Consumer Psychology Through the Lens of Behavioral Economics

Opportunity cost refers to the most valuable of the things given up as a result of a choice.

However, in real life, weighing the opportunity cost of every choice takes considerable cost and effort, so people often fall into this trap and spend irrationally.

Professor Dan Ariely points to two major mistakes people make about money: relativity and fairness. The first is the relativity of money: people perceive the real size of the same amount, or the same discount rate, differently depending on the background information they are given.

The second is fairness: people try to judge the value of a service based on the effort and time invested to obtain it, rather than on the outcome itself.

The tendency to feel that a locksmith who works for a shorter time charges more is a typical example of the fairness trap.

When participants drank a free coffee themselves, the change in their happiness was small, but when they gave a coffee to someone else, their happiness and satisfaction were much higher.

This leads to the conclusion that to buy happiness, you should spend money on others rather than on yourself.

Professor Dan Ariely describes the phenomenon in which the farther away a reward is, the more rational our decisions become, and the closer it is, the more emotional they become, as time preference. People tend to place greater value on immediate gratification than on future rewards.

In addition, the word "free" paralyzes people's rational judgment and maximizes the perceived psychological benefit, producing the "free effect," which leads to irrational choices.

People treat free things as special, and some will even pay more money to enjoy the privilege of getting something free. People will line up to get a free umbrella even if it is expensive.

In a Duke basketball ticket experiment, students who owned tickets demanded an average of $2,410, while students without tickets offered only $170.

This is due to the endowment effect, in which people overvalue what they own purely from their own point of view. Sellers think about the experience they are giving up, while buyers think about the money they are giving up, which creates a large gap in how they value the same thing.

People show a strong attachment to things they make themselves, known as the "IKEA effect." This is similar to the sense of pride one feels in assembling IKEA furniture oneself.

In a origami experiment, the people who folded the works themselves valued them highly, but others rated their value low.

The more crude the result, the more attachment grows because of one's own effort, but this irrational attitude leads to the illusion that others will also like a work that carries their own effort.

For example, if a slice of pizza is charged at 25 cents per bite, satisfaction with the meal drops significantly.

Statistics showing that electricity consumption rises by 4% when bills are paid by automatic transfer rather than manual payment show that consumption increases when the pain of paying is reduced.

This is closely related to the "law of attention." When operations lack transparency and the process is not visible, people tend to be reluctant to pay costs.

When results appear immediately after loading, satisfaction stays fixed, but when only a loading screen is shown, satisfaction drops sharply the longer the wait lasts.

However, when the progress is shown visually, people feel the waiting time as less tedious and their perceived satisfaction rises. This is consistent with the tendency for people to rate value more highly when transparency is secured.

Egocentric transparency also causes misunderstandings in relationships. In interviews with couples, the sum of each partner's self-reported effort always exceeded 100%.

This is because people can see everything they themselves do, but do not notice well what the other person does, so it is important in families and other relationships to make your own efforts known.

If the flow of money that we cannot see is causing a problem, Professor Dan Ariely suggests making it visible. Making abstract concepts such as financial loans or insurance visible raises awareness of them.

Just as spending psychology changes depending on the payment method (cash, debit, or credit), making effort visible through small markers, such as diet or exercise records, can raise the probability of achieving a goal.

The act of mentioning dating expenses transforms a long-term bond built on mutual trust into a short-term transaction. Bringing up how much was spent after a date is an example of an act that changes the nature of a relationship.

Just as offering a fee when helping someone removes the pure pleasure of helping, help leaves satisfaction behind only when it happens within social norms.

When a fine system was introduced for late pickups at a daycare center, the number of parents arriving late actually increased. This is because paying the price in the form of a fine relieved the social emotion of guilt about being late.

Even after the fine system was abolished, the vanished sense of guilt did not easily return, showing that monetary incentives can disable social norms.

In an experiment at a semiconductor company, the group that received a praise message maintained the highest productivity when compared with groups that received a pizza coupon, cash ($30), or no reward.

Cash rewards had an effect only on the first day, and productivity dropped sharply afterward.

In effect, the company spent $30 and still lost money as productivity fell, suggesting that praise is always effective.

True motivation comes from a sense of accomplishment, from overcoming the impossible, and from teamwork, rather than from enjoyment. A marathon is painful, but the sense of accomplishment gained by finishing it creates a strong motivation.

Like going to the library on a holiday morning or immersing oneself in exercise until the body is exhausted, money is closer to momentary pleasure, while true motivation comes from inner achievement and overcoming challenges.

In an experiment conducted in India, the group whose stake was up to six months of living expenses showed achievement rates more than 20% lower than the group receiving smaller rewards.

This shows that too large a bonus increases stress, and excessive expectations and motivation can actually reduce performance. A strategic approach that pays appropriate bonuses to the right people is needed.

Interestingly, when bonuses were paid to employees who were not performing well, the company's results improved. This is because for employees who already perform at the highest level, the presence or absence of a bonus does not greatly affect their work attitude.

On the other hand, employees with low performance have much room to grow through bonuses and can be given motivation to achieve. For top employees, promotions, base-salary increases, or assigning more important roles instead of bonuses can be an effective strategy.

This makes innovation and challenging choices possible.

Companies are more likely to succeed when they avoid bureaucracy and share the same goals with their employees. Therefore, rather than trying to buy motivation with money, companies should invest in building the right motivation system.