Money and stuff create different beliefs about fairness

Fairness matters a lot to us.  From a young age, children complain about inequalities with the chant, “That’s not fair.”  Debates about public services by the government focus on whether particular programs are treating taxpayers and citizens fairly.  People’s happiness at their jobs is influenced by whether they feel like they are being treated fairly at work.  The Occupy Wall Street movement is based on the perception that wealth is not distributed fairly in the United States.

Part of what complicates the ability to treat others fairly is that what people may consider to be fair may change with circumstance.

For example, people generally have (at least) two different beliefs about fairness.  One prominent belief about fairness is equity.  That is, we often like to distribute things to people evenly, so that everyone gets the same amount. 

However, a second strong belief is fair reward.  That is, we believe that people should be compensated for an outcome based on how much they contributed to that outcome.  That is why we allow people to be paid different amounts at a job.  We think it is fair that people who are more successful on the job are paid more money, even though that means that there are inequalities in how much people are being paid. 

A study by Sanford DeVoe and Sheena Iyengar in the February, 2010 issue of Psychological Science examined these beliefs in fairness.  They found that the standard people used to judge fairness was based on the object used to reward people.

They had participants in a study evaluate the fairness of a reward.  They were told that a company was planning to reward its sales staff after a very good year.  Some people were told that the reward was money (the sales staff was going to get a bonus).  Some were told that the staff was going to get rewarded with credit card reward points that could be exchanged for goods.  A third group was told that the sales staff was going to get vacation days as a reward.  A fourth group was told that the staff was going to get boxes of chocolate.

Participants were then told that the reward was going to be divided equally among the sales people.  That is, the sales staff would each get the same reward, even though not every sales person sold the same amount that year.  Participants rated the fairness of this reward scheme.

There was a strong effect of the type of reward on the beliefs about fairness.  People thought that rewarding people equally was fairer when the reward was chocolate or vacation days than if it was money or credit card points. 

This result suggests that we associate different types of items with different concepts of fairness. 

We tend to distribute things equally to people.  For example, when we are giving candy to a group of children, we tend to distribute it equally to all of the children.  So, when people see things distributed to groups, they tend to use this kind of scheme to evaluate fairness.

On the other hand, we tend to distribute money unequally.  People make more money when they are more successful.  So, we tend to judge the fairness of transactions with money (and with things that are like money such as credit card points) based on a scheme in which reward is related to success.

These findings make clear that if we want to predict whether people will think we are judging them fairly, we have to take into account both the beliefs people have about what is fair as well as the relationship between those beliefs and the specific objects that are involved in the situation.   

Spending money with credit cards and cash

In my last blog entry, I wrote about research suggesting that people may spend small bills more freely than large bills. A number of people asked me what happens with credit and debit cards.

Debit and credit cards are an important part of our economic lives. These days, it is almost a surprise to go to a store and see someone pay with cash or a check.

There are many advantages of debit and credit cards, of course. They are easy to carry. You are not limited by the specific amount of money in your pocket. There is protection for cards that are lost or stolen, while money that is lost is just gone.

Obviously, credit cards have their dangers. The most obvious of these dangers is that they typically carry high interest rates. Once a person goes into credit card debt, it can be hard to dig out from beneath the payments.

There is also a lot of evidence that consumers spend more money when paying with credit cards than when they are spending cash. For example, Drazen Prelec and Duncan Simester reported studies on this topic in a 2001 issue of Marketing Letters. In one study, they told that randomly selected participants in the study would be offered the opportunity to purchase tickets to an actual professional basketball game that had just sold out. These tickets were highly desirable. Participants were told either that they would have to pay in cash or that they would have to pay by credit card. They were asked how much they would be willing to pay for these tickets. Those who were told they would have to pay by credit card were willing to pay over twice as much on average as those who were told that they would have to pay by cash.

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What is going on here?

There are many possible explanations for the observation that people pay more when using credit cards than when using cash.

For example, Richard Feinberg explored the link between credit cards and spending in a 1986 article in the Journal of Consumer Research. He varied whether people could see credit card logos while they were making purchases or leaving restaurant tips. People left higher tips and indicated that they would be willing to spend more for products when they could see a credit card logo at the time than if they could not.

