3 experiments with money
I am a big fan of behavioral economics which tries to explain why people act the way they do.
Here are 3 interesting experiments that scientists have made in order to get a better insight into how people relate to money.
The Ultimatum Game
You are given 100 dollars. You need to decide how to split this money between yourself and another person taking part of the experiment. If the other person accepts the amount that you will give him - you will both get to keep your share of the money. If the other person declines - neither of you get the money.
This experiment is set up in order to reveal whether mankind is rational (as the economic theory suggests) or not.
A rational person would accept any amount offered because he or she knows that when he doesn’t accept the amount that is offered to him - he gets nothing. In other words if the first person(A) taking part of the experiment suggests to the second person(B) that they should split the money $99 to A and $1 to B - the second person should accept. Rationally looking it is better to get 1 dollar than nothing.
What really happens?
Proposals to accept less than 30 dollars are usually rejected. The reason? According to our judgment the proposal is not fair. If you are offered a small amount of money while the other person gets a lot more (that comes from potentially your money) - you’ll have a feeling of injustice and would rather not get money than to get a small amount and feel bad afterwards.
Perceived value of money
The following is a thought experiment.
Would you rather earn 100 000 dollars when everyone around you makes $50 000 or would you rather make $200 000 when everyone around you makes $400 000. The only rule you have to keep in mind is that the cost of living and goods stays the same.
Which option will most people choose?
A rational person would choose the second option, where he makes more money but less than people around him. That way he will have twice as much to spend. In reality most people choose the first option - being richer than other people.
Some scientist think this experiment demonstrates the irrationality of man.
I disagree. This experiment clearly shows that social rank is far more important to people than the amount of money they have. If one can choose between more money than your friends vs. less money than your friends - it is a rational decision to choose the first option (even when the total amount of money is less than in the second option). In this experiment people make an irrational money decision but a rational “people decision”. The latter outweighs the first.
The Line Experiment
The first person is standing in a line. When he gets to the counter he is congratulated on being the 1 millionth customer and as a gift gets 100 dollars.
A second person is standing in a line at a different place. The man in front of him is congratulated for being the 1 millionth customer and wins 1000 dollars. The second person wins $150 for being the 1 million and first person.
Which would you rather be?
Surprisingly most people would choose the first option - getting the $100. Money wise this is a bad decision - you lose 50 bucks. The reason most people would rather lose the $50 is because they don’t want to feel the regret of not being the millionth person themselves and winning $1000
What do these experiments show
These experiments show us, that just like in other things people can at times be irrational when it comes to their money. There are situations in life that are more important than money and economists need to understand this. When talking about economy (and the stock market), we should realize that economy consists of ordinary people who at times make financial decisions that are money wise bad for them.
Find the places and areas of life where people make these decisions, play your cards right and you will get to keep their money.
If you liked this post there is a good chance that you will find something of interest on my insights page where I post short reviews of longer articles about the rules of making money:
Insights to money and how getting rich really works
Illustrated Guide to Reading People’s Faces
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You knew I would comment on this one didn’t you Roman?
Logic vs. analogic, also known as emotion or feeling. People, men, women, children, are all motivated by emotion. No mater how they twist it to say “I bought it because it will preform…) No, you had a need, it filled that need. Needs outside of food, water, and shelter are driven by emotion. Some would argue even those are emotional. The quest is to find the emotional trigger. In your report, there are two, one was the feeling of being taken advantage of(I’m sure theres a word I cant find here) on the second it was Status. Both of them(3) played on fear to gather results. People are only going to run towards something, or away from something. Your objective is to catch them in the middle. You could present a problem, they will perceive as their own, and then offer the solution(for a fee of course).
When I was younger I always thought that everyone are rational.
After being a door-to-door salesman for about 8 months I know for a fact that everyone is emotional. Even the most rational decisions are made based upon emotions.
For example if you take a multi-billion company then their management board makes a lot of decisions to make more money! They are motivated by greed to get more and by fear to lose their money and positions in the company.
