The Psychology of Money

My second week of Dan Ariely's online behavioral economics class A Beginner's Guide to Irrational Behavior reaffirmed for me that stretching is good when it comes to personal development. It's a subject I never thought I'd be interested in, but its very newness is part of what I find compelling. Here are some of the things I found most interesting in Week 2:

Relativity. We often think of money in relative rather than absolute terms. We’ll walk two blocks to save $8 on a $15 item, but we won’t to save the same $8 on a $1,115 item. The goal is to think about these decisions independently, not relatively. However, we also need to understand that these decisions are not just about spending money; they’re about happiness and how much we’re willing to sacrifice for it.

Fairness and Reciprocity. It’s hard for us to pay for expertise. It’s much easier for us to pay for something that requires conspicuous effort, but much harder to pay an expert who performs the job effortlessly. The longer it takes, the more we’re willing to pay.

Loss Aversion. Psychologically, gains make us happy, but losses make us disproportionately miserable – about 25 times more than gains make us happy.

The Endowment Effect. We adjust to our level of ownership and it becomes the baseline by which we judge future gains and losses. The moment you move into owning something, you focus on what you would give up rather than what you’d gain with something else.

Market vs. Social Norms. In some situations, adding money to the equation makes things worse (e.g., bringing up the cost of date at the door when you want a goodnight kiss; taking money instead of wine to a friend’s house for dinner).

• Once the financial motivation comes in, the social motivation (e.g., feeling good about yourself) goes away.
• We live on a continuum between market norms and social norms and experiments show that even a small amount of money can upset it.
• Gifts are in the social domain but cash doesn't build social capital.
• Gifts in the workplace move relationships toward the social domain and build social capital.
• Social relationships create a greater sense of reciprocity.
• Introducing market norms into a social relationship (even in a business situation) moves things out of the social relationship and it’s virtually impossible to go back.