I’ve heard these ones many times, so I thought I share as I find these examples fascinating. They certainly paint you a picture n how we think about money, and the emotions we link to it, or the lack of it.
1. How much would you pay for a $20 bill?
I have seen this one demonstrated live, and it was hilarious to watch. If you have a good cause you want to make money for do try it at your next fundraising event!
How it works? Pull out a $20 bill and let the people know that you will sell it to them for whatever they’d pay for it. The bidding generally starts low, say at $1 and moves up pretty fast.
Here is the catch, all people in the room get to bid for this $20 note. If someone outbids you and you give up, you still have to pay your final bid price. You will get nothing in return.
How much are you willing to pay?
Psychologist and life coaches have been using this experiment for years. It appears we still haven’t learnt from it as it always has the same outcome. First the excitement of getting $20 for $1 or $5 kicks in, after all it is free money. At around $17 the bidding war begins as the highest bidders begin to realise that they will be paying $20 for nothing soon, but they don’t want to lose.
Then someone breaks the barrier and bids $21. After this it is all downhill as the fight becomes fearsome. Now the aim for the game is to be losing the least amount, rather than win the most. As this loss aversion kicks in, the bids for your $20 bill will go to incredible heights.
Those who run this experiment claim to have had people paying up to $500 for a $20 not, just so they didn’t lose.
2. Insuring your fears
The insurance market is based on our fears, what if something bad happens?
Temple State University and the University of Pennsylvania ran an experiment. They asked students how much they were willing to pay for travel insurance to get $100,000 worth of cover.
They were given two choices:
a. Was a terrorism insurance, that covered death caused by terrorism
b. Was insurance for all causes of death
Guess which one people would pay more for? Yes, you guessed it. People were willing to pay more for insurance covering only terrorism than they did for insurance covering everything, including terrorism.
The emotions around ‘all causes’ does not give a vivid picture of pain to people as such it didn’t inspire them for action. However the emotions people linked to terrorism made them react without question.
3. Incentives cause failure
I bet you thinking I must be insane for saying this. We all thrive to get more incentives. Yes, logic says that the higher the incentive the better we will perform, however actions show otherwise.
Economist Dan Airly has conducted an experiment in India. (The reason he conducted it there was purely economic, I have seen the same thing happening in the corporate world in first world countries)
His team collected random willing participants, and offered them different level of financial rewards ranging from one day salary up to 5 months salary. The level of reward was determined by the roll of a die.
The tasks ranged from memorising numbers to trying to fit nine quarters into a small square.
It was found that those who were to lose the least amount performed at the highest levels. The people with low to medium bonuses achieved a good performance third of the time, and the largest bonuses buckled under the stress of achieving.
The people with large bonuses lost focus of the task as all they could think about was the money – not wanting to lose it. And as we know, what you focus on is what you get.
4. You’d rather earn less, than be poorer than your neighbour
A study conducted by Harvard School of Public Health ran an experiment on people’s preference. They had two choices:
a. Earn $50,000 a year when everyone else around them earns $25,000
b. Earn $100,000 a year when everyone around them makes $200,000
Cost of living is stipulated to be the same for all levels. So higher salary would mean owning nicer things, bigger house, nicer car.
50% of people chose option one just so they were not poorer than their neighbour. I guess if it is done right, that can be a good driver.
5. Once you offer something for free, you cannot start charging for it
There is a story about Red Cross going around. As you know they are a not for profit organisation. But people, especially veterans do not trust them. Why?
Back in World War II they were providing doughnuts and coffee at US Army comfort stations, for free. The British soldiers had their comfort stations also, but they had to pay for their goods.
It caused animosity between soldiers fighting for the same side.
So the secretary of War wrote to the Red Cross and asked them to charge for the comfort stations. They did, but only very briefly as it caused a massive outrage. After all these years later, they still haven’t found forgiveness.
Once you offer something for free, charging for it completely changes the relationship. Suddenly the motives and goals of an organisation are being questioned. Psychologists propose it gives the feeling of a bait-and-switch theme..
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