How does money affect our behavior?

You just won four season tickets to the Chargers. You now hold in your little hands a windfall that may enable you to get braces for little Billy, new tires for the old truck or just some fun at several football games. Do you hold onto the tickets or sell them? How much could you get for them?

There is a school of economics called behavioral economics, and economists combine finance theory with psychology. They have come up with such insightful tidbits as noting that people often buy things they don’t need if the words “and get one free” are attached to the sale.

Other than playing Captain Obvious, however, behavioral economists conduct experiments that turn an eye to how we really feel about things like money and goods and how they affect our behavior.

In 2000, researchers Ziv Carmon and Dan Ariely interviewed students at Duke University who had taken part in a yearly lottery for basketball tournament tickets. The lottery is totally random, so when all is said and done there are a lot of people who still want the tickets but will have to now pay more for them from scalpers.

Carmon and Ariely sat down with some who had won tickets and others who had lost but still wanted to go. How much would the losers be willing to pay for tickets? How much did the sellers expect to get?

The buyers expected to pay an average of $166 for a ticket to a single basketball game. The sellers, however, had dreams of grandeur – they expected their tickets to sell for an average of $2,411 each! Not one buyer was willing to go that high and none of the sellers were interested in dropping the price by more than $2,000.

What were those ticket holders thinking?

Dan Ariely, an MIT professor and the author of “Predictably Irrational,” believes that ownership changes our perception of something when we own it. He points out six ways ownership makes us irrational:

1. Ownership increases perceived value. People get attached to their stuff and overestimate the worth of it. eBay sales and antique consignment stores are testament to the value we impute to our possessions. What looks like a $5 tchotchke to someone is a precious $50 memento to the owner.

2. We tend to focus on losses. Rather than feel warm and happy about the money we’ll have after unloading those baby clothes and stuffed animals, we focus on the feeling of loss over not having them anymore. This makes us put the opening bid at $20 for a stuffed penguin we bought five years ago for change we found in the couch.

3. We assume others think the same way we do. As buyers paw through our goods for sale – the crib that has seen several years of hard service, the setting for eight that’s only missing two salad plates – we expect them to sympathize with us and see how hard it is to part with such treasures. What the buyer is really thinking, however, is how badly we’ve taken care of our stuff and wondering how it will ever sell.

4. Effort increases perceived value. A table you put together is worth more to you than a table you buy ready-made, even if that table came from Ikea and had seven parts left over. My husband and his dad put together a small armoire from Target 15 years ago and you would think it was a Shaker-quality piece of furniture the way it has been so carefully schlepped through four moves. We’d be lucky to get $5 for it at a garage sale, but to my husband it’s worth a million dollars.

5. Virtual ownership. Ariely argues that the inflated prices that people are ready to pay on eBay are partially a response to virtual ownership. We put a bid on something we mildly would like to have and as others fight tooth and nail for it, its value becomes greater in our eyes until we must have it and throw our bidding limit to the wind. It is people like this who spend $81 on Simpsons comic books, which made my 14-year-old very happy last week when he unloaded them. Once again, people feel attached to stuff. They want to possess it and impute a value to an object that earlier they may have reckoned as far less.

6. Partial ownership usually leads to full ownership. Stores have 30-day guarantees because they know that most people, no matter how disappointed or unhappy they are with their purchase, will never take the time to really return it. As soon as that new table or media center gets in the front door it becomes a member of the family and we’ve become too attached to it to take it back.

All this irrational thinking hurts us – as buyers and sellers. It makes us charge too much when selling and it makes us pay too much when we’re buying.

Is it possible to be objective and dispassionate about ownership? Are we stuck with opening ourselves up to making detrimental choices no matter what?

Maybe knowledge is power, and the more we know about the underlying motivations to our behaviors the more we can control ourselves. What do you think?

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