Sunday, April 20, 2008

Penny for your Thoughts

Into the growing body of research on “predictably irrational” behavior comes a new study from Adam Alter and Daniel Oppenheimer of Princeton, to be published in the Psychonomic Bulletin & Review. Like others before it, this study examines the great plasticity of perceived value. In their experiments, Alter and Oppenheimer’s subjects value a $1 Susan B Anthony coin less than they do a traditional $1 greenback bill. Similarly, subjects also seem to value $2 bills less than they rationally should as compared to the more frequently encountered “ones.” The authors argue that this is a result of familiarity which subjects value more than they rationally should.

Initially, the authors’ explanation of the results did not strike me as correct. Generally rare things are the most valuable. Even with money, the units we see the least frequently (like $100 bills) are more valuable than those we see all the time ($1 bills). However, I have tried to think of alternative theories and I have not hit on anything that holds together as well as the familiarity explanation.

One alternative explanation is that subjects are using touch stone categories as heuristics to determine value. Imagine that we place amounts we encounter into one of three buckets valued lowest to highest: pocket change, wallet, and bankable. These categories are formed around how people use money, where they physically store it, and perhaps some kind of “purchase ambition.” Subjects would place a Susan B. Anthony coin into the pocket change bucket. The $1 bill would be placed in the higher category of “wallet” and thus be valued more. Of course the $2 bill falls into the same “wallet” category as well yet subjects value the $2 bill significantly less than two $1 bills. Something else must be going on.

Perhaps there is a glass half full or half empty framing effect with value. Here are some possible subconscious monologues. I have a single coin and I feel poor because you can’t get much for a coin (half empty). I have a dollar bill and I feel relatively wealthy because one dollar is a psychological threshold to having something of real value (half full). The same effect may happen with two $1 bills. I separate the money into two units and frame each on the threshold of value and feel even wealthier (half full). On the other hand, the $2 bill may inspire visions of higher value bills. I now frame on the wish that I had a $20 bill and I then feel poor (half empty).

Neither of the two theories I put forward can account for a third experiment run by the authors but it does prompt a new alterative. In the third experiment subjects effectively compare the value of one real $1 bill and one that has been slightly altered by reversing the image of George Washington’s head (the fake). The fake should appear less “familiar” than the real bill and therefore be valued less, which indeed was the case.

Is it possible that subjects are not valuing the familiar itself but instead discounting the unfamiliar? Unfamiliar money could somehow make subjects less comfortable, perhaps because they fear that it could be fake? They may worry it will be more difficult to trade it to others in the future even if they understand that it is the equivalent to the more frequently encountered money. Maybe, but to risk a bad pun this is probably just the other side of the same coin. I think I will stick with the authors on this one after all. They present the simplest explanation to all the observations.


ryan said...

Justin, on a similar vein to your theory about devaluing the unfamiliar, it may be the case that subjects were prejudiced against items that they perceived as "obsolete". Most subjects probably are aware that SBA coins and two dollar bills are not produced anymore. Thus, those currencies may be being perceived as "faulty" or "recalled", or perhaps subjects are even engaging in some erroneous low-level reasoning about the time value of money ("This bill was worth $2 way back then / $2 buys a lot less today than it did then"). This explanation doesn't map well to the experiment with the fake bill, but that example could be caused by an entirely different (or only partially related) phenomenon. I'm skeptical that the results of an experiment asking people to reason about unfamiliar money are necessarily causally related to the results of an experiment asking people to reason about fake money. I haven't read the original, so I could be convinced.

Justin M. Cook said...

You probably have something here. This is similar to my "discounting the unfamiliar" thought. $2 bills, SBAs, and certainly doctored bills are suspect which would impact valuation. On the other hand, in my own experience I actually keep/collect $2 bills because they are rare/unique and (perhaps irrationally) may have HIGHER value like a stamp with an upside-down airplane ;-)

Justin M. Cook said...

New thought – Frequency of exchange might be more important than familiarity per say. I could be exposed $2 bills every day because a few of them are sitting on top of my desk but if I don’t frequently exchange them for goods and services their value may get murky on some psychological plane.

Anonymous said...

Haven't seen the original results on how they are determining perceived value, but could there be a psychological component at play regarding the rarity of the SBA/$2 bills along these lines: Their novelty gives them status as collectable (whether someone actually collects them or not). This creates a perception of them being less liquid as there is a reluctance to use them, which equates to a perceived lower value in commerce.