Great post, one of your best yet I think. I don’t see so many bloggers writing on this general topic area, so I think it could be a good niche for you.
I’m happy to say that in the two thought experiments that I tried for myself, I made the “correct” rational choice each time:) LOL
MoneyEnergy, there is hope for you to get rich!
If you liked the post, maybe you can make me a small favour and Stumble it!
Consider it stumbled upon!
Thanks a thousand! If this traffic keeps up, it will become my best day in terms of traffic!
My record so far is about 739 unique visitors a day, right now I’m standing at 540. If we break the 1000 mark I will also do an overview of how it happened!
Very interesting post! Keep writing about this topic! I stumbled it.
Thanks a lot zEro XK. I’ll try to do the best I can!
“Money is the root of all evil”
It’s fine to look at it from a cold, scientific perspective, but more interesting from a moral one.
Yeah, if you take morals into account everything can seem a lot different…
It is the “love” of money that is the root of evil, not money in of itself.
The desire to be wealthy is not an evil desire - the evil is putting this desire above all else.
If one is charitable with their wealth (tithe, giving to charity, giving to the poor) what does it matter how much a person earns? There are many who are wealthy and you would never know it. Their focus with their wealth is to help those in need versus with material goods.
The most selfish people I’ve met are those who are not charitable - they beleive it is the government’s role to assist the less fortunate - on the backs of everyone else (taxes).
If a person wants the force of government to make people “charitable” (sharing their wealth) that person is at least a socialist at worst a communist.
Money is the most significant discovery by mankind and it is a significant source of mental balance and inner security.Philosophical detachment to money and the evils associated with too much of it,catches attention with limited opportunity to spend it satisfactorily.however,being rational and making the best of what is available seems logical and an obviously intelligent choice.In the experiments you can add one more dimension that is ethics.Yes,billion dollar companies want to pile on more billions and this is apparently rational.A saner hard look will set in motion a process of introspection and this is where the line between reason and logic gets clearer.It is good to have money any way so long one could sleep well and peacefully with lots of it and more pouring in
I totally agree with the ethics thing. While ethics can play a vital role on our everyday life huge companies seem to lose their ethics and are just about willing to do anything that makes them more money! That’s probably because big companies hire only the best of the best - the people who bring in the most amount of money. The thing is that its a lot easier to become a big player when you lose some of your ethics!
Same old crap all over again..
What is the relevance in an experiment where you’re asked which one would you be, when you’re not actually getting any money.
Or hypothetically asked if you’d take 100k or 200k depending what others get… if offered REAL 100000 dollars or 200000$ I’d doubt people would give a shit if the person next would get double or triple that abount…
Is there an actual scientific study supporting these hypothesis? What is most people-51%-99%.
I picked all the rational answers and would think most others would, too. Of course, I could be wrong.
The fact that you were reading this article and this blog already makes you stand out of most people Blip!
It means that you have the ability to make rational decisions money wise (or at least that you are striving to that direction)
Individuals are often called rational if they tend to act optimally in pursuit of their goals. Without knowing the goals, you can’t know if a behavior is rational or not. In all three experiments, a goal is assumed, then subjects are described as “irrational” when they do not appear to have this goal. It is not irrational to have goals other than income maximizing. In fact, maximizing income is at best inadvisable, as it commonly conflicts maximizing such goals as survival, happiness, health,and security. “It is better to get $1 than nothing” no matter accompanies the dollar?
Doug, I think your comment shows great insight!
Just because one makes an irrational choice from the point of maximizing your income doesn’t mean that this choice was irrational - maybe the person did exactly what he wanted to do and got what he wanted!
This is a great post and makes some very good points, but I wonder how the experiment is presented and set-up. I think if people who are subjects of the experiment really know what is going on, then their response would be different than if they didn’t know.
There’s a name for that as well, I just can’t think of what it is…where people act differently when they know they are being watched.
Thumbs Up. Man choses the option which builts his ego.
But,to reach God,you should not have any ego.
being look for a long time for that 200,000 is it still an offer? i like to take it.
Yeah right, there no such thing, a thought experiment. don’t really happen.