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Money Shame

Steve Abramowitz

AFTER PENNY READ about lower stock market valuations abroad, she bought an exchange-traded index fund focused on European shares. She showed the article to her friend Peter, who purchased the same fund. But the next day, a large French bank reported difficulty meeting customer withdrawals, stoking fear of a bank run.

The U.S. stock market was down slightly, but European shares got clobbered. Penny was disappointed but believed the government would take steps to ease the crisis and vowed to stay invested. Peter was more worried and sold out, berating himself for his inability to manage money.

What’s going on here? Why the difference? Penny grew up in a family where money wasn’t a source of conflict, and that made her feel confident about handling her finances. In Peter’s home, money was a source of friction between a frugal mother and a wasteful father. He emerged from adolescence unsure how to deal with money.

Nobel laureate Daniel Kahneman discovered the phenomenon of loss aversion, which holds that the pain of losing is about twice as powerful as the pleasure of winning. People with backgrounds similar to Peter’s may be even more sensitive to financial missteps, often leading them to pass up opportunities for monetary gain. Peter suffers from a syndrome I’ve come to call money shame.

In my family, money served both as a source of pride and as possible protection from religious persecution. Its importance was magnified by a well-intentioned but overbearing father whose deft money management left me feeling I’d never measure up. I’ve dealt with my money humiliation in professional training and personal therapy, and believe I’ve gained valuable insight into its negative impact on my investing habits, including how I handle my real estate investments.

All landlords grapple with the dilemma of whether, when and how much to raise rents. Increases compensate for many of the troublesome aspects of real estate ownership. Besides capital appreciation, the investor’s ultimate goal is to maximize net income and maintain a steady cash flow. In times of high inflation like now, raising rents is necessary to offset the greater cost of repairs and maintenance. Tenants whose rent payments are chronically late, who constantly complain or who have damaged the unit become prime candidates for an increase.

But a rent increase can also backfire. Some tenants think an increase is an invitation to make more requests of their landlord. The bigger danger is losing a good renter who’s on a tight budget. Departure of a responsible tenant is almost always an unwelcome development and can be a fiasco. The landlord must deal with any issues the outgoing renter was willing to overlook and prime the property for a new occupant.

Often overlooked is the loss of rent for, say, two months to allow time for the ongoing work and the search for a new tenant. By the time you factor in the property manager’s finder fee, you’re not dealing with chump change anymore. To be sure, the bump in rent for an incoming tenant is usually higher than for a continuing one. But what’s a 10% increase on a $1,000 rent when new carpet or paint can easily run $3,000?

Because of the risk of losing a cooperative renter, I rarely raise rent more than 6%, barely enough to keep pace with today’s inflation. What else, beyond the rational fear of forcing out a pleasant renter, might influence my conservative rental policy? I’d like to think my restraint is rooted in part in the empathy modeled by my mother and grandmother. What budget item will the single working mother have to forgo to make room for that rent increase? Yes, concern for others is definitely part of it.

But there may be another factor at work. Perhaps I keep my rent increases small to avoid the painful self-criticism I’d experience if a reasonable renter vacates and sets in motion the money mayhem of re-renting. Am I so anxious to avoid the sense that I’m failing as an investor that it prevents me from maximizing my rental income? Consistent with Kahneman’s notion of loss aversion, I’m face-to-face with the consequences of my need to avoid the money humiliation I experienced as a teenager.

You certainly don’t have to own real estate directly to be familiar with the discomfort of money shame. Suppose you’re a long-term buy-and-hold investor in broad market index funds, but you expect the Federal Reserve will soon cut interest rates. You yield to the temptation to make a sector bet on beaten-down real estate investment trusts. Instead, a surprise increase in the Consumer Price Index results in another hike, battering your real estate fund.

How is your mood affected? Are you awash in self-reproach? How long do you ruminate over the reversal of fortune? Your answers to these and similar questions will tell you how susceptible you are to the money humiliation syndrome.

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.

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