouse. People tip more generously when using credit cards, buy higher priced items and generally pay less attention to prices.
The irony is that the dollars people spend on their credit cards are more expensive than other dollars unless they pay their card balance off in full every month.
A final wilful delusion is failing to invest at all - thanks to another behavioural finance concept: loss aversion. Because there is risk of losing any money at all in KiwiSaver, shares or other investments, some people don't invest at all. Loss aversion also leads to selling at the bottom of the market. People delude themselves into thinking they've lost money if prices fall, instead of seeing it as a temporary blip or even an opportunity to buy more.