Just the ticket
Last weekend, my daughter and her husband had planned to go and see a performance by the Liverpudlian comedian John Bishop. Unfortunately, some unforeseen circumstances put a spanner in the works. (I have long wondered whether anyone ever invokes foreseen circumstances. But I digress.) The tickets could not be refunded, so she left them with us, in case my wife and I wanted to go. If we did, should we pay her for the tickets? My accidental behavioural economist eyes lit up as my accidental behavioural economist brain spotted a rich topic to think (and write) about.
Such tickets have made an appearance in behavioural science literature before. A classic paper by Amos Tversky and Daniel Kahneman (over 40 years old by now!) introduces a thought experiment that illustrates a particular case of framing and mental accounting. (Tickets were cheaper then, but the principle applies just the same.)
More than mental accounting
In the first frame, you are asked to imagine you decided you want to see a performance for which the ticket costs $10. When you arrive at the box office, you notice that you have lost a $10 note. Would you still pay $10 for the ticket? 88% of their respondents said they would, 12% said they would not. In the second frame, you want to see a performance and have bought a ticket for $10. As you arrive at the theatre, you notice that you have lost the ticket. Would you pay $10 to buy a replacement ticket? Here, only 46% of respondents said they would, while 54% would decide not to.
If you only look at the financial position, no matter how you twist and turn it, the two situations are entirely equivalent. Whatever you decide, you are exactly $10 worse off in both scenarios. And yet, people respond very differently. The explanation Tversky and Kahneman (and countless behavioural economists since) give is that this is a case of mental accounting. In the first scenario, the $10 is lost from a ‘general’ mental account, and the available ‘budget’ in the ‘entertainment’ account remains unaffected…