THINKER'S ALMANAC - September 12

How does our attitude about a found $10 bill reveal our irrational thinking when it comes to money?

Subject:  Financial Planning - House Money Effect 

Event: Economist Richard H. Thaler is born, 1945

If you would be wealthy, think of saving as well as getting. - Ben Franklin

Imagine you are holding a $10 bill in your hand.  Obviously this piece of legal tender is worth $10 no matter how you acquired it.  However, a study by economist Richard H. Thaller, who was born on this day in 1945, reveals that $10 is not always $10, at least in our minds.  Thaler’s experiments showed that people were more willing to risk and spend money if it came from a windfall.  In other words, people are about 40% more likely to risk a $10 bill that they found on the ground than they are to risk a $10 bill that was a part of their monthly earnings.  Thaler dubbed this the house-money effect, adopting the term from the jargon of gamblers who refer to their winnings as “house money.”

Image by Mike from Pixabay

The house-money effect explains why so many lottery winners end up losing their winnings rather than capitalizing on the opportunity to invest their windfall.  It also explains why gamblers don’t quit while they are ahead; instead, they gamble their winnings and end up losers in the long run.  Marketers know the power of the house-money effect.  

Be wary whenever you are given credit for signing up for a membership of any kind.  Companies know that giving you a little can result in them getting a lot more from you.  When you make a gain, celebrate it, but don’t set your rationality aside.  Remember that the house-money effect, like many other cognitive biases, will tempt you to lose both your good sense and your good cents. 

Think about your spending habits.  If you receive a 50 dollar bill in a birthday card from your aunt, are you more likely to spend it than the $50 you earned working mowing lawns?  Rationally, money is money, and if it is in our possession, it shouldn’t matter how we acquired it (1).

Recall, Retrieve, Recite, Ruminate, Reflect, Reason:   How does the House Money Effect influence two possible ways of looking at the same $10 bill differently?

Challenge - Money Talk:  Money is one topic that all of us have on the brain.  Do some research on quotations on money and how we should think about it.  What is one quotation that you think gives the proper perspective on how we should think about money?

ALSO ON THIS DAY:

September 12, 1683:  The Ottoman army of 250,000 troops was defeated in its attempt to take Vienna, Austria.  The Austrian army was assisted by Polish forces, led by King John Sobieski, who came at the request of Pope Alexander VIII.  After a battle that lasted fifteen hours, the Turks retreated, leaving behind weapons, stores of food, and thousands of their dead.  After his victory, the Polish King sent a dispatch to the Pope that read, “I came, I saw, God conquered.”  To celebrate the victory, Vienna’s bakers cooked up a new culinary creation, a crescent-shaped roll that mimicked the crescent moon on the Turkish flag.  Later, in 1770, the new roll was introduced to France when Marie Antoinette, originally of Austria, married the future Louis XVI.  Only then did the roll become the croissant, French for crescent.  A second culinary creation resulted from the large quantities of coffee left behind by the Turkish army as they fled.  Finding the coffee bitter, the Christian soldiers added milk and honey to make it more palatable.  For the name of this new concoction, they turned to a Capuchin monk named Marco d’Aviano, who had been sent by the Pope as an emissary to assist the commanders of the Christian army.  The tasty drink was named Cappuccino in honor of Friar Marco d’Aviano’s order, Capuchin (2).

September 12, 1961:  President John F. Kennedy presented a speech on this day at Rice University, where he said, “We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard.”  His vision was fulfilled with the Apollo Moon Landing on July 20, 1969.

Sources:

1-Dobelli, Rolf.  The Art of Thinking Clearly New York:  Harper Paperback, 2014: 251.

2-Marsh, W.B. and Bruce Carrick.  365:  Your Date with History.  Cambridge, UK:  Totem Books, 2004.