We Overemphasize Money

Dan Ariely
By Dan Ariely
Duke Fuqua School of Business, Irrational Labs

November 06, 2018

Editor's Note: Today is the one year anniversary of the publication of the book I (Jeff Kreisler, secretly Editor of PeopleScience) co-authored with the brilliant and kind Dan Ariely, "Dollars and Sense: How We Misthink Money and How to Spend Smarter."

To say it’s been an incredible, educational, emotional and life-changing year would be a gigantor understatement. From having our ideas shared in print, via audio and on stage around the world to being given the honor of editing PeopleScience and chatting with all of you, I’ve been #blessed (the hashtag means “I’m not snarking”).

So, to celebrate, here’s an excerpt from our book (which is also out in paperback today): FYI, the ideas in this chapter – about how we overemphasize money when making decisions – have become sneakily omnipresent in my work at PeopleScience. I’ve learned a lot about the truly meaningful value of non-monetary rewards in engagement, motivation, habits, loyalty, wellness and more. My instinct – that money isn’t everything but is often the only thing by which we measure everything – is a solid foundation for the study of other, better ways to measure our lives’ worth. I look forward to seeing how much further away we can go.

Way back around the turn of the century — that is, around the year 2000 — a young(er) Dan Ariely was looking to buy a couch for his office at the Massachusetts Institute of Technology. His search led him to a fine sofa that cost $200. Shortly thereafter, he found another sofa by a French designer that cost $2,000. It was much more interesting, very low to the ground, and sitting in it felt very different. But it wasn’t clear that it was more comfortable or that it would serve its role as a sofa in a better way. It certainly didn’t seem to be worth paying ten times as much. But Dan bought the fancy one anyway. Since then, when guests of all sorts come to his office, they have a hard time lowering themselves onto this sofa and an even harder time getting out of it. We will not address rumors that Dan has kept this sofa simply for the purpose of torturing his visitors. 

What’s Going On Here?

Dan had a hard time evaluating the long-term experience offered by the fancy sofa. He tried it out by sitting in it for a few minutes, but the real questions were how comfortable the sofa would be after sitting in it for more than an hour—which turned out to be very comfortable — and how his guests would feel using in it —which turned out to be not so great. (After many years, Dan now knows that certain guests don’t feel comfortable sitting so low and that they have a hard time getting up again.) Without having a way to answer these questions at the time of purchase, and thus a way to know how suitable the sofa would be for his needs, Dan used a simple heuristic: Expensive must mean good. So he got the expensive couch.

Dan is not alone in using this decision strategy. Would you eat cheap lobster? What about discount caviar or bargain-basement foie gras? Restaurants don’t put delicacies like these on sale because of how we deal with the price, and the powerful signals it sends. Even if the wholesale markets for lobster, foie gras and caviar plummeted, as happened a few summers ago, restaurants won’t pass those savings on to diners. That’s not just because they’re greedy, but because low prices send us uncomfortable messages about the nature of luxury items. We infer that discounts mean lower quality. We start thinking there’s something wrong with the weird little food things. We certainly assume they’re inferior to competitors’ delicacies.

What if, instead of cheap lobster and foie gras, we were offered extremely inexpensive heart surgery? Same thing: We would think something’s wrong and would seek out the best surgeon we could find, which, given our lack of knowledge about cardiology, would probably be the most expensive one we could find. 

What if, instead of cheap lobster and foie gras, we were offered extremely inexpensive heart surgery? 

That’s because another important way we value things — a way unrelated to actual value — is by assigning meaning to a price. When we can’t evaluate something directly, as is often the case, we associate price with value. This is especially true in the absence of other clear value cues. Dan, as a young, impressionable MIT professor, didn’t know how to measure the value of an office couch, so he went with what he could measure: Price. A decade and a half and many unhappy guests later, he knows he made a poor choice.

