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