Money Flashcards
In Dan’s example, what was the purpose of keeping a weekly allowance of cash in an envelope?
Making a person think about how much money is left in the envelope, encouraging a better understanding of opportunity costs.
Why might people be more willing to earn a tangible good like a $3 cappuccino than $3 in cash?
People often place a higher value on specific items than on the monetary value of those items.
What is opportunity cost?
The loss of potential gain from other alternatives when one alternative is chosen.
People are sometime willing to walk three blocks to another store, why?
When there is a big relative difference in cost between the same items at different stores
What happens as the absolute value of one’s salary increases? What is the psychological effect of increasing monetary payments?
The same absolute amount of a salary increase has different psychological implications for different starting salaries.
What can make paying more painful?
Make paying a salient aspect of an experience.
What happened when AOL switched users from paying per hour of internet use above 20 hours a week to unlimited internet use without per-hour charges?
The reduced pain of paying influenced the number of hours that people used when they switched to unlimited Internet packages.
What is Mental Accounting?
Once we designate money to a particular category, we have trouble thinking of it as coming from a different category.
How can mental accounting be good for us?
It allows us to make financial decisions more manageable.
What is the best way of dealing with money?
Admitt that it’s hard to get people to change the way they think about money and using their irrationalities to their advantage.
What does fairness for our psychological concepts about paying for a service?
We often think that services that is easy or quick, should cost less.
What does the experiment with paying a technician for recovering data shows us about willingness to pay?
When the technician spent long time recovering much data, people were willing to pay more money.
How can we use loss aversion to motivate behavior?
Have an employer contribute a certain amount of money to employees’ savings plans, then remove the money that employees did not match from the account at the end of the year.
What is the endowment effect?
It is the fact that people will pay more to retain something they own than to obtain something owned by someone else.
What is likely to happen when you offer someone money to do something he or she would be willing to do for free?
That person may do for money what he or she would have done for free, but you would have to pay more than a nominal amount.