In Predictably Irrational, Dan showed that we are conditioned to see high price as a stand-in for effectiveness. Dan, along with his colleagues Rebecca Waber, Baba Zhiv and Ziv Carmon, did an experiment with a fake painkilling drug they called VeladoneRx. (In truth, it was a vitamin C capsule.) They gave it to test subjects along with brochures and a technician in a crisp business suit and white coat and slapped on an expensive price tag of $2.50 per pill. They then gave participants a set of electrical shocks to see how much pain they could take. Almost all the patients in the study showed reduced pain after ingesting VeladoneRx. When Dan and his partners in crime carried out the same experiment, but used a price tag of 10 cents per pill, the average amount of pain relief patients experienced was about half of that under the $2.50 pill.

Baba, Ziv and Dan extended these findings using Sobe energy drinks. In these experiments, mentioned earlier, those who had the beverage along with literature claiming it improved performance actually displayed improved performance on all kinds of mental tasks. Another experiment showed that those who received discount-priced energy drinks performed worse than those who drank full-priced beverages. Another experiment showed that those who got the discounted drinks expected them to be worse, and indeed, they experienced them as worse because of the signals sent by price.

Whether it makes sense or not, a high price signals a high value. In the case of important things like health care, food and clothing, it also signals that the product isn’t cheap or of low quality. Sometimes the absence of poor quality is as important as the presence of high quality. Aunt Susan may not pay $100 for a T-shirt, but if that’s JCPenney’s “regular” price, then, the rationale goes, someone must be willing to pay it. Therefore it must be a high-quality product. And, lucky Aunt Susan, she just got one of those fancy $100 T-shirts for $60. The Vertu cell phone offers the same service and functionality as most other phones, but those who can afford it pay between $10,000 and $20,000 for the honor of playing Angry Birds on a prestigious status symbol. “Surely no one would pay that much if it wasn’t worth it,” someone must have reasoned and then went ahead and got a Vertu. On another technology platform for only one day — because it was quickly taken down — there was an iPhone app for sale called “I Am Rich.” It simply displayed a few words of affirmation about being rich. It did nothing else. It cost $999.99. Eight people bought it. We would like to invite those eight people to contact us about some other similarly promising opportunities.

Prices shouldn’t affect value, performance or pleasure — but they do. We are trained to make quick decisions based on money with every single transaction, and, especially in the absence of other value markers, that’s what we do.

Remember that anchoring and arbitrary coherence show that just listing a price can impact our perception of value. (The first price we see associated with a product anchors our valuation of it, and it doesn’t even need to be a price; it can be an arbitrary number like a Social Security number or the number of countries in Africa.)

Consider wine, the best way to a man’s stomach, which, as we’ve heard, is then the way to his heart. The higher the price of a bottle of wine, the more we like it. The evidence is clear: When we know how much we’re spending on what we’re drinking, then the correlation between price and enjoyment is incredibly strong. And it doesn’t matter much what the wine is. However, using price to infer quality is a fairly blunt assessment. The impact of the price on this inferred quality might be reduced if we could judge the wine in other ways — if we know where the wine is from, when it was grown, why that matters, or if we know the winemaker personally and how he or she washes his or her feet before crushing each individual grape. But that seems unlikely.

Prices shouldn’t affect value, performance, or pleasure — but they do. We are trained to make quick decisions based on money with every single transaction, and, especially in the absence of other value markers, that’s what we do.

Uncertain Situations

That’s all well and good, but how often do we “know the winemaker”? That is, how often do we know all the relevant details that would allow us to objectively assess the value of a safari or a widget or a safari full of widgets? Hardly ever. As we’ve seen, we usually don’t have any idea what anything should cost. Without context, we have no independent ability to truly value anything, be it casino chips, home prices or Tylenol. We are afloat in a sea of financial-value uncertainty.

In times like this, money becomes the salient dimension. It’s a number. It’s clear; we can compare it across multiple options; and because it’s easy to think about money in this literal, seemingly precise way, we pay too much attention to it at the expense of other considerations.

Why is this? Well, it’s about our love of precision. There’s a saying that with regard to our decisions in general, and our financial decisions in particular, psychology gives you a vaguely right answer and economics gives you a precisely wrong answer.

We love precision — and the illusion of precision — because it gives us the feeling that we know what we are doing. Especially when we don’t.

