While economists keep assuming that people make rational decisions about money and spending, both common sense (how many people do you know -- other than yourself, of course -- who spend money solely on a rational basis?) and psychological experiments (echoed in primate studies), demonstrate otherwise.

A is waiting in line at a movie theater. When he gets to the ticket window, he is told that as he is the 100,000th customer of the theater, he has just won $100.

B is waiting in line at a different theater. The man in front of him wins $1,000 for being the 1-millionth customer of the theater. Mr. B wins $150.

Amazingly, most people said that they would prefer to be A. In other words, they would rather forgo $50 in order to alleviate the feeling of regret that comes with not winning the thousand bucks. Essentially, they were willing to pay $50 for regret therapy.

Regret falls under a psychological effect known as loss aversion. Research shows that before we risk an investment, we need to feel assured that the potential gain is twice what the possible loss might be because a loss feels twice as bad as a gain feels good. That's weird and irrational, but it's the way it is.

I know for myself that I try to be rationale about spending (and other) decisions -- but I also acknowledge that there's at least some emotional component to them.  It seems to me that economists -- and HR departments, for that matter -- could use the concept of  "loss aversion" a bit more diligently in their policy proposals.

(via Les)

Filed under :: Science