pay top price because you only managed at the last minute to get the time off to attend your friend’s wedding. You know you’re paying perhaps a couple of hundred pounds more than you would have done otherwise but in this instance you are happy enough to pay it. After all, you’re unexpectedly getting the chance to be there for your friend’s big day. Yet change the circumstances back to having booked a cheap flight and then finding you have to take a train because of an air traffic controller’s strike. The extra cost might be the same, but your response, I’d bet, will be very different.
The same mental processes, and mental anguish, happen when you decide a purchase is good value, only to discover that there are extras such as booking fees or seat selection charges. If the initial price had been a bit higher you might not have minded: you would have factored it into your mental account for the flight, but once you’ve established in your mind that the original price is what you’re paying, any extra cost feels like a loss on the account or, worse still, a fine.
Because our minds work in this way, I’m surprised that certain budget airlines took so long to realise that their notorious practice of adding extra charges later in the booking process annoys people. If the executives of the company had taken the trouble to look at the welter of psychological research (which they’re not alone in ignoring, I should add), they would have realised that what they thought was a clever business strategy was actually causing long-term brand damage. Our mental accounting makes us acutely alert to anything that feels like a rip off. In other words it helps us to exercise mind over money.
It’s a finding I pick up in the next chapter. The strongest psychological reaction we experience in relation to money is the one that occurs when we know we are losing it.
4
TO HAVE AND TO HOLD
How we hate losing money more than we like making it, how Puerto Rican monkeys helped a researcher understand the financial crisis and why it’s a mistake to choose the same lottery numbers every week.
HEIRESSES AND TRUSTAFARIANS aside, most of us don’t ‘come into’ money. We acquire what money we have through a combination of the opportunities open to us and our own efforts. So it’s not surprising that what we have, we want to hold. What is surprising perhaps is that we seem to value this money so much that many of us would rather hang onto it than use it to acquire more money.
Try this test set by Daniel Kahneman.1 You’ve been given £1,000. Then you’re offered a choice: double your money on the toss of a coin, or take an extra £500. What would you do?
Most people go for the certainty of taking home £1,500. I know I would. But what if the test is changed slightly?
This time you’ve been given £2,000, and your options are as follows:
1.Go for a coin toss that could result either in you getting to keep the bigger sum or losing half of it, in which case you’d be back down to £1,000.
2.Take a fixed loss of £500, which would mean you’d take home £1,500 – no more, no less.
This time the gamble probably feels more attractive to you. Yet of course the potential outcomes are identical. You either opt for a certain £1,500 or you take a gamble that results in you taking home £2,000 if you win or £1,000 if you lose. I know this test very well, and yet every time I read it, I still find myself tempted by the coin toss in the second version of the test. So why do we view the two sets of options so differently?
It’s all to do with presentation. In the first test, the safe option is presented as a gain. You had £1,000 anyway but without taking any risk you can increase the sum to £1,500. While in the second test, the safe option is presented as a loss. You had £2,000, now you’re being asked to surrender a quarter of it.
The fancy name for our different thinking in these two instances is loss aversion. Our general propensity to loss aversion is one of the most robust findings in behavioural economics, and it influences many of the decisions we make about money. We all like the chance to win, but we’ll put more effort into not losing. The thought of even a small loss holds more power over us than the prospect of a larger gain. Indeed as Amos Tversky and Daniel Kahneman, who developed the theory in this area, have demonstrated, our aversion to a loss is actually measurable. It is just over twice as strong as our attraction to a gain of the same size.
Another example of this aversion can be seen in our reaction to late deliveries. When we place an order for a new sofa, for example, we generally accept that it will take some weeks to arrive. Let’s say the seller in the furniture shop says a month. Fine, we say. But how do we react if the day before the delivery date the company tells us our sofa won’t now arrive for another fortnight? If the seller had said at the start that it would be six weeks we probably wouldn’t have objected. But now we do. Strongly. We demand compensation. And research has shown that we would expect that compensation to be higher than the price we would have been prepared to pay in the first place for a ‘guaranteed’ or ‘speedy’ delivery date of four weeks.2 That unanticipated wait of a fortnight is now viewed as a definite loss – which we hate.
And we are not alone. It seems loss aversion is buried deep in our evolutionary biology, because it’s not just us humans who feel this way.
MONKEY BUSINESS
Anyone visiting the island of Cayo Santiago in Puerto Rico needs to wear glasses and a hat at all times to protect them from showers of urine. The culprits are the rhesus monkeys who delight in sitting high in the trees and peeing on the heads of the humans on the ground. Look up at the wrong moment without protection and you could find yourself not only wincing in pain and disgust, but contracting a kind of herpes called simian B virus, which can be fatal.
For Professor Laurie Santos from Yale University, the risks are worth it. Despite their antisocial ways, the Cayo Santiago monkeys have become habituated to humans, which means Santos and her research colleagues can get close enough to study their behaviour in the wild. One of the striking things about rhesus monkeys, and other species such as the tufted capuchins, is their skill at problem-solving. And that got Santos thinking . . . about the financial crisis.
Yes, that’s right. Santos was on a tropical island studying urinating monkeys, and this led her to ponder on the economic crash of 2008. Bear with me on this one. Santos had in mind those investors who were so resistant to accepting losses that they continued gambling on the stock market, hoping for an elusive win, even as their losses grew and grew. She thought too of people who refused to sell their houses for less than they had paid for them, even though these home-owners weren’t in negative equity and with prices slumping could have upgraded to a larger house. Both were classic examples of human loss aversion. The fear of losing out must be buried pretty deep in us, Santos thought. So could it be that the monkeys, our evolutionary cousins, were loss averse too?
To find out she had to return to the Comparative Cognition Laboratory at Yale, where she and her team have a group of captive capuchins. These monkeys have been trained to exchange shiny round tokens for food.
A capuchin called Auric heads to what researchers call the monkey marketplace. There he’s given a pouch filled with tokens. He sees two research assistants behind a glass window holding out their offerings, slices of grape in a dish or occasionally a marshmallow, and he knows that if he puts a token through a round hole in the glass window he’ll get some food in exchange. But Auric’s a smarter monkey than that. He’s also learnt to spot the best deals, choosing to go to the ‘traders’ who offer the most fruit or the biggest treat for the lowest number of tokens.
Like humans, Auric and his fellow capuchins ‘spend’ and ‘value’