In addition, people may pay less attention to prices when they are paying by credit card than when they are paying by cash. For example, the article by Prelec and Simester cites an unpublished study by Dilip Soman suggesting that people are less likely to remember the amount they spent on a purchase when they pay with a credit card than when they pay with cash.

This last finding relates to many observations in a variety of settings that people are better able to control their behavior when they have physical objects that help to guide their behavior than if they have to think conceptually. For example, people taking food at a buffet may have the desire to control the amount of food that they eat, but they still tend to fill their plate. Thus, they eat more overall if they are given a large plate than if they are given a small plate.

Likewise, driving behavior is affected by the type of speedometer in the car. For a while, car manufacturers were putting digital speedometers in cars. It is hard for people to judge the change in speed with a digital speedometer relative to an analog speedometer, because they have to actually think about the change in numbers.

Credit cards have this character as well. To stay within a budget using a credit card, you have to remember the prices for each of the items and then keep track of how those prices relate to your overall budget. If you have cash, then you can also limit the amount of cash that you carry as a way of limiting the amount you spend without having to remember all of the purchases you have made.

As you can see, many factors come together to make it difficult to maintain a budget when spending with credit cards. Perhaps the title of the paper by Prelec and Simester says it best: "Always leave home without it."

How are spending habits affected by the type of money in your pocket?

When I was a kid growing up in central New Jersey, I had relatives who lived near Atlantic City.  To visit them, I could get a bus not too far from my house that was nearly free.  You paid for the bus, but then got a voucher from one of the casinos for $10.  When you got to the casino, you could cash in the voucher, and they would give you a roll of quarters worth $10. 

Why did they give out quarters?

Quite a bit of research suggests that the form of money that people have affects the way that they spend money.  From an economic standpoint, every dollar is just as good as every other dollar, whether it is a coin, a bill, or a number stored in a bank that can be accessed by a debit card.  Psychologically, though, the form of the money you have affects what you will do with it. 

There are at least two things going on here.

First, there are transaction costs with money.  A transaction cost is any cost (in money or time or effort) that is required to spend money.  The casino gives you quarters, so that you can immediately unroll the quarters and dump them directly into a slot machine.  If they gave you a $10 bill, you would first have to change it into coins to use in the slot machine.  That extra effort would make it less likely that you would play the slots.  That is the same reason why bartenders give you your change in dollar bills.  They hope that you will stuff a few of them in the tip jar (which you should, they work hard).

Second, research suggests that the size of the bills that you are carrying affects how likely you are to spend and how much you spend.  A paper in the December, 2009 issue of the Journal of Consumer Research by Priya Raghubir and Joydeep Srivastava looks at this issue.  In a number of studies (many of them looking at real purchases), they found that when people had money in larger bills, they were less likely to spend money than when they had money in smaller bills or coins.  Of interest, though, once people decided to spend money, they tended to spend more money when making purchases with the larger bills than with the smaller ones. 

The authors of this study interpret the results as arguing that large bills are treated as less flexible than smaller ones, and that is why people are reluctant to spend them.  I’d like to give a different interpretation of this work, though, based on some research I did with Miguel Brendl and Tory Higgins.

The form of money that you have tends to remind you of particular kinds of purchases.  If you are carrying $1 bills with you, those bills are most typically used for small purchases like buying candy or a cup of coffee.  Larger bills are more associated with larger purchases. 

When you have a particular amount of money in small bills, the form of the money helps you to think about spending it in a series of small purchases.  You are willing to make these small purchases, though each of them will be for only a small amount.  So, you spend money easily, but you spend a small amount each time. 

When you have that same amount of money in large bills, you treat it as a lump sum.  That lump sum supports making a larger purchase.  Large purchases often require more deliberation than smaller ones, and so you are less likely to spend the large bills at any given moment.  When you do spend those bills, though, you will probably make a larger purchase.

What does this mean for your cash spending habits?

If you are the sort of person who tends to blow through a lot of money making lots of small purchases, then you should probably avoid carrying lots of small bills with you.  The combination of the transaction cost for making small purchases (you’ll have to get change for your large bills) along with the fact that large bills are not strongly associated with small purchases will help you to control your spending.

If you are the sort of person who tends to make large purchases on impulse (that is, you are penny wise and pound foolish), then you may want to avoid carrying around large bills.  These large bills will be associated with larger purchases, and you may find yourself feeling like you have the money to make these large purchases.  Instead, you should probably carry around a small amount of money in small bills to keep yourself from over-reaching.

