Mattress Money - Hakuna Matata?

A recent BBC article highlighted the growing trend among Greeks to withdraw their money from banks and, presumably, put it under their mattresses. With confidence in their currency fading fast one can understand why the Greek populous are voting with their money, so to speak. This is an example of risk averse behaviour.

We all have different attitudes towards risk. Some are risk preferring, some risk neutral and some risk averse.

If you had the following choice, which of the two options would you choose?

• A 50% chance of getting £100
• A 100% chance of getting £40

I would hope it would be obvious that the first option has a higher expected value (0.5 times 100 is 50). Despite this, many of us (me included) would choose the certain £40. This is called risk averse behaviour. In our minds the 50% risk of getting nothing is not worth taking.

The Greeks who are withdrawing their cash from banks are exhibiting risk averse behaviour. They would clearly prefer to forgo any interest they could earn from their savings, instead making sure that whatever happens at least they have some money.

It's commonly accepted among economists that people are often relatively risk-averse, and thus good economic models account for this type of behaviour. Risk aversion is not bad, indeed, we could do with bankers taking fewer risks at the moment! The level of risk aversion will depend upon the exact situation. For example, if I had already given you £500 before giving you the above choice, you may have been more likely to take the risk (any economists out there will recognise this as the income effect).

In conclusion, mattress money is a prime example of risk aversion. I wonder, if you were Greek right now, would you be happier sleeping on your life savings or entrusting it all to the banks?

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Hakuna Matata