And so even today, there’s some remarkable crosstalk between the two. People are less likely to donate money to charities, for example, if they are hungry than if they are full; meanwhile, experimental subjects (excluding those who were dieting) who are put in a state of “high desire for money” eat more M&Ms during a taste test than do people who are in a state of “low desire for money.”[21] To the degree that our understanding of money is kluged onto our understanding of food, the fact that we think about money in relative terms may be little more than one more accident of our cognitive history.
“Christmas Clubs,” accounts into which people put away small amounts of money all year, with the goal of having enough money for Christmas shopping at the end of the year, provide another case in point. Although the goal is admirable, the behavior is (at least from the perspective of classical economics) irrationaclass="underline" Christmas Club accounts generally have low balances, so they tend to earn less interest than if the money were pooled with a person’s other funds. And in any event, that money, sitting idle, might be better spent paying down high-interest credit card debt. Yet people do this sort of thing all the time, establishing real or imaginary accounts for different purposes, as if the money weren’t all theirs.
Christmas Clubs and the like persist not because they are fiscally rational but because they are an accommodation to the idiosyncratic structure of our evolved brain: they provide a way of coping with the weakness of the will. If our self-control were better, we wouldn’t need such accommodations. We would save money all year long in a unified account that receives the maximum rate of return, and draw on it as needed; only because the temptation of the present so often outweighs the abstract reality of the future do we fail to do so such a simple, fiscally sound thing. (The temptation of the present also tends to leave our future selves high and dry. According one estimate, nearly two thirds of all Americans save too little for retirement.)
Rationality also takes a hit when we think about so-called sunk costs. Suppose, for instance, that you decide to see a play and plop down $20 for a ticket — only to find, as you enter the theater, that you’ve lost the ticket. Suppose, further, that you were to be seated in general admission (that is, you have no specific assigned seat), and there’s no way to get the ticket back. Would you buy another ticket? Laboratory data show that half the people say yes, while the other half give up and go home, a 50-50 split; fair enough. But compare that scenario with one that is only slightly different. Say you’ve lost cash rather than a prepurchased ticket. (“Imagine that you have decided to see a play, and the admission is $20 per ticket. As you enter the theater, ready to purchase one, you discover that you have lost a $20 bill. Would you still pay $20 for a ticket for the play?”) In this case, a whopping 88 percent of those tested say yes — even though the extra out-of-pocket expense, $20, is identical in the two scenarios.
Here’s an even more telling example. Suppose you spend $100 for a ticket to a weekend ski trip to Michigan. Several weeks later you buy a $50 ticket for another weekend ski trip, this time to Wisconsin, which (despite being cheaper) you actually think you’ll enjoy more. Then, just as you are putting your newly purchased Wisconsin ski-trip ticket in your wallet, you realize you’ve goofed: the two trips take place on the same weekend! And it’s too late to sell either one. Which trip do you go on? More than half of test subjects said they would choose (more expensive) Michigan — even though they knew they would enjoy the Wisconsin option more. With the money for both trips already spent (and unrecoverable), this choice makes no sense; a person would get more utility (pleasure) out of the trip to Wisconsin for no further expense, but the human fear of “waste” convinces him or her to select the less pleasurable trip.[22] On a global scale, the same kind of dubious reasoning can have massive consequences. Even presidents have been known to stick to policies long after it’s evident to everyone that those policies just aren’t working.
Economists tell us that we should assess the value of a thing according to its expected utility, or how much pleasure it will bring,t buying only if the utility exceeds the asking price. But here again, human behavior diverges from economic rationality. If the first principle of how people determine value is that they do so in relative terms (as we saw in the previous section), the second is that people often have only the faintest idea of what something is truly worth.
Instead, we often rely on secondary criteria, such as how good a deal we think we’re getting. Consider, for example, the question posed in Bob Merrill’s classic sing-along: “How much is that doggie in the window?” How much is a well-bred doggie worth? Is a golden retriever worth a hundred times the price of a movie? A thousand times? Twice the value of a trip to Peru? A tenth of the price of a BMW convertible? Only an economist would ask.
