I had the opportunity to attend a really cool conference over the past weekend called The Behavioral Economics Summit for Startups that is focused on helping startup founders and product designers understand and drive user behavior. There were some great speakers like Dan Ariely, Chris Anderson and Hal Varian.
Here are some notes on the talk Dan Ariely (Duke Professor & best-selling Author of Predictabyl Irrational) on the psychology of money and payment systems. Hope you guys find this valuable!
The paradox of money
- Money is a tremendous invention – on the same level as the wheel
- Extremely useful but because it’s so versatile, makes it hard to think about
Shadow Value of Price
- When you buy coffee – you should ask: what else could I do with this $2.50?
- The rational approach is to consider alternative uses / tradeoffs
- Doing this with money is hard – it’s easier to think about what to do each day
Envelope Thought Experiment
- Imagine you got an envelope with $1000 cash each week
- How would you spend it?
- You’d spend a lot early on, but then realize later the trade-off value of the money
- We studied Intuit customers – this is the pattern we see with people’s spending their paychecks
- Credit cards and other things make it hard to see financial horizons
Nice Speakers Thought Experiment
- Imagine buying either $700 Sony speaker set vs $1000 Pioneer speaker set
- Most people go for the better, pricer Pioneer speakers
- New comparison: $700 sony + $300 only in CDs/DVDs vs $1000 Pioneer speaker set
- Now – most people choose the speaker + CD package over the Pioneer
- Why? It is easier to imagine the value of $300 of CDs
- vs the diluted value of $300 spread across all kinds of things (despite the fact that you could buy CDs or anything else with the $300 saved from buying the Pioneer)
Considering Trade-Offs When Buying Cars
- Went to a Toyota dealership and asked people:
- What are you giving up in order to buy this car?
- First got blank stares
- Then people said – “Well I’m giving up buying a Honda”
- No one said – “I’m giving up 700 lattes, 4 weeks of vacation, etc”
People Vary In Ability/Willingness to Make Trade-Off Comparisons
- Turns out poor people are better at weighing the differences compared to wealthy people
- When dealing just with cash – the difference is more clear/obvious that if you buy one thing (food) you can’t buy something else (shelter)
- Also seen in the difference in Presidents: George W Bush vs Dwight Eisenhower
- Bush said his budget increased the defense budget because the price of freedom is not too high
- Eisenhower talked about how the cost of a single destroyer could house more that 8000 people