How Language and culture impact perspective on financial decisions

As a college teacher, I often encouraged my students to explore the field of psychology by asking them to identify a psychological discovery that astonished them. I wanted them to think about findings that were completely unexpected, things they could not have anticipated before learning about them.

A significant focus of my discussions included groundbreaking research from the University of Chicago, particularly in the areas of cognition and culture.

One of the remarkable questions raised in this research is whether thinking in a foreign language can lead individuals to make more rational decisions. To illustrate this, imagine yourself in a casino located in Las Vegas.

You arrive at a table prominently featuring the sign "The Big Payoff." At this table, you’re presented with a game where you must wager $100.

A mechanical device is used to flip a coin. If the coin shows heads, you lose your $100. If it shows tails, you win a payout of $250. Now, would you be willing to take this bet?

For professional economists or seasoned gamblers, the answer is clear: they would advise you to take the bet without hesitation and continue to play as long as possible. They recognize that this game offers a favorable chance to profit before the casino might catch on to the odds being skewed in the player's favor.

On the other hand, for many ordinary people, the decision is far more complex. While the prospect of gaining $150 sounds appealing, there is also a significant risk. The possibility of losing $100 weighs heavily on the mind, and the thought of such a loss can overshadow the potential joy of winning.

This situation highlights a concept known as myopic loss aversion. Myopic refers to a short-sighted viewpoint. In scenarios involving risk, many individuals may choose to avoid the possibility of loss, even if they understand that the odds of winning are in their favor.

This aversion to risk is rooted in a fundamental psychological principle: losses feel more impactful than gains. Daniel Kahneman, a recipient of the Nobel Prize in Economic Sciences, articulated this phenomenon succinctly when he stated, “Losses loom larger than gains.” This explains why a majority of people are inclined to shy away from risk-laden choices.

Given the prevalence of situations that entail risk in daily life, one might wonder if there is a strategy to encourage more rational decision-making. Consider the everyday choices we make: Should I invest in this company? Should I enter into a relationship with this person? Should I take a shortcut on my route?

In 2012, Boaz Keysar and his research team at the University of Chicago conducted an experiment to investigate this very issue. In their study, 54 volunteers participated in a simplified version of the aforementioned game. The researchers assigned participants randomly to play the game either in their native language, English, or in a foreign language they spoke fluently, such as Spanish.

Each participant started the experiment with $15 in $1 bills. In every round of the game, they faced a choice: keep one dollar bill or risk losing it in a game of chance where the odds of winning or losing were equal. If a player won the bet, they retained their dollar plus received an additional $1.50.

In this setup, someone who opted not to take any bets would leave with $15. However, a player who chose to bet in every round could expect to accumulate around $18.75, based on the expected value of $1.25 per bet across 15 opportunities.

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