Your perception of your future self affects how you value future outcomes

Many choices in life reflect a tradeoff between the value of things in the present and in the future.  For example, if I buy a new computer today, I get to use that new computer now, but undoubtedly a better one will come out a year from now that will be nicer than the one I just bought.  Similarly, if I invest money in the stock market, I am trading the value of that money to me now for the hope that it will be worth a larger amount in the future. 

Clearly, some option in the future has to be more valuable than the option available in the present in order for us to wait for it.  But how much better does the future have to be in order for us to wait?

You can think of your willingness to wait until some time in the future to get something (an object or money) that is similar to what you could get now as your degree of patience.  An interesting paper in the February, 2010 issue of the Journal of Experimental Psychology: General by Dan Bartels and Lance Rips suggests that the people are more patient when they view their future self as being similar to their current self.

Let me break this down.  Being patient means that you are willing to wait to get something that you could get more without requiring a huge increase in value to pay for the wait.  For example, imagine you had the chance to get $100 right now.  I might give you the chance to wait a year to get more money.  How much more would you need to get to wait the year?  If you said that you needed $110, that would be more patient than if you said $150. 

The authors looked at this question a few different ways.  First, they just used correlations.  They had people rate how similar the person they are right now would be to the person they think they will become at various points in the future.  Then, they had people do exercises in which they had to say how much money they would want to wait a particular amount of time predict the amount of money that would be required for them to wait to get some amount of money (as in the example in the previous paragraph).  They found that for each individual, time periods with large decreases in self-similarity people also became less patient.

In other studies, they had participants read about other people and their life changes.  Some of those life changes were fairly small (Jill discovered she likes rice dishes), while others were more significant (Bill had a health scare in which doctors thought he had a rare blood disease, but in the end he was found to be perfectly healthy).  The participants in the study rated the similarity of the people in the story before and after the events.  Later, they also did patience tasks like the one described earlier.  In some of these studies, the valuable things were things like vacation days from work rather than money. 

In these experimental studies, participants judged that the people would be more patient in periods in which they had undergone only small life changes than when they had undergone big life changes.  People also felt that the big life changes would make the person more different from their former self than the small life changes.

What does this all mean? 

When we plan for our own future, we are most focused on sharing the things we have with our future self.  The more similar we are to that future self, the more willing we are to share. 

 Often, though, we must make plans to put things off to the distant future when we feel that we will be quite different from what we are now.  For example, many people have difficulty saving enough money for their retirement.  You must begin saving for retirement when you are in your 20s or 30s, even though you may not  retire until you are in your 60s or 70s.  That means that you must agree to share your current money with someone who feels very little like you now.  Because this future self feels so different, people often put away too little money toward their retirement.  That is one reason why government pension funds like Social Security end up being so important to people.

In the end, when trying to plan for the future, it is probably best to use a little more math and a little less intuition.  For example, in the case of retirement savings, work with someone to make an assessment of how much money you will need when you retire.  Then, create a specific savings plan that will lead you to that amount of money in the future. Otherwise, you will be most likely to share that current money with a self that is more like who you are right now.

It is easier and more satisfying to buy experiences than to buy stuff

One of my kids has a tough time making choices.  If he has gift money to spend at the toy store, he’ll find three things he really likes and then agonize over the decision.  Just when we think he’s ready to pick one of the items, he starts to think about not having one of the others and he gets thrown back into the agony of the choice. 

I hadn’t noticed it before, but last year I gave him the choice between going to a local amusement park and a nearby water park.  That choice was free of the real pain that usually goes along with decisions.

Some new research gives some insight into what is going on.

A paper in the January, 2010 issue of the Journal of Personality and Social Psychology by Travis Carter and Tom Gilovich looks at differences in the way people treat choices involving material goods (that is, stuff like toys, electronics, or jewelry) and choices involving experiential goods (like trips or visits to an amusement park). 

Consistent with the story about my conflicted son, they find that people report that choices for material products are harder for them to make than choices for experiential products. 

There is another interesting finding as well.  When people were asked about choices they made for material products, they found themselves less satisfied with the choice they had made over time.  When people were asked about choices of experiences, though, they were more satisfied with their choice over time. 

Why is this?

