Tuesday, May 11, 2010

Monks & Money

by Tara Deliberto

The study of individual decision making is certainly incomplete without taking into account several elements of human psychology. Rather than thinking rationally about decisions to ensure a favorable outcome, people tend to make decisions without a rational foundation, often defaulting to a set of heuristics (Amir & Ariely, 2007). Without knowledge of these psychological components at work, risky or detrimental choices cannot be understood.

One of the most established phenomena in the psychology of human decision making is that people are generally loss averse. Not only do people feel negatively about loss, but losses tend to loom larger than gains (Ariely, Huber, & Wertenbroch, 2005). In other words, people view something as more valuable when they give it up than when they acquire it. Greater value is given to an item after it comes into one’s possession than beforehand. In a study conducted by Knestch (1989), the results showed that people were unwilling to trade the item they received, whether it be a mug or a candy bar, despite random assignment. While loss aversion has been found to exist with the exchange of goods in other studies as well (Kahneman, Knestch, and Thaler (1990), it has not been found to exist for the exchange of money or other goods that are used as currency (Heath & Soll, 1996, Thaler, 1985).

While a loss is inherently averse, it is subjective in that current endowment of both goods and money must be taken into consideration. For instance, the loss of a sandwich to a wealthy person is not felt as strongly as the loss of a sandwich to someone who is destitute. By the same token, the loss of $50 to a millionaire would be felt as less dramatically than a loss of $50 to a typical college student. This is known as the endowment effect.

Ariely et al. press the field forward by proposing potential mediators to both loss aversion and the endowment effect. First, emotional attachment goods may increase reluctance to part with them. In support of this theory, a study by Strahilevitz and Loewenstein (1998) showed that consumers adopt more ownership of items over time, providing support for moderation of loss aversion. Along with emotional attachment, Ariely et al. offer perspective change as a second mediator. While buyers are trying to minimize costs, sellers are trying to maximize gains. As a result, a price gap emerges. This gap is a product of the fact that people value items from different perspectives. In support of this notion, Carmon and Ariely (2000) have found that ticket sales to major sporting events depended on the manipulation of various benefits and opportunity costs, causing a shift in perspective about the purchase. In short, personal valuations of the monetary worth of products vary. Loss aversion could be mediated by one’s perspective of the good.

Furthermore, Dhar and Wertenbroch (2000) suggest that perhaps emotional attachment and cognitive perspective change could actually mediate the loss aversion for money. Although loss aversion has been seen to occur on a lesser scale than for money than goods, it is thought that cognitive allocation of money for certain goods could enhance loss aversion for currency. If the person’s perspective is that the money is to be spent on certain goods, feelings of loss over potential or intended goods may be felt.

While emotional attachment and perspective changes may very well mediate loss aversion and the endowment effect, another element of human perception of money particularly piques the author’s interest. Perhaps a mediator of the endowment effect for money could be the qualitative valuation differences of money. In other words, people place different levels on importance on money despite their current endowment. For example, the loss of $5,000 to a typical millionaire might be felt more dramatically than the loss of $5,000 to a hippy choosing to live on a commune who also happens to be a millionaire. The hippy may simply care less about money. Although their endowments are matched, they still may view the loss differently.

Perhaps this may partially be explained by a cultural overgeneralization of the value of the dollar. In other words, perhaps Americans tend to assume that other cultures may also highly value money. To demonstrate the point, an extreme example will be used: while many people in America strive to acquire wealth, Buddhist monks and people from communist countries, for example, place a very different personal value on currency. Although this concept is slightly similar to perspective change, Ariely et al discuss this potential mediator as short-term shifts rather than long-term persisting value differences. While they may be different constructs, perhaps perspective change and valuation are at opposing extremes of a larger unified construct of attitudes towards money. Furthermore, the construct of qualitative valuation differences of money is different than the idea of emotional attachment because it is not describing affection with a certain object, but a personalized concept of the importance of money. As previously mentioned, emotional attachment was only found with objects, not money. People who value money are not emotional attached to the money itself. An example of a group with a true emotional attachment to money might be coin collectors, while a group of people who think of money as important might be MBA students.

While it may be useful to utilize the example of Buddhist monks valuing money less than a typical American, it seems rational that varying degrees of qualitative valuations of money exist amongst Western people as well. The author thinks that differences in valuations are relevant because they have the capacity to highly impact decision making. Related to how one valuates money, may be irrational decision making. As a simple example, holding endowment constant, if one places importance on money itself, more of it may be saved rather than spent.

Other variables of interest might include the distinction between viewing money as a means to acquire goods versus a reward for work. It is the author's hypothesis that viewing money more as a reward than as a mean to acquire good would result in more conservative decision making.

An interesting study might assess differences in valuation of money amongst poker players and correlations to how they play the game. This particular subgroup was conceived as a sample for a hypothetical study because polarizations between placing high and low importance on money might be able to be studied in this population. Some may think of poker chips as directly relating to how many goods they are able to acquire, while other player may have more distance, and simply view the chips worth hefty amounts of money more as just small round discs of plastic. My guess is the players viewing money as chips may make more rational decisions in the game over time. While this doesn't exactly examine valuation of money, it may clearly depict how people make decisions based on how they perceive money.

Additionally, after this type of distinction is measured, a study might be able to code and quantify specific moves within a given set of games. Actual decision making regarding money could be observed this way. Perhaps there is a better way to execute the evaluation of the presence and socially relevant impact of varying valuations of money, but it is the author’s rough idea that poker players might be an interesting subgroup to study.

While the idea of individual valuation of money effecting decision making may seem reasonable, the author has not found literature on this topic. It was particularly surprising to find personal valuation of money was not mentioned anywhere as a potential mediator of the endowment effect. In short, research should be done in the area. First it must be determined if the phenomena exists. If it is found to exist, exploring it's role in decision making may provide useful insight into irrational and rational behavior regarding money.
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