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.