Part of what is happening is that when we buy a material product, it is often easy for us to compare that product to other similar ones.  So, if you go out and buy a flat-screen TV, the store probably has a wall of TVs just like it.  They differ in lots of ways, and so you can always think about the ones you did not buy and how they may have been better than what you got.

Experiences are different.  It is hard to compare across them.  If you take a trip to the beaches of Florida in the winter, you might spend your time swimming, eating good food, and dancing at night.  You could have chosen a trip to ski in Colorado instead.  Your activities on that trip would have been much different, and so it isn’t so easy to compare the different options.

Consistent with this idea, Carter and Gilovich find that when people are making choices for material products, they spend more time comparing alternatives than when they are making choices for experiences.  People think about choices for experiences, but they aren’t really comparing the different options.

Another difference is that material products are just possessions.  Even really expensive and important purchases are just things that eventually get older or break or are replaced by newer and (usually) better things.  The stuff you have is not psychologically a part of you.

Experiences, though, are a part of you.  The trips you take, the movies you see, and the things you do create your memories which become a central part of who you are.  Even bad experiences can often become stories that you tell, and in that way, they gain value.  You do not shed your experiences as easily as you shed your stuff.

Finally, as Carter and Gilovich point out, it is important to remember that many things that you may buy have both a material and an experiential part.  For example, a new car can be thought of as a material product.  It has features like the styling, handling, and engine power that can be compared to other cars.  It may also be thought of as an experience.  You could choose to focus on the enjoyment of driving the car and the trips you take in it. 

In the end, you are much more likely to be satisfied with your choices if you treat the objects in your life as experiences rather than just as stuff that you have accumulated.  Stuff will come and go, but your experiences will make you who you are.

A dollar is a dollar is a dollar…Right?

The purpose of money is to provide a uniform method for valuing things.  It doesn’t matter whether I have a crisp new $1 bill in my pocket, an old dollar bill, four quarters, or even a check made out to me for a $1.  They all have the same value.  This currency system allows us great freedom to buy and sell things and services.

Despite the great flexibility that money permits us, people have trouble treating every dollar the same as every other dollar.  Here are two examples.

First, sociologist Viviana Zelizer in her fantastic book The Social Meaning of Money has done an extensive analysis of the way that people use money.  One thing that becomes clear quickly is that people really do create different types of money to help them organize their lives.  As a simple example, people treat birthday money differently than other money.  For example, if a relative gives you $25 for your birthday, you are likely to spend it on something nice for yourself rather than on bills, even though the gift money is part of your total pile of money once it has been given to you.  That is, we keep the money psychologically separate. 

One way to see this idea of different types of money is in gambling behavior.  There is a phenomenon that arises in research on gambling called the “house money effect.”  Basically, people get more risky in their bets when gambling after they have won a bit.  The idea is that the money that they have won isn’t really theirs.  They are gambling with the house’s money.  Somehow, that money is less valuable, and so people are more willing to risk it. 

The second example ties the value of money to our motivational system as well.  A study by Adam Alter and Danny Oppenheimer in the October, 2008 issue of Psychonomic Bulletin & Review, looked at how the ease of thinking about money influences the value of money.  This ease of thinking is usually called fluency.  Alter and Oppenheimer suggested that being more fluent with a type of money would make that money seem more valuable.

To test this idea, they did a number of studies in which they contrasted the value of a familiar form of money with an unfamiliar form of money.  For example, in one study, the familiar form of money was a one-dollar bill.  The unfamiliar form of money was a Sacagawea dollar.  They gave people a list of inexpensive items (like paper clips and Hershey’s kisses) and asked how many of them they thought they could buy for a dollar.  People suggested that they would be able to buy far more of the items with the familiar one-dollar bill than with the unfamiliar Sacagawea dollar.  This result suggests that people found the familiar form of money more valuable than the unfamiliar form of money.

Findings like these suggest that the psychology of money is far more complex than the economics of money.  For economists, every dollar is the same as every other dollar.  For people, though, some dollars have different uses than others.  Perhaps more importantly, some dollars have more value than others.  

There are important implications for research like this.  Politicians tend to assume that the free-hand of the market will work to ensure that businesses run efficiently.  However, this belief makes many assumptions.  Among these assumptions are that there are no systematic biases in people’s economic behavior that will distort the way markets operate.  These results suggest that there are systematic biases in the way people treat money all the way down to the level of the value of a single dollar.