Newswise — Psychology tells us that human beings tend to make irrational economic decisions when they are free to focus on the irrelevant details of the purchases they make. They will, for example, pay a premium at the movie theater for the same box of candy that's available at a discounted price at the drug store down the block. "Scarcity Frames Value," a new study by University of Chicago Booth School of Business professor Anuj K. Shah, along with Eldar Shafir of Princeton University and Sendhil Mullainathan of Harvard, recounts behavioral experiments that show why this is the case. Their findings have implications for individuals facing their own budgetary choices and for policymakers working with budget constrained communities around the world.
The researchers began their inquiry with a finding from a 1985 study that showed participants were willing to pay a premium to buy a beer from a fancy beach resort but offered less money for the same beer when it was available from a corner grocery store. That study concluded that most people draw on contextual clues to determine how much they should pay for an item, with less regard than economics would suggest for an objective analysis of the intrinsic value of the purchase.
Through a series of surveys, the researchers determined that people with less time or money to spare are better able to focus on what the purchase might be worth to them. They write: "When money is short, the utility bill or rent are top of mind. These concerns make trade-offs or opportunity costs highly accessible — buy one thing means giving up other things. We compare the beer to other demands on our budget like tomorrow's lunch of bus fare. And these trade-offs do not depend on where the beer is purchased. These trade-offs lead us to ignore irrelevant contextual cues and instead rely on our own standards."
They were also able to determine that shortages of time and convenience had similar effects on reasoning. In practice, they conjecture, this might explain why policymakers who spend a lot of time highlighting the positive effects of mosquito bed nets in poor areas stricken by malaria are unsuccessful. Scarcity reasoning means that the intended recipients of this good advice must give far more weight to the prices of those nets, relative to their other needs. They also suggest that in the payday loan sector, where high interest rate, short term loans are made to people in desperate need of cash, that requiring providers to supply an annualized interest rate (which would tend to be in excess of 500 percent) will not deter borrowers. Instead, they say, it might be better to have the loan provider give a dollar denominated price so that the cash-constrained borrower can make the most rational decision.
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Contact: Anuj K. Shah is available for comment at 773-834-2342 or [email protected].
From: Susan Guibert, Chicago Booth Office of Media Relations, 773-702-9232 (office); 574-286-4839 (cell) or [email protected].
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