From scams to stocks, how we make sense of the economy

Finance Professor Camelia Kuhnen is an expert in neuroeconomics, behavioral finance and corporate finance. An over-arching theme of her work is understanding how people make financial and economic choices.

I grew up in Romania during the transition from communism to capitalism. As a child, I loved to accompany my grandmother on her errands around Braila, a port city on the Danube. Each month, she would walk downtown and hand over some of her savings to a man staffing a kiosk.

My grandmother told me that, if she gave money to this pop-up investment bank, she could get five times the amount back in a few months. Even as a child, I found this hard to believe. “How can it be?” I would ask her. But she proceeded to fork over the money, as did millions of other Romanians at kiosks across the country in the early 1990s.

It turns out that this was a Ponzi scheme. Billions of dollars were “invested,” only to disappear. This was one of the many scams that proliferated after the fall of communism, in societies that had extremely low levels of economic literacy and a desperate hope for the future to change overnight.

During communism, people had very little private property and there was no stock market in which to invest. Lacking a basic understanding of how financial markets and investments worked, they were easily duped.

While this particular scam is long gone, get-rich-quick schemes are still with us, from meme stocks like Gamestop to the collapsed crypto trading platform FTX. The human desire to believe we can make something out of nothing is as strong as ever.

I never lost my interest in understanding how we make decisions about our money. As a finance professor at UNC Kenan-Flagler Business School, I study why we often behave in ways that don’t match the perfect rationality envisioned by economists.

As a specialist in neuroeconomics and behavioral finance, I try to explain why what people feel about the economy is often quite different from what is actually happening.

My research has found that genetics, neuroscience, psychology, and our life experiences all contribute to how we view the economy.

Some of us are inherently cautious, while others like to take risks with their money. Some are born optimists; others are natural pessimists.

Our environment also counts for a lot.

My research shows that life experiences can actually rewire our brains and impact how we process information about financial gains and losses. This leads people from low-income backgrounds to have more pessimistic beliefs about the economy and makes them less willing to invest in the stock market, even when those investments are likely to have good outcomes.

After the collapse of the kiosk Ponzi schemes, many people – including my grandmother – stopped trusting financial institutions. They kept their savings at home, tucked under a mattress, instead of in a bank account. It took years before many of these people trusted the financial system again. In the meantime, they lost out on the benefits of saving and investing through the formal financial system.

It’s important to keep in mind that most people’s perspectives about the economy are formed regardless of the data. We tend to project the state of our pasts, our hopes and fears, and our own bank accounts onto society as a whole.

Engaging in some self-analysis to understand our own biases and going beyond ourselves – be it by studying financial history or speaking to people outside of our social circles about how they feel about the economy – can help us make more clear-headed financial decisions.

Camelia Kuhnen is a professor of finance and Sarah Graham Kenan Distinguished Scholar at UNC Kenan-Flagler.