Dr. Warren Reed: Imagine you're running a nursery, and you have a problem: parents are always late. So you introduce a fine. Simple, right? Problem solved. Except, what if I told you that after introducing the fine, twice as many parents started showing up late? This isn't a hypothetical; it's a real-life example of how our attempts to build logical systems crash headfirst into the wall of human psychology.

Freddie Williams: And that crash is something I see all the time, Warren. We design these elegant, logical systems in government or education, and then we're shocked when people don't behave 'rationally' within them.

Dr. Warren Reed: Exactly. And that's the core of what we're exploring today, using Claudia Hammond's brilliant book, 'Mind Over Money.' It's essentially a user manual for the human brain's bizarre relationship with money. We're joined by systems designer Freddie Williams, who grapples with this system-versus-human tension daily. Today we'll dive deep into this from two critical perspectives for any systems thinker. First, we'll explore the 'bug' of mental accounting and why we treat money in illogical ways.

Freddie Williams: And then, we'll get into what I think is the most critical part for anyone in policy or governance: the dangerous world of incentive misalignment, where well-meaning policies create the exact opposite of their intended effect.

Dr. Warren Reed: Alright, Freddie, before we get back to why that nursery fine backfired so spectacularly, we have to understand a fundamental glitch in how we think about money. Let me ask you this: Would you walk ten minutes down the road to save £15 on a £25 bike rental?

Freddie Williams: Absolutely. That's a huge saving, more than half the cost. It's a no-brainer.

Dr. Warren Reed: Okay. Now, what if you were buying a car for £10,025, and the same model was available ten minutes away for £10,010. Would you make the trip to save that same £15?

Freddie Williams: Hmm. Honestly? Probably not. It feels like a rounding error on a purchase that large. It's... insignificant.

Dr. Warren Reed: And right there, you've just demonstrated a massive psychological bug that breaks economic theory. The £15 is the same. Your time is the same. But your decision is different. This is the core of what the book calls 'Mental Accounting'. We don't treat money as fungible—as interchangeable. We put it into different mental buckets. The £15 saving on the bike feels huge because it's a large percentage of the 'bike rental' bucket. On the car, it's a tiny fraction of the 'car purchase' bucket, so we dismiss it.

Freddie Williams: It's like we have a mental filing cabinet, and each drawer is labeled 'holidays,' 'groceries,' 'big purchases,' and the rules for each drawer are completely different.

Dr. Warren Reed: Precisely. And this leads to some truly bizarre behaviors. The Nobel laureate Daniel Kahneman came up with a classic thought experiment. Imagine you've bought a pair of theatre tickets for $160. You get to the theatre, you reach into your pocket... and they're gone. You've lost them. The seats are still available. Do you buy another pair of tickets for $160?

Freddie Williams: Ouch. That's painful. My gut reaction is no. It feels like I'd be paying $320 for that one show.

Dr. Warren Reed: That's what most people say. Now, scenario two. You're on your way to the theatre to buy those same $160 tickets. You open your wallet and realize you've lost $160 in cash. It's just gone. Do you still go to the box office and buy the tickets, maybe with a credit card?

Freddie Williams: That's different. Yes, I think I would. I'd be annoyed about losing the cash, but that feels like a separate, unrelated event. The show still costs $160.

Dr. Warren Reed: But it's the exact same financial loss! In both cases, you are $160 poorer than you expected to be. The reason for the different decision is mental accounting. In the first case, the cost of the show in your 'entertainment' mental account has just doubled to $320, which feels exorbitant. In the second, you took a $160 loss from your general 'bad luck' account, and the show still only costs $160 from your 'entertainment' account.

Freddie Williams: That's fascinating, Warren. Because from a pure systems or economic perspective, it's a nonsensical distinction. But it highlights a critical flaw in how we design programs. We might create a specific government grant for, say, educational supplies, assuming that money will be 'additional' funding for a family.

Dr. Warren Reed: Right, you earmark it.

Freddie Williams: Exactly. But if the recipient mentally puts that grant into their 'education' bucket, they might just free up money they were going to spend from that bucket and use it on something else entirely. The system's intended purpose—to increase education spending—is completely bypassed by the user's mental filing cabinet.

Dr. Warren Reed: The money isn't fungible in our heads. It's 'colored' by its source or its intended destination.

Freddie Williams: And this has huge implications for infrastructure too. Think about toll roads. People viscerally hate paying tolls, even if a study shows it saves them time and fuel that costs more than the toll itself. The 'toll' comes from a different mental account than 'gas money'. It feels like an extra, punitive loss, an unexpected charge that wasn't part of the original 'driving' budget. Designing a system without understanding that emotional accounting is, in many ways, designing it to fail.

