Why our brain is bad at money

When we talk about financial literacy with young people, we often start with practical things: budgeting, saving, income and expenses. All of that matters. But financial literacy is also about understanding how our brain makes decisions.

People do not always make financial mistakes because they cannot calculate. Sometimes certain financial processes are simply difficult to imagine.

The chessboard and the grain of rice

Imagine a chessboard with 64 squares. Put one grain of rice on the first square, two on the second, four on the third, and keep doubling.

1 → 2 → 4 → 8 → 16 → 32 → ...

At first, nothing spectacular happens. But the numbers soon grow extremely fast. This is exponential growth. People systematically underestimate this kind of growth, often called exponential growth bias.

That matters in personal finance.

Compound interest works in both directions

Imagine €1,000 earning 5% each year. After one year, you gain €50. The next year, you also earn interest on the return already earned. Over time, returns generate new returns.

This is compound interest. It can help savings grow, but it can also make debt much more expensive.

A €500 debt can become much larger through interest, late-payment fees and additional costs. The lesson is not simply “debt is bad”. It is: understand what happens to an amount over time.

Percentages are difficult

Suppose something costs €100, rises by 50% to €150 and then falls by 50%. You do not return to €100. You end up at €75.

The percentages are the same; the amounts are not.

This matters when we talk about investments, discounts, inflation and losses.

Financial literacy has several layers

Financial literacy should therefore not be reduced to budgeting. Young people also need to understand saving, financial buffers, debt and credit, interest, inflation, risk and return, fraud, contracts, administration and entrepreneurship.

And there is another layer: behaviour.

A person can know that saving is important and still not save. Someone can understand that an investment is risky and still invest because everybody around them seems to be making money.

Knowledge matters, but so do emotions, social pressure, habits and fear of missing out.

Start with real situations

Instead of only giving classroom lessons, we can start with situations young people recognise:

Someone offers you €100 to deliver a package. Would you do it?

A friend promises that an investment will double your money. What questions should you ask?

There is not always one simple answer. That is precisely why the discussion becomes useful.

Financial literacy should not turn young people into accountants. It should help them make more conscious decisions, recognise risks and understand the long-term consequences of short-term choices.

And sometimes simply realise:

“My intuition about this number may be wrong.”

That may be one of the most useful financial skills of all.