But what people actually do is no less weird, often giving more attention to the salesperson’s jabber than the dog in question. If the breeder quotes a price of $600 and the customer haggles her down to $500, the customer buys the dog and counts himself lucky. If the salesperson starts at $500 and doesn’t budge, the customer may walk out in a huff. And, most likely, that customer is a fool. Assuming the dog is healthy, the $500 probably would have been well spent.[23]
To take another example, suppose you find yourself on a beach, on a hot day, with nothing to drink — but a strong desire for a nice cold beer. Suppose, furthermore, that a friend of yours kindly offers to get you a beer, provided that you front him the money. His only request is that you tell him — in advance — the most you are willing to pay; your friend doesn’t want to have the responsibility of deciding for you. People often set their limit according to where the beer is going to be purchased; you might go as high as $6 if the beer is to be purchased at a resort, but no more than $4 if the friend were going to a bodega at the end of the beach. From an economist’s perspective, that’s just loopy: the true measure should be “How much pleasure would that beer bring me?” and not “Is the shop/resort charging a price that is fair relative to other similar establishments?” Six dollars is $6, and if the beer would bring $10 of pleasure, $6 is a bargain, even if one spends it at the world’s most expensive bodega. In the dry language of one economist, “The consumption experience is the same.”
The psychologist Robert Cialdini tells a story of a shopkeeper friend of his who was having trouble moving a certain set of necklaces. About to go away for vacation, this shopkeeper left a note for her employees, intending to tell them to cut the price in half. Her employees, who apparently had trouble reading the note, instead doubled the price. If the necklaces didn’t budge at $100, you’d scarcely expect them to sell at $200. But that’s exactly what happened; by the time the shopkeeper had returned, the whole inventory was gone. Customers were more likely to buy a particular necklace if it had a high price than if it had a low price — apparently because they were using list price (rather than intrinsic worth) as a proxy for value. From the perspective of economics, this is madness.
What’s going on here? These last few examples should remind you of something we saw in the previous chapter: anchoring. When the value we set depends on irrelevancies like a shopkeeper’s starting price as much as it does on an object’s intrinsic value, anchoring has clearly cluttered our head.
21
How do you get people to lust after money? Let them imagine they’ll win a significant amount of money in the lottery, then ask them to think about how they would spend it. The more money they are asked to envision, the more lust is engendered. In the particular experiment I describe, people in the “high desire for money” condition spent a few minutes thinking about how they’d spend a £25,000 prize, while people in the “low desire for money” condition spent a few minutes contemplating how they’d spend a £25 prize. A remarkable indicator of the influence of induced money lust came from a follow-up question: people were asked to estimate the size of coins. The bigger the lust, the larger their estimate.
22
As a final illustration, borrowed from maverick economist Richard Thaler, imagine buying an expensive pair of shoes. You like them in the store, wear them a couple of times, and then, sadly, discover that they don’t actually fit properly. What happens next? Based on his data, Thaler predicts the following: (1) The more you paid for the shoes, the more times you will try to wear them. (2) Eventually you stop wearing the shoes, but you do not throw them away. The more you paid for the shoes, the longer they will sit in the back of your closet before you dispose of them. (3) At some point, you throw the shoes away, regardless of what they cost, the payment having been fully “depreciated.” As Thaler notes, wearing the shoes a few more times might be rational, but holding on to them makes little sense. (My wife, however, notes that your feet could shrink. Or, she adds brightly, “You never know, you might get some sort of foot surgery.” Never give up on a nice pair of shoes!)
This is not to say that prices need to be fixed, as they are on
23
I’m neither a dog owner nor a “dog person,” but if my wife’s experience is at all typical, a fluffy golden may be among the best things money can buy. She’s had hers for a dozen years, and he still brings her pleasure every day, far more than I can say for any of the myriad electronic gadgets I’ve ever acquired.