The strange thing about money is that, even though we don’t understand what it is, it’s measurable. Whenever we encounter a product or experience with many different properties, along with one precise and comparable attribute (money), we tend to overemphasize that specific attribute because it’s easier to do so. It’s hard to measure and compare features like flavor, style or desirability. So we end up focusing on price as a way to make our decisions, because we can measure and compare it more easily.

Remember that people often say they’d prefer being the highest-paid employee of a company rather than the lowest-paid one — even if it means making less money. Ask people if they’d prefer to make $85,000 and be top dog or earn $90,000 and not be, and they’ll choose the $90,000. Make sense? Yes.

But if we ask the same question with a different focus, we get a very different answer. When we ask people if they would be happier if they made $85,000 and were the highest paid or if they made $90,000 and were not—the same options with the same parameters, just framed in terms of happiness — they say they would be happiest making only $85,000. The difference between how people respond to the problem in general versus when focused on happiness is due to the fact that it is very easy to think just about money. In the absence of another specific focus, money is the default focus. When we think about something like a job, even though there are many things that come into play, money is so specific, precise and measurable that it comes to mind most quickly and plays a large role in our decision.

To consider a more mundane example of the same principle, consider our nightmare of choosing a cell phone. There are many factors — screen size, speed, weight, camera pixels, security, data, coverage. Given all these factors, how much weight should you give the price? Well, as a product’s complexity increases, relying on the price becomes a relatively simpler and more attractive strategy, so we focus on the price and largely ignore the many complexities of that decision.

Along the same lines, as we learned in the discussion of arbitrary coherence, most of us have a hard time comparing one type of product or experience to a very different one. That is, we don’t use opportunity costs to compare a Toyota to a vacation or to 20 expensive dinners. Instead, we compare things in the same category — cars to cars, phones to other phones, computers to computers, widgets to widgets. Imagine we bought the first iPhone, which was the only smartphone at the time. There was no similar product to compare it to, so what would we compare it to? (Yes, Palm Pilot and Blackberry were around back then, but the iPhone was so far ahead as to be a completely different category of product.  Also, Palm Pilot? No thanks, Grandpa).  How would we figure out if it was worth the cost? When Apple first introduced the iPhone, the price was $600. A few weeks later, the company reduced the price to $400. That created a new category to which to compare the iPhone — the first iPhone, which was, in fact, the identical iPhone at a different price. Once there are multiple products in a category, money becomes an alluring way of comparing them, which can in turn lead us to overemphasize price. We focus on the price difference (wow, it is $200 cheaper) rather than on other qualities, and of course we continue to ignore opportunity costs.

Money is not the only attribute that is easily used for points of comparisons. Other attributes, if we quantify them, can also function in the same way. But these same attributes — if we don’t quantify them — are much too difficult to use. It’s hard to measure the deliciousness of chocolate or the drivability of a sports car. This difficulty shows the gravitational pull of price: It is always easy to quantify, measure and compare. For instance, megapixels, horsepower or megahertz, once specified and held up side by side, become more comparable and precise. This is called evaluability. When we compare products, features that are quantifiable become easy to evaluate, and even if they are not truly important they nevertheless come into sharper focus, which makes it easier for us to evaluate our options in terms of those features. Often these are the features that the manufacturer wants us to focus on to the exclusion of others (in other words, let’s talk about pixels, not how often this camera breaks). Once an attribute is measured, we pay more attention to it and its importance on our decision grows.

Christopher Hsee, George Loewenstein, Sally Blount and Max H. Bazerman once ran an experiment in which they asked people browsing used textbooks how much they would pay for a music dictionary that had 10,000 words and was in perfect condition. Another group was asked how much they would pay for a music dictionary with 20,000 words but a torn front cover. Neither group knew about the other dictionary. On average, the students were willing to pay $24 for the 10,000-word dictionary and $20 for the cover-torn 20,000-word one. The cover — irrelevant to looking up words — made a big difference.

