We Overemphasize Money, According Psychology And Behavioral Economics Professor
In his new book Predictably Irrational, Duke professor of Psychology and Behavior Economics Dan Ariely takes some time to consider how humans irrationally overemphasize money in a number of ways, according to an excerpt published on People Science.
One of the ways that we irrationally overemphasize money is by using price as a form of shorthand for quality. Since we cannot be an expert in every field, we are often left with this rule of thumb when gauging the quality and value of a product. Additionally, this form of shorthand leads us to demand that we pay a high price for certain items so as not to raise our own suspicions. For example, a few summers ago the wholesale values for lobster, foie gras, and caviar plummeted, allowing restaurants to purchase those items much cheaper. However, they didn’t dare lower the cost of those items on their menu, because customers would assume a lack of quality on what is normally considered a luxury item. If a cardiologist offered a suspiciously low price for open heart surgery, our lack of understanding about said surgery would lead us to confer with another specialist, fearing that there was some sort of caveat attached. We value things by assigning meaning to a price. A high price signals high value to us.
The price of an item can literally improve our experiences. In a psychological experiment, patients were given a placebo (a Vitamin C capsule, unknown to the test subjects) and told that it was a painkiller. One group was given the pill by a well-dressed man in a business suit with a white lab coat, offered product brochures, and told that the pills cost $2.50 each, then given a series of electric shocks and asked to describe their level of pain. A second group was placed under exactly the same conditions but told that the price of the medication was $0.10 per pill. With no difference between the experiment and the two groups save for the price of the medication, the people taking the more expensive placebo claimed 50 percent less pain than the group taking the cheaper one. Another experiment asked one group to perform a series of mental tasks after drinking a Sobe energy drink, while another group performed the same tasks after drinking a discount energy drink. The group drinking the full-priced beverage performed better. On top of that, the group who received the discount drink said that they expected to perform worse on the tasks, and indeed they did, simply from the signals given by price.
Price should affect value, performance, or pleasure, but it does.
In another experiment, subjects were asked if they would rather be the top dog at a company and make $85,000 or be the lowest man on the totem pole but make $90,000 the test subjects will take the $90,000 job. Which makes complete sense. However, when the question was framed to which job the subjects would be happier with, they chose the $85,000 job and the chance to be the top dog. In the absence of something to focus on (happiness), the default focus was money. Money is specific, precise, and measurable, and is often the first and sometimes the only consideration for people.
This is a big problem when the measurable thing (usually money) is not the most important part of the decision. Money is much more tangible than happiness, well-being, and purpose. Thus, we tend to focus our decision-making on money rather than our ultimate, more meaningful goals.
Money is a good thing as a signifier of value and worth. However, it is dangerous when its role as a measure of value and worth is extended into parts of our lives beyond goods and services. We often focus on money as an approximation of our life’s value. We all know that money isn’t the most important thing in life. Yet since money’s value is easy to measure and less frightening to consider than the intangible qualities of life, we focus on it instead.