Dr. Warren Reed: And that feeling of a 'punitive loss' brings us right back to that Israeli nursery. This is where it gets really dangerous for policymakers. The idea was simple: impose a cost—a fine—to deter lateness. But as we said, it backfired. Let's break down exactly what happened, because the details are what matter.

Freddie Williams: I'm keen to hear this. It sounds like a perfect case study in unintended consequences.

Dr. Warren Reed: It is. In 1998, economists studied six nurseries in Haifa, Israel. For weeks, they just observed. And parents were mostly on time. Why? Because of social pressure. They knew a teacher had to stay late, they felt guilty, they had a social contract. It was a system governed by norms.

Freddie Williams: A sense of civic duty, or community responsibility.

Dr. Warren Reed: Exactly. Then, the economists introduced the fine. It was small, about 10 shekels, maybe three dollars. And what happened? Lateness. It didn't just increase; it doubled. The reason is that the fine wasn't a punishment anymore. It became a. Parents, consciously or not, reframed the entire situation. It was no longer, 'I'm making this teacher's life difficult.' It became, 'For a few shekels, I can buy an extra 15 minutes of my time.' The financial incentive had completely crowded out the social one.

Freddie Williams: It commodified the relationship. The fine didn't just add a cost; it a norm. It sent a message to parents: 'Your relationship with the teacher is now a commercial transaction.' And once you flip that switch, it's very hard to flip it back.

Dr. Warren Reed: You can't! The study proved that. After 12 weeks, they removed the fine. But the lateness didn't go back down. It stayed at the new, higher level. The social norm was dead, and it couldn't be resurrected. Hammond's book gives another powerful example: a referendum in Switzerland in the 90s about siting a nuclear waste dump.

Freddie Williams: A classic 'Not In My Backyard' problem.

Dr. Warren Reed: You'd think. Initially, they surveyed a community and found that 50% of residents said yes, they would accept it out of a sense of national civic duty. Then, the researchers asked a different group: what if the government compensated every resident with several thousand dollars a year? The acceptance rate plummeted from 50% to 25%.

Freddie Williams: Wow. So paying them made them willing.

Dr. Warren Reed: Far less. The money changed the question from 'Am I a good citizen?' to 'Is this amount of money worth the risk to my family?' It crowded out civic duty and replaced it with a market calculation. And the price wasn't high enough.

Freddie Williams: This is the core challenge in governance. We default to economic levers—fines, taxes, subsidies—because they're scalable and seem 'lawful' or objective. But we forget they operate within a complex web of social and cultural contexts. And that makes me think about some of the Indigenous-led institutional frameworks I've studied. Many are built on principles of reciprocity, kinship, and collective responsibility, not on transactional, individualistic incentives.

Dr. Warren Reed: A completely different operating system.

Freddie Williams: A completely different OS. And if you try to 'modernize' those systems by just bolting on a Western-style financial incentive program, you risk this exact crowding-out effect. You could inadvertently destroy the very social fabric that makes the system resilient and effective in the first place. It's a profound lesson in the need for true alignment with human values, not just the application of economic force.

Dr. Warren Reed: So, let's pull this together. We have two powerful, system-breaking ideas from 'Mind Over Money'. First, our brains create irrational 'mental accounts' for money, which means we don't treat it as the fungible asset economists assume it is.

Freddie Williams: And second, our go-to tool for shaping behavior—financial incentives—can completely backfire, destroying the very social norms and intrinsic motivations that were holding the system together.

Dr. Warren Reed: It's a minefield for anyone trying to build something that works for real people.

Freddie Williams: And I think the through-line for me, Warren, is that you simply cannot design a human-centered system by ignoring the human. The internal logic of the system is completely irrelevant if it doesn't align with the psychological reality of the user. You're just building a beautiful machine with the wrong user manual.

Dr. Warren Reed: Perfectly put. So, for everyone listening, especially those who design or manage systems in any capacity—from company policy to public infrastructure—here's the takeaway. The next time you're creating a rule, a policy, or an incentive, stop for a moment. Don't just think about the economic outcome.

Freddie Williams: Ask the psychological questions first.

Dr. Warren Reed: Exactly. Ask: What mental account will this draw from for the user? Will it feel like a gain, or a painful loss? And more importantly, what social norm, what sense of duty or goodwill, might this financial lever accidentally destroy? Answering that might be the difference between a system that works and one that spectacularly breaks.