The researchers then cornered another group and presented them with both options simultaneously. Now the students could compare the two options side by side. That changed their perception of the products. In this easy-to-compare group, the students said they would pay $19 for the 10,000-word dictionary and $27 for the 20,000-word one with the torn cover. Suddenly, with the introduction of a more clearly comparable aspect — number of words — the larger dictionary became more valuable, despite the torn cover. When evaluating only a single product, the study participants weren’t sensitive to whether the dictionary had 10,000 or 20,000 words. It was only once that attribute was easily comparable that it became an important factor in assessing value. Again, when we don’t know how to evaluate items, we are disproportionally affected by features that are easily comparable, even when those features (the torn cover, in this instance) have little to do with the real value of the product in question. In this case, the importance of the number of words increased and the importance of the condition of the cover dropped. More often than not, though, the feature we overemphasize when we make our decisions is the one thing that is always easy to see and evaluate: price.

So, if we tend to focus on whatever is most measurable and comparable, is there something wrong with that? Well, yes. It can be a big problem when the measurable thing is not the most important part of the decision. When it is not the desired end, but just the means to that end. A good example is frequent-flyer miles. No one’s life aspiration starts and ends with the accumulation of frequent-flyer miles — they’re merely a means that can one day procure the desired end of a vacation or free flights. Even George Clooney’s character in Up in the Air strives to gather miles not for themselves, but for other reasons, as a symbol of power and prosperity.

While few people consider maximizing frequent-flyer miles to be the key to a life worth living, it’s tempting to maximize anything that’s easily measurable. How do we compare 10,000 more miles with four more hours of relaxation on the beach? How many miles equals an hour of relaxing?

Money works the same way. It isn’t the final goal in life, it’s a means to an end. But because money is much more tangible than happiness, well-being and purpose, we tend to focus our decision-making on money instead of on our ultimate, more meaningful goals.

We want to be happy and healthy and enjoy our lives. Measurable things like frequent-flyer miles and money and Emmy nominations are among the easiest ways to gauge our progress. People will often choose to fly crazy routes just to get more miles, the process of which actually reduces their overall happiness due to flight delays, uncomfortable seats, and the talkative sales guy who won’t shut up about his crush on Mavis from the copy center. Just ask her out, already!

Neither of us is competent or qualified or 110 percent blissfully happy enough to tell anyone what to do with their lives, but we have sufficient data to show that we should aim to be more free from the overbearing burden of money. 

Winning the Game of Life

Ah yes, life. And money. And what is important.

Money is a signifier of value and worth, which is, for the most part, a good thing. Our lives are individually and collectively more vibrant, enriched and free because of money. But it’s not so good when money’s role as a measure of value and worth extends into parts of our lives beyond goods and services.

Since money is more tangible than human needs like love and happiness and a child’s laughter, we often focus on money as an approximation of our lives’ value. When we stop to think about it, we know that money isn’t the most important thing in life. No one ever lies on their deathbed wishing they’d spent more time with their money. But because money is much easier to measure — and less frightening to consider — then whatever the meaning of life might be, we can focus on it instead.

Consider how an artist’s work is valued in a modern economy that doesn’t pay for content creation as it once did. Since money is how our culture defines value, not getting paid for your work can be both insulting and demoralizing, even though money is, arguably, not the goal of art. Many of the great artists of history either relied upon generous patrons, the likes of whom do not exist anymore, or died destitute... and that was back when they didn’t have to compete for attention with Candy Crush and Instagram models.

Throughout Jeff’s nontraditional career — lawyer for about three minutes, comedian, columnist, author, speaker, male underwear model (not really, but one can dream) — his family greeted every one of his accomplishments, from writing a book, to getting on TV, to making connections, to meeting Dan (it was through Jeff’s first book on dishonesty, not on Tinder, as the rumors may have it) with the question “What does it pay?” For a long time, this bothered him, because it seemed callous and dismissive, a clue that they didn’t understand the true value of what he was doing. Well, they didn’t understand what he was doing, but they were not dismissive. They were trying to understand. They were using the money question as a proxy in an attempt to learn. Seeking monetary terms was a bridge for them to reach out, to translate the intangible, incomprehensible steps Jeff was taking into a language they could understand: money. At first, that was a painful difference between how Jeff and the people around him saw the world, but as Jeff realized that it was not just criticism but also an attempt to understand, it became a bridge of common language. It helped them analyze what he was doing and attach judgments and values and advice and support. This way they could ridicule his choices with informed put-downs, reality-based jokes and educated eye rolls. Progress.

