3 Simple Tests to See if You’re Irrational When It Comes to Money

Some things are seemingly impossible to explain.  I mean, how do spiders know how to spin such beautiful webs?  What ever inspired the construction of Stonehenge?  And why is Taylor Swift so darn popular?  ;-)

One perplexing question that scientists have been diligently working to reveal is the reason why people make weird decisions about money.  Indeed, there have been countless experiments in behavioral economics that demonstrate when it comes to money, reason and rationality are often trumped by our emotions and feelings.

Here are three behavioral experiments that have been conducted by scientists.  What decisions would you make for each of the presented scenarios?

1.  Assuming that prices of goods and services stay the same, would you rather earn…

A. $50,000 a year while other people make $25,000

B. $100,000 a year while other people get $250,000

Did you pick option A?   Although that is completely irrational, research shows that the majority of people would rather make twice as much as others – even if that meant earning half as much as they could otherwise have.

Okay, let’s see how you would handle the next scenario:

2.  Nancy and Karen are standing in line at different movie theaters.  Who would you rather be?

Nancy:   She gets to the ticket window and is told that as the 100,000th customer of the theater she has just won $100.

Karen: She gets to the window and wins a consolation prize of $150 after the man in front of her won $1,000 for being the 1-millionth customer of the theater.

Would you rather be in Karen’s shoes?  That’s what a person thinking rationally would choose but, once again, the rational thinkers were in the minority.  That’s right.  The majority surveyed would rather forgo $50 in order to alleviate the feeling of regret that comes with not winning the thousand bucks.

Here’s one last scenario based on something called “The Ultimatum Game:”

3. I was given $100 by a friend of mine to split between me and you.  Here’s the catch: Whatever division of the money I propose, if you accept it, we’ll both get to keep our share. If, however, you reject my proposal, neither of us will get any money.   I’m proposing a 90/10 split; of course, I’d get $90 and you’d get $10.  Do you accept or reject my proposal?

Think about it for a second.  If you’re rational you are going to accept my offer, pocket the $10, and feel good that you just got something for nothing.  But research shows that offers of less than $30 are usually rejected.  The reason for this is behavioral scientists say that an emotion evolved in man known as “reciprocal altruism” that demands fairness on the part of our potential exchange partners.  Amazingly enough, this moral sense of fairness is not only hard-wired into the brains of most humans, but primates as well.

So how did you do?  Are you rational or irrational when it comes to money?

For a more in-depth explanation of the logic behind these three tests and people’s resulting irrational decisions, as well as additional information on the results of similar money behavior tests performed on primates, check out this link:

Why People Believe Weird Things About Money

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11 comments to 3 Simple Tests to See if You’re Irrational When It Comes to Money

  • Ha ha. this time around, I was actually rational each time! Somehow it’s easier to be rational when you’re reading it in black and white…. good points, though, when we think of it in relation to paying off debt the “mathematical” way etc (highest payments first, etc.).

  • I can never get enough of these behavioral psychology posts!

    One thing though, to be picky — in question one I think it makes more sense to say “while your closest friends make…” rather than “while other people make…”

    If you made twice as much money as everyone else in the world as your wording suggests wouldn’t it be rational to choose to be the richest man in town?

    The point as I understand it is that people compare themselves to their peers, where they would rather be wealthier than them even at the cost of being poorer than the general population.

    Anyway, just a thought. :)

  • @Money: Me too. I think that is attributable to the engineer in me – it tends to take all emotion out of the equation! :-)

    @Monevator: Hmm. Regarding your question about wouldn’t it be more rational to be the richest man in town – I think the key point in the hypothetical question is that we are “assuming all prices of goods and services stay the same.” If that is true, then I think it would be more rational to have double the buying power even though everyone else has even more of it. For me, that would hold true regardless of whether everyone else was just my closest friends or the entire world. But then again, I’m probably not as rational as I think – after all, I’m very happy driving my 12-year old car and living in a very modest home, even though I could afford much much better if I so desired. It makes you think, doesn’t it? :-)

  • How interesting! #2 and 3 would really make me mad, so I definitely succumb easily to my emotions! :)

    I’ll throw another classic into the mix – ever notice that you’ll try for hours to save $10 on a $50 product, but when you can save $15 on a $2,000 product, it doesn’t matter all that much anymore?

  • I think that’s very very true, and I think it is rational too – at least in my twisted mind! lol

    I guess, for the latter case, the key is whether the savings are readily available. If they are, then to me it doesn’t make sense to ignore them. But if it requires a bit of effort – like filling out a complex rebate form or sitting through a 30 minute presentation, then I’d figure the $15 wasn’t worth my time.

    Would the behavior scientists say that the same logic should apply to both the $50 item and the $2000 item? I’d be interested to know! :-)

  • Santos

    “Amazingly enough, this moral sense of fairness is not only hard-wired into the brains of most humans…”

    The sense of what is right just evolved huh? Talk about irrationality ;-)

  • Guy

    Wealth is pretty relative and most people would rather be the big fish in a small pond than a small fish in a big pond. Many people would constantly feel bad about themselves as their friends are going on trips to Hawaii and they can’t afford it. I’ve found it is easier to be friends with people who are poorer than with those who are richer, as you can spend less and do everything they do where as for rich friends you can never keep up.

  • [...] Len Penzo dot Com, here are 3 fun tests to see if you’re irrational with money. I added a fourth in the [...]

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