ariely presentation final
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www.danariely.com
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The psychology of money
Opportunity cost
Relativity
Pain of paying
Mental Accounting
Fairness
Price of 0
Self herding
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Opportunity cost
How should we make decisions about money?
Decision makers confronted with a showcase of
beluga caviar consider how much hamburger they
could buy with the money [that] a pound of caviar
costsPeople intuitively take opportunitycosts into account (Becker, Ronen &
Sorter, 1974)
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We found we really missed going to thetheatre and eating in nice restaurants, so
we gave our kids away
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$700 $1000
Sony Pioneer
+
$300worthof
CDs
$1,000
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Shadow value of price
The concept of the shadow value of price is
crucial for people to be able to make tradeoffs
between goods
Can people do it?
Naturally -- not, but maybe under some
conditions?
What does that means for spending and for
savings??
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Relative size matters !!!
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The importance of relativity
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Relativity
Because it is hard to estimate
absolute levels (pleasure) we userelativity as a decision rule
We use it in many decisionsacross many domains
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Pain of paying
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3 components of the aversion to making a payment
Totaldisutilityofa
payment
Disutility of money spent: theutility that could be realized by
spending the money is the best
available alternative if the payment
were not made
Hassle, effort, or annoyance of
actually executing the payment
Pain of paying: psychological
aversion to parting with the
payment, above and beyond the
economic disutility and the hassle
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Payments over time
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The utility of pain of paying
-30
-10
10
30
50
t1 t2 t3 t4 t5 t6 t7
Consumption Spending Utility
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The AOL story
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Can the pain of payingdiminish over time?
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Pain of paying: summary
The pain of payment is an additional aspect of
disutility
It is influenced by the timing of the payment,
and by the coupling of experience with payment
Club med? Subscriptions? Micro payments?
Can the pain of paying be useful?
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Mental Accounting
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Bought ticket(cost $100)
Lost ticket
Buy new ticket?
Lost $100 on the way totheater
Buy ticket?
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Theater tickets Restaurant meals
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Theater tickets Restaurant meals
Sunk moneyfeels free
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Are there benefits for MA?
Mental accounts causes many mistakes in
decision making
But, it might also help people fight the problems
of making monetary decisions (shadow value of
price, trading off goods and money etc.)....
Having savings as a mental account can help
people save more
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Mental accounting summary
Money is not fungible in peoples minds!
Money has budgets which in turn have effects onspending
Where money comes from determines where itcan be spent
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Fairness
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Price of 0
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Halloween
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Experiment 2 Results
1 oz Snickers 2 oz Snickers Nothing
%c
hoice
0
10
20
30
40
50
60
70
80
90
100
7
93
0
70
30
0
1&2
0&1
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How should people
decide about buying acup of coffee?
What is the self herdingversion of these decisions?
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???
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Arbitrary Coherence ...
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Just because youve always done it that way
doesnt mean its not incredibly stupid.
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$600
$400
? ?
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Social and MarketNorms
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Theatertickets
Restaurantmeals
0 25
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Lessons
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VS.
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www.danariely.com
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