Of course, while some focus on money is understandable, some might say we all left the useful parts of that focus behind long ago and are now aimlessly powering through the seas of financial uncertainty wholly obsessed with money. 

Apples to Apples, Dust to Dust

We should realize that money is just a medium of exchange. It allows us to exchange things like apples and wine and labor and vacations and education and housing. We shouldn’t attach symbolism to it. We should treat it as what it is: a mere tool to get us what we need, want and desire — now, a bit later and much later than that, too.

There’s the old expression about how difficult it is to compare apples to oranges. But that’s not true. Comparing apples and oranges is actually very easy: No one ever stands by the fruit plate wondering if they prefer the apple or the orange. When we value things by how much pleasure they would give us — what’s known as a direct hedonic evaluation — we know with high certainty which option is expected to give us more pleasure.

What’s hard is comparing apples to money. When we bring money into the equation, we make the decisions much more difficult, and we open ourselves to mistakes. Determining how much money is equal to the pleasure we expect to get from an apple is a calculation fraught with danger.

From this perspective, a useful financial decision-making strategy is to pretend that money doesn’t exist.

What if we took money out of the equation from time to time? What if, instead of looking at a vacation, we quantified the amount that this vacation would cost us in terms of movies we could attend or wine we could drink? What if we looked at the wardrobe we were going to replace for the winter and we calculated how many tanks of gas or bicycle repairs or days off work it would cost? What if, rather than considering the difference in price between big-screen TVs, we were to think about the difference as a dinner out with friends and 14 hours of overtime and then decide if that’s worth the upgrade or not?

When we move from comparing money to things to comparing things to things directly, it puts our choices into new perspective.

This process may be most applicable and useful for big decisions. Imagine we have the option to buy a big house and spend a lot on a mortgage, or a medium house with a smaller mortgage. It’s hard to compare these options when the terms are in dollars a month and a down payment and interest rates and the like. The decision gets even harder when everyone involved in the process — the sellers, the agents, the mortgage lenders — wants us to spend more to buy the larger house. What if we didn’t think in terms of money? What if we said, “You know what, the bigger house costs me the same as the smaller house plus one yearly vacation, a semester of college for each of my children, and an additional three years of working before retirement. Yes, I can afford it, but maybe it’s not worth exchanging all those things for an extra bathroom and a larger yard.” Or maybe we do that calculation and still decide the bigger house is worth it. Great! But at least we are making a clear-eyed decision by considering some alternative ways of using our money.

This direct-comparison method is not necessarily the most efficient, or even the most rational, approach. It would be crippling to take the time to translate every transaction into a money-free opportunity cost analysis. But it is a good exercise with which to assess our decision-making abilities, particularly when we face large decisions.

Money is a curse and a blessing. It’s a wonderful thing to have money as a medium for exchange but, as we’ve learned, it often misdirects us and influences us to focus on the wrong things. For an antidote, a bit of moneyless reframing helps from time to time. Consider the underlying trade-offs between things and other things instead of between things and money. If you’re happy with the trade-off, go for it. If you’re not, think again. And again. And again.

No matter our station in life, we believe it is important that, instead of thinking of life decisions in terms of money, we think about them in terms of life.

Money in Charge

Neither of us is competent or qualified or 110 percent blissfully happy enough to tell anyone what to do with their lives, but we have sufficient data to show that we should aim to be more free from the overbearing burden of money. Or at least loosen its grip on us a little bit.

We don’t want to tell you how to prioritize things, where you should place money on the sliding scale of family, love, good wine, sports teams and naps. We just want you to think about how you think about money.

 

Find the hardcover, paperback and 22 international editions of the book here.

 

Dan Ariely
By Dan Ariely
Duke Fuqua School of Business, Irrational Labs
Jeff Kreisler
By Jeff Kreisler
Editor PeopleScience.com and Co-Author “Dollars and Sense”

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