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# Psychological Accounting

### Transcript

Here are two hypothetical situations involving money. See what you would decide to do in each situation.

First, imagine that you have decided to see a play where admission is \$20 per ticket. As you enter the theater you discover that you have lost a 20 dollar bill.

Assuming you have more money, would you still pay twenty dollars for a ticket to the play? When a psychologist posed this question to over 180 people, around 88 percent of them said they would go ahead and buy the \$20 ticket even after discovering that they had lost a 20 dollar bill.

One interpretation of this is that we keep psychological accounts and base our decisions on them. In this case, the lost money and the cost of the ticket seem to have been entered in separate accounts. Losing twenty dollars had no particular bearing on the decision to buy a ticket to the play.

Now, consider a second hypothetical situation. You've already bought a \$20 ticket to the play, but as you enter the theater you discover that you have lost your ticket.

The seat is not marked and you can't recover the lost ticket. Would you pay the twenty dollars for another ticket?

When this question was posed to a couple hundred people, only 46 percent said they would pay twenty dollars for a replacement ticket.

In both situations, you end up paying \$40, rather than twenty, to see the play. The difference in people's responses seems to be a matter of psychological accounting.

In the second situation, the lost object was the ticket itself. The cost of the new ticket and the cost of the old ticket were entered in the same psychological account. The total cost of \$40 then seemed excessive.

This experiment gives evidence that what we decide to do depends not only on the information we have, but on how we organize that information. Viewing the same question two different ways, we may come up with two different answers.

(Wikimedia Commons)

Here are two hypothetical situations involving money. See what you would decide to do in each situation.

First, imagine that you have decided to see a play where admission is \$20 per ticket. As you enter the theater you discover that you have lost a 20 dollar bill.

Assuming you have more money, would you still pay twenty dollars for a ticket to the play? When a psychologist posed this question to over 180 people, around 88 percent of them said they would go ahead and buy the \$20 ticket even after discovering that they had lost a 20 dollar bill.

One interpretation of this is that we keep psychological accounts and base our decisions on them. In this case, the lost money and the cost of the ticket seem to have been entered in separate accounts. Losing twenty dollars had no particular bearing on the decision to buy a ticket to the play.

Now, consider a second hypothetical situation. You've already bought a \$20 ticket to the play, but as you enter the theater you discover that you have lost your ticket.

The seat is not marked and you can't recover the lost ticket. Would you pay the twenty dollars for another ticket?

When this question was posed to a couple hundred people, only 46 percent said they would pay twenty dollars for a replacement ticket.

In both situations, you end up paying \$40, rather than twenty, to see the play. The difference in people's responses seems to be a matter of psychological accounting.

In the second situation, the lost object was the ticket itself. The cost of the new ticket and the cost of the old ticket were entered in the same psychological account. The total cost of \$40 then seemed excessive.

This experiment gives evidence that what we decide to do depends not only on the information we have, but on how we organize that information. Viewing the same question two different ways, we may come up with two different answers.

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