Psychology of Money - Reinoud

Psychology of Money

Biases concerning money• Anchoring• Decoy effect• Cost of Zero• Mental accounting• Pain of direct paying• Hyperbolic discounting• Denomination effect

AnchoringA.k.a. “The relativity trap”

The first thing (price) you see colours any that come after that

Explains why you’ll pay €25 for an hour of parking after seeing €30 at a lot down the street

Turner, B. M., & Schley, D. R. (2016). The anchor integration model: A descriptive model of anchoring effects. Cognitive Psychology, 90, 1–47.

Anchoring

Decoy effectA.k.a. “Asymmetric dominance effect”

Change preference between two options when presented with a third

Cost of ZeroThe word “FREE” has a magical effect

People react strongly when adding free options

Don’t make your option very cheap,.. make it free!

Mental accountingPeople are their own irrational accountant

1. Different resources have different purposes

2. Sunk Cost Fallacy (“I can’t cancel the concert, I've already paid”)

3. Discount in % rather than in €

Mental accounting

1. Different resources have different purposes

Mental accounting

2. Sunk Cost Fallacy

Mental accounting

3. Discount in % rather than in €

Pain of direct payingPaying activates brain regions associated with pain

Make payment painless

1. No € signs2. Timing and methods effects enjoyment

Daniel Arielyhttps://www.youtube.com/watch?v=PCujWv7Mc8o

Hyperbolic discountingThe desire for an immediate reward versus a higher-value, delayed reward

Why?Our brain is hardwired in a way that immediate reward triggers more dopamine.

Brainstem and mesolimbic system overpower the neocortex

Hunter-gatherer reaction

https://blog.kissmetrics.com/hyperbolic-discounting/

Denomination effectA cognitive bias relating to currency

1. People are less likely to spend larger bills,than their equivalent value in smaller bills

2. Once decided to break the larger bill, spending is increased

Bias in theory:1. Price your product in small bills

(only 5x €10 or even better: vijf tientjes)

2. Make consumers break their big bills

Adjustments biases Make Denomination effect “Charm pricing” with sub-headers:

Denomination effect - People are less likely to spend larger bills,than their equivalent value in smaller bills

Numerical cognition - €49,99 sells better than €50, -Rounded figures makes a product or service look more expensive , make the prices visually attractive! Asking a rounded amount can give the impression that you have not carefully figured out what the service or product should cost.

Price points - €1.250 looks bigger than €1250Consumers unconsciously link the length of a word with the size of the payment.

Hackl, F., Kummer, M.E., Winter-Ebmer, R. (2014) 99 Cent: Price points in e-commerce. Information Economics and Policy 26 (12-27) http://www.forresult.nl/i/tip-prijzen-afronden

Coulter, K.S., Choi, P., Monroe, K.B. (2012) Comma N' cents in pricing: The effects of auditory representation encoding on price magnitude perceptions. Journal of Consumer Psychology 22 (395 – 407) http://www.psyblog.nl/2013/03/05/prijspsychologie-zo-lijkt-de-prijs-lager/

Adjustments biases

Priming and Spiegelen

Which of these should be chosen when an ad uses smiling people?

Adjustments biases

Impact and Framing

Which do you choose when confronted with a broken car in an insurance add?

Funfact:Your Brain Does Really Weird Stuff When It Thinks About Money

That stomach pain you feel when your money is at risk is real Activation of neurons connected with your gut when losing money (Sanfey et. Al. ’03)

Your brain making money looks a lot like your brain on cocaine Activation of nucleus accumbens (reward, pleasure, motivation, and addiction) correlated to

that of cocaine users (Breiter et. al. ‘97)

http://static1.1.sqspcdn.com/static/f/588791/11840974/1303404072337/Sanfeyetal_science03.pdf?token=s0kK621g1FBnLUeWv6vimfc6F%2F8%3Dhttps://www.ncbi.nlm.nih.gov/pubmed/9331351

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