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:
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