ROI By FJR:Mental Currency

R.O.I. By Frank J. Rich
Mental Currency
December 10th, 2012

By Frank J. Rich


Why is money not an economic motivator for the poor or the billionaire? Most will find the question strange. Allow a flight of curiosity, if you will. The travel may be informative, even entertaining.


For the poor, economic motivators are inextricably tied to survival, so money holds no particular value but to secure one’s need to get by. For the billionaire, money is a measure of self-esteem and achievement on a scoreboard. It holds no particular value for one with so much of it. Further, such systems of rewards and punishments are occupants of the mind, far more than the planned model of achievement so often written about. We know far less about the things we pursue, and the reasons we pursue them, than we are willing to admit. The result is a string of narratives that presuppose behavior – most often narrative fallacies.


If our decisions – indeed most behavior – are the workings of our mind, and no less an exercise in math to balance reward and punishment, we build models of bias that presage behavior and are often made of the emotional content in them. This system of scales shapes our preferences and informs and motivates our actions or behavior.


As a result, we are biased against the things that cause pain or loss, such as the decision by a worker not to speak up in a large group for fear of looking less than the sense of himself he believes others have of him – the self image, or what we think others think we think of ourselves. When it means cutting losses that might save the company, we might take antipodal action for fear of admitting failure. We avoid actions that might produce regret, disappointment, disapproval, and loss. Because mental accounts are used to keep score they are greater motivators than anything else.


Mental accounts, the models we form to measure benefit and loss, rewards and punishment, are the emotional currency that equips our decision-making and ultimate behavior, often creating the conflicts that lead us in the paths we take. They do “good” by narrowing the focus of the choices before us, though by a subcutaneous math, providing the framing necessary to a final choice.


The model is so well entrenched in the human psyche, apparent by the simple choices we make, that decisions are more tacit than spoken about and follow common logic – we are more inclined to value something we’ve paid for than that which is free. I once gave up tickets to the Super Bowl, thinking the pain associated with getting to the game and home again was greater than the benefit of watching my beloved San Francisco 49ers whip the Miami Dolphins only six miles from my house. It was a decision I regretted, but it reveals the emotional balance I weighed in the tacit calculations common to all.


Our efforts at furthering the enterprise, most initiatives, suggest an overwhelming preference for choosing winners over losers, what science calls the “disposition effect.” In the case of equities, we would logically choose to sell a stock that was not expected to do well in the future. That is, if wealth is our goal. But if motivated by lower taxes, might hold onto this stock over a “winner” because selling it would expose us to more taxes.


The same is true for a retailer with a favorite product. The product may have been acquired for the emotional joy in having something he always wanted, such as Mazda dealer who buys a Jaguar at auction. Most who visit his dealership aren’t looking for a Jaguar. But if it doesn’t move quickly, the dealer might not make the logical choice and wholesale it to recapture his investment. The pain associated with this decision is clearly greater than the reward of having the investment back on a car that might not move from his lot. This “narrow framing,” as it is called, values the Jaguar greater than money in his pocket. Kahneman’s Law of product value speaks of the same math.


The “endowment effect” described in this example weighs losses twice as much as gains, according to science. Coincidentally, the “loss aversion” coefficient, the measure of loss we will avoid, is much lower for things and on matters other than health. If selling this endowment makes the dealer above feel like he’s not worthy of a Jaguar on his lot, he is projecting an uncomfortable outcome and may not make a logical choice.


We work hard at predicting and avoiding the emotional pain that derives from choices. Unfortunately, it leads to a mental account whose currency is loss-aversion, and not gain. The market is full of such examples, probably because it is so difficult to manage the mental currency in our choices.

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