Is the value of money something psychological?

Psychology of Money - 5 Psycho-Money Phenomena

The psychology of money

The Psychology of money always fascinates me anew. And apparently you too - the article 5 expensive mistakes that cost you money every day has long been one of the most popular articles on my blog. Now a new book has been published that deals with the psychology of money: ‘Think first, then pay *: The psychology of money and how we can use it‘For this article, I've extracted 5 of the money psychological phenomena from the book that you might come across in everyday life. Perhaps one or the other aspect will help with the next decision-making.

1. Compromise effect

A highly exciting phenomenon in the field of 'psychology of money' is the compromise effect. When I was still watching TV, I liked to watch the program 'Rent, Buy, Live', where real estate agents tried to get rid of their properties. What quickly becomes apparent: The interested parties were always presented with three objects. Never just one or two or four. And one that was obviously below the expectations of the interested parties, a mediocre and an object that was far too expensive. Although the brokers know the price limit of the prospective buyer, they always show an object that would significantly exceed the budget. Does the broker really believe that the potential buyer will just double his budget? Of course not. The broker knows exactly what he is doing and hopes for the compromise effect. By viewing a house that one can never afford, the realtor wants to influence the assessment of the other houses. You're supposed to think, 'Okay, that one house might be smaller than you want it to be and the street isn't as nice as hoped, but it's still pretty okay compared to the expensive property, maybe even a bargain.' So that's what you choose middle house that the realtor wanted to get rid of anyway.

What works with houses works with pretty much any object. For a study (in the 1980s), participants were shown descriptions and images of SLR cameras and asked which of the two models they would buy. The decision rate was 50/50 - half wanted the cheaper model, the other half preferred the higher-priced version. However, as soon as the selection was expanded to include a third model, 2/3 opted for the now mid-priced version, while the rest chose equally the cheapest or the most expensive option.

The compromise effect has to do with loss aversion (the video by Eckart von Hirschhausen on the psychology of money is worth seeing). A luxury item has the best properties, but the big disadvantage is its high price. The cheap version is great in terms of price, but has the disadvantage of a supposedly poorer quality. The offer in the middle price range wins neither in price nor in quality, but has no disadvantages either.And since we humans are accompanied by a constant aversion to loss and would rather avoid a loss than make a profit, our choice falls on the compromise.

How can one escape the compromise effect? Whenever you want to buy something, imagine what it looks like on its own. Because the fact is: In your living room the television stands on its own and not, as in the shop, next to 5 much larger models (which you may not even be able to afford ... ?!). With this little trick (based on the theory of evaluability) you make sure that you assess the object of your desire as more valuable because you see it in isolation.

2. Confirmation failure

The psychology of money in its purest form: When it comes to confirmation error, people look for evidence of what they believed was true from the start. Example: wine. Of course, if we are told that we are drinking an expensive wine, it tastes much better than if we think we have a cheap wine by the glass. Researchers even found that we just didn't claimto like a certain wine after naming the price in order to look good. No, brain scanners show that we have this wine really prefer. Real happiness can only come from the assumption that something is expensive.(So ​​you don't really need to buy expensive wine the next time you visit your parents, you can just say it was very expensive.)

What do you need after a good evening of wine? Right, headache pills. Do you prefer the expensive branded tablets or the cheap generics? A study of 800 women regularly took aspirin found that around a third of perceived pain relief is based on believing in swallowing the expensive branded product. The price seems to have a kind of placebo effect. Therefore, if you don't trust yourself to outsmart your own brain, you'd better buy the expensive pills.

3. Bar or card?

That we tend to spend more money when we don't touch it and have to give it to someone - as is the case with cash - is probably no longer news to you. Here's another reason to pay for your weekend shopping in cash: You buy more unhealthy things when you pay by card. American researchers followed the grocery purchases of 1,000 households over a period of 6 months. They came to the conclusion that people like to buy chocolate or cake when paying by card. Apparently, our willingness to indulge in a pleasure increases when we do not have to spend 'real' money on it.

By the way, it is also the case that Purchases with cards change our thinking. We don't remember how much we paid, and we're more generous with tips. Speaking of tips: if your waiter wears a red top the next time you go to a restaurant, touches you lightly on the upper arm, presents you the bill on a heart-shaped plate and makes a joke, he has pulled out all the psychological registers to get a big tip . Because it is precisely these factors that subconsciously lead us to tip more. So: stop for a moment and consider how good the service really was. And of course pay in cash. Is clear.

4. Endowment effect

Suppose you want to sell your car. You research online and find a market value of 6,000 euros. Now you will receive the following offers:

  1. You get 6,500 euros for your car from the dealer and you can buy the new car you have in mind for 8,500 euros. Or:
  2. You get 5,500 euros for your car and pay 7,500 euros for the new car.

How would you choose The bottom line is that both deals come out on the same page: You pay 2,000 euros to swap old for new. Still, most people choose the 1st deal. Why? Because you get more for your car with the 1st deal. Doesn't it matter? From a rational point of view, yes. But the endowment effect ensures that we Appreciate things we own more than their market value. When something has been in our possession, even if only briefly, we consider it to be much more valuable than before. As a child, I once opened a Christmas present from my sister, by mistake of course. I couldn't do anything with the content, I think it was a doll. Zero. But the mere fact that this doll was now in my possession increased its value to me enormously. It was mine now and giving it back was of course not an option.

So the next time you want to sell something on ebay and nobody is interested in your item, it may be because the endowment effect has struck. Try to rationalize what the part is really worth.

5. Friendship ends when there is money

A big party is coming up and you are afraid that you will not be able to cater for the guests on your own. So you ask a friend for support. What should you offer her in return? Everything but money. Research has shown that the introduction of money can transform such an interaction and lead to it being viewed from then on according to market norms. Your girlfriend now sees herself in a row with paid party helpers and will soon be comparing the small sum you promised her with what a professional gets. Or she compares the effort with what she could earn if she didn't help you but worked. Therefore: better give a book or a joint visit to a restaurant as a thank you.

Also unfavorable: Asking friends for a favor that somehow has to do with their livelihood. It is of course convenient to ask your friend who happens to be a plumber for help. However, he knows exactly what he would earn on the job if he weren't your friend. It feels to him that he's losing money because he's your friend.

Conclusion

The psychology of money is and will remain one of my favorite subjects. I am fascinated by how simple we are when it comes to money. Adults behave like children (endowment effect) and allow themselves to be manipulated from front to back (e.g. with the compromise effect). It can't hurt to know a few of the tricks for making rational decisions. The book 'Think first, then pay *: The psychology of money and how we can use it' I can definitely recommend it warmly. Loosely written and although the author addresses 263 studies, the book doesn't seem too scientific. For me it was the ideal holiday reading.

You can find the book here

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