New research has shown some surprising attitudes towards money. Assuming that goods are services stay the same price, would you rather earn $50,000 a year whilst other people earn $25,000, or would you rather earn $100,000 a year whilst other people earn $250,000?

Surprisingly, the study has shown that the majority of people would head for the first option over the latter.

Or how about this: which scenario would you prefer experience?
A: You are standing in line at a movie theater. As you get to the ticket office, they tell you you are the 100,000th customer and so have won $100.
B: You are standing in line at a movie theater. When the person in front of you gets to the ticket office, they are told they are the millionth customer and have won $1,000. When you get to the window, you are told you have won $150.

Surprisingly, the majority of people said they would prefer to be A rather than B, in other words they would forgo the $50 in order not to feel the regret that they had not won the larger sum of money.

These results are part of a larger body of research done into behavioural economics, neuroeconomics and evolutionary economics, demonstrating that we make some odd choices when it comes to money with social status sometimes being more important than financial status.

The second set of scenarios demonstrates a psychological effect known as loss aversion and is something that can be seen when we go to make investments – when we look at the risks involved in an investment, we need assurances that the potential gains are twice what the potential loss might be, because losing feels twice as bad as a gain feels good.

And it isn’t just humans who exhibit this trait – experiments have shown that monkeys also suffer from the same thing.

In 2006, an experiment with capuchin monkeys was done where each monkey was given 12 tokens. Each monkey could then trade these tokens for pieces of fruit – either an apple slice or a grape – with the researchers. To start with, the ‘prices’ were the same – one apple slice was one token, and one grape was one token. In this way, the researchers could see what sort of trade each monkey preferred, for example one particular monkey might go for 6 apple slices and 6 grapes whilst another preferred 4 grapes to 8 apple slices.

The trading terms were then changed – monkeys were given additional tokens to trade however one of the food items would also double in price. According to the law of supply and demand, the monkeys should now have purchased more of the cheaper food and less of the more expensive food and this is exactly what happened.

The researchers now introduced a twist to the trade – the monkeys had a 50% chance of a bonus and a 50% chance of a loss when they traded. Overall results found that the monkeys were twice as averse to the loss as they were motivated by the gain – the same result that is seen in humans.

We like to see financial choices as rational and logic, but perhaps there is more emotion behind it than we previously thought. The parallels with monkeys are also quite striking and perhaps point to some evolutionary or genetic factor, as well as environmental.

Consider this last scenario: You are given $100 and you must split it between yourself and your game partner. If your partner accepts the split, you both get to keep your share. If you partner rejects your proposed split, neither of you get the money. So, what sort of split would you offer?

You could offer a $95-$5 split in your favour – after all, your partner came with nothing and $5 is better than nothing. However, studies have shown that anything less than a $70-$30 split is normally rejected by the game partner. But why? It seems that we have some form of moral altruism and fairness is important when it comes to finances.

If you are interested in this, you might be interested in our article on Game Theory, and how you can create a small game for children which not only introduces them to mathematics and economic, but can also help children learn the art of compromise.

Popularity: 24% [?]