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Valuing Money and Things: Why a $20 Item Can Be Worth More and Less Than $20

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  • A. Peter McGraw

    (Leeds School of Business, University of Colorado at Boulder, Boulder, Colorado 80309)

  • Eldar Shafir

    (Department of Psychology and Woodrow Wilson School of Public and International Affairs, Princeton University, Princeton, New Jersey 08544)

  • Alexander Todorov

    (Department of Psychology and Woodrow Wilson School of Public and International Affairs, Princeton University, Princeton, New Jersey 08544)

Abstract

The study of risky decision making has long used monetary gambles to study choice, but many everyday decisions do not involve the prospect of winning or losing money. Monetary gambles, as it turns out, may be processed and evaluated differently than gambles with nonmonetary outcomes. Whereas monetary gambles involve numeric amounts that can be straightforwardly combined with probabilities to yield at least an approximate "expectation" of value, nonmonetary outcomes are typically not numeric and do not lend themselves to easy combination with the associated probabilities. Compared with monetary gambles, the evaluation of nonmonetary prospects typically proves less sensitive to changes in the probability range (inside the extremes of certainty and impossibility), which, among other things, can yield preference reversals. Generalizing on earlier work that attributed similar findings to the role of affect in the evaluation process (Rottenstreich, Y., C. K. Hsee. 2001. Money, kisses, and electric shocks: An affective psychology of risk. Psych. Sci. 12(3) 185-190), we attribute the observed patterns to a fundamental difference in the evaluation of monetary versus nonmonetary outcomes. Potential pitfalls in the use of monetary gambles to study choice are highlighted, and implications and future directions are discussed.

Suggested Citation

  • A. Peter McGraw & Eldar Shafir & Alexander Todorov, 2010. "Valuing Money and Things: Why a $20 Item Can Be Worth More and Less Than $20," Management Science, INFORMS, vol. 56(5), pages 816-830, May.
    • Handle: RePEc:inm:ormnsc:v:56:y:2010:i:5:p:816-830
    DOI: 10.1287/mnsc.1100.1147
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    2. Barrafrem, Kinga & Västfjäll, Daniel & Tinghög, Gustav, 2021. "The arithmetic of outcome editing in financial and social domains," Journal of Economic Psychology, Elsevier, vol. 86(C).
    3. Festjens, Anouk & Bruyneel, Sabrina & Diecidue, Enrico & Dewitte, Siegfried, 2015. "Time-based versus money-based decision making under risk: An experimental investigation," Journal of Economic Psychology, Elsevier, vol. 50(C), pages 52-72.
    4. Ehsan Taheri & Chen Wang, 2018. "Eliciting Public Risk Preferences in Emergency Situations," Decision Analysis, INFORMS, vol. 15(4), pages 223-241, December.
    5. Robert Mislavsky & Uri Simonsohn, 2018. "When Risk Is Weird: Unexplained Transaction Features Lower Valuations," Management Science, INFORMS, vol. 64(11), pages 5395-5404, November.
    6. Chan, Eugene Y., 2015. "Endowment effect for hedonic but not utilitarian goods," International Journal of Research in Marketing, Elsevier, vol. 32(4), pages 439-441.
    7. Alice Moon & Leif D. Nelson, 2020. "The Uncertain Value of Uncertainty: When Consumers Are Unwilling to Pay for What They Like," Management Science, INFORMS, vol. 66(10), pages 4686-4702, October.
    8. McGraw, A. Peter & Todorov, Alexander & Kunreuther, Howard, 2011. "A policy maker's dilemma: Preventing terrorism or preventing blame," Organizational Behavior and Human Decision Processes, Elsevier, vol. 115(1), pages 25-34, May.
    9. Yitong Wang & Tianjun Feng & L. Keller, 2013. "A further exploration of the uncertainty effect," Journal of Risk and Uncertainty, Springer, vol. 47(3), pages 291-310, December.

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