Highlighting our irrational selves is part of what behavioral economists do. Their studies show human beings are inconsistent in the way we deal with money. We’ll drive across town to save $20 on a $50 slow cooker, but wouldn’t budge from the couch to save $20 on a $5,000 television. (It’s still $20 isn’t it?)
This irrationality is predictable and, fortunately, can be used to positively influence our motivations, decision making and behaviors.
It starts with mental accounting. Mental accounting is what we use to differentiate our life’s accounts. Our brains don’t calculate that “this slow cooker was 20 percent paid for with birthday money from Auntie Marguerite, 70 percent paid for with my regular salary and 10 percent with money from my parents.”
We are remarkably quick to calculate percentages and assign motivations. We know from the start of the year that if we earn a $500 cash bonus, we’re going to spend it on bills. Research indicates that 86 percent of all cash bonuses go to pay bills or are unmemorable. Those facts work against our motivation to earn. The brain quickly decides we’re not willing to go through all the effort just for a small percentage of our salary.
When we calculate what we can take home guilt-free by earning points and redeeming them for merchandise or travel, it affects our motivation in a positive way. We get emotionally engaged in, say, a new set of golf clubs in a way that is nearly impossible to be engaged with our kids’ orthodontic bills.
Research in the area of awards is clear. While people indicate their preference for cash awards, they work significantly harder and achieve significantly more when they are striving toward guilt-free awards (such as points that cannot be combined with cash). Human beings are robust and frail, courageous and cautious. We can enumerate examples of both strengths and weaknesses. Behavioral economists help us understand how our decision-making succumbs to psychological frailties and mental accounting helps us overcome them.
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