The compartments of your (financial) mind

We are all mental accountants, for better and for worse

You probably have them too in your purse or your wallet: a stack of store loyalty cards. Every time you pass a till, you habitually hand over a piece of plastic, and as if by magic points — it’s always points — get added to your account. And then you get some vouchers to use next time, giving you extra points when you buy deodorant, breakfast cereal or canned plum tomatoes.

A preference for points

They can generally be exchanged for a cash discount at the till, something a rational person would of course do at every occasion. Why leave them in what is effectively a 0% interest savings account? The best thing to do would be to keep your points balance as close as possible to zero, and reduce the shopping bill every shopping trip. But do I do so? Nope. And I am not alone: according to a Daily Telegraph article, in 2015 20% of loyalty scheme members had not cashed in any points in the preceding year, and 7% had never redeemed them.

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I am a very loyal person (image: Gordon Joly)

Jars of money

In an interview for American National Public Radio, Thaler gives a striking example of mental accounting, referring to this video:

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Money in the jar

Beneficial trickery

But such trickery can actually benefit you. Last week, Moneyweek published a small article (it’s halfway down the page when you click) praising a change by the Nationwide, the world’s largest building society, to its retirement savings scheme. Before, employees contributed 4% of their salary (to which the employer added a further 9%), which they could increase to 7% (matched by the company). After the change, the maximum of 7% became the default, which employees could reduce back to 4% if they so wished. This turned out to be a very successful nudge using the status quo bias to encourage people to save more: while at first only 9% of employees made the maximum contribution, today a whopping 84% are doing so.

Accidental behavioural economist in search of wisdom. Uses insights from (behavioural) economics in organization development. On Twitter as @koenfucius

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