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 particularly perplexing question that scientists have been diligently working to reveal is the reason why people make weird decisions about money.
As Michael Shermer explains in the Los Angeles Times, 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.
Shermer highlights three behavioral experiments that are used by scientists to measure people’s rationality with respect to money that I found to be really interesting — and so I want to share them with you.
Here are the scenarios. What decisions would you make for each of them?
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 one-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. Yep. The majority would rather forgo $50 in order to alleviate the feeling of regret that comes with not winning $1000!
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’re 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. Behavioral scientists say this is because an emotion evolved in man known as “reciprocal altruism” 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?
Photo Credit: Tax Credits
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! 🙂
“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 😉
That just goes to show what a behavioral scientist knows. 😉
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.
I was mostly rational (except for the first question) but I didn’t like it :).
Since goods and services cost the same the $100,000 looks fine.
If I didn’t expect the $150, I ‘d be quite pleased to get anything. And happy for the person in front of me.
As far as the third question, I’d try to dicker first. I might just take the $10, but you wouldn’t be my friend anymore. It’s not just a financial issue, it is a character issue.
very rational. Did well and pretty much got all of them! Then again, I was doing a lot of analytical stuff of this nature this weekend, so it makes sense.
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Groovy.
It’s sad we live in a society with so much competition that we would rather beat someone else rather than better ourselves.
I’d like to see exactly the demographics of the poll.
How is all that data split up.
Yep. I feel the same way, Kevin. I don’t have the demographics for the poll, unfortunately.
I’m totally rational. And I don’t get Taylor Swift’s popularity either, except that her songs probably appeal to girls in their early teens who have been “wronged” by a boy.
You’re probably right, Kathy.
OK, the first one is a bit lacking in information:
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
Is ‘other people’ ALL other people ?? If so, I’ll take “A”……because if ALL other people are only making 25k, I would probably have more purchasing power because the market for goods and services would only bear what most folks make. You can clearly see this in areas around the country where earnings are low….the cost of living in Tennessee, for example, is a whole lot lower than the cost of living in California, or NYC.
You are correct in your thinking, Andy, based on your assumptions — but for the purposes of this quiz, “other people” means other people in your personal circle of friends and acquaintances.
These specific examples can be extrapolated to a more general “truth”: Take the opportunity presented while it’s available. The opportunity won’t become more perfect nor will it last.
This principle has served me well throughout my life; everything from choosing which secondary training to choose in the Army, to going to work in the U.S. Patent Office when they were low on examiners and hired people not “fully qualified” (the “credentials” shibboleth, again – while I was able to exploit it in this case, I hate it), to “paying to much” for a large bloc of land I wanted in WV.
I agree that is true more often than not, Dave.
Asking questions are a genuinely nice thing if you are not understanding something entirely.
If you say so, Chet.
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