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One Factor You May Be Leaving Out of Your Financial Decision-Making
- July 18, 2023
- CBR - Behavioral Science
Rational economic theory suggests that people take their current level of wealth into account when they make financial decisions. If you’re going to give something up (your time, for instance) in exchange for money, the rational thing would be to consider how much you need the money. However, research from China Europe International Business School’s Xilin Li and Booth’s Christopher K. Hsee suggests people often neglect to do that—but can be prompted to.
Imagine you are at the airport waiting for a flight home after a week away. All of a sudden over the intercom, the airline is asking if anyone would be willing to wait up to nine hours for a later flight in exchange for a $200 flight voucher. Would you take it?
Rationally speaking, your answer should depend on how wealthy you are and how much you need this additional $200 given your current wealth level (i.e., the “marginal utility” of the $200). However, Chicago Booth’s Christopher K. Hsee and former Chicago Booth PhD student Xilin Li find that people don’t always consider their current wealth level before making such financial decisions. In fact, they find that people generally neglect to take their financial situation into account in such decisions—unless prompted to first consider their financial well-being.
The researchers ran a study presenting this scenario to over 400 participants. The results showed that there was actually no correlation between reported wealth and willingness to wait for the $200. However, participants could be influenced to make more rational decisions. If they were prompted to first consider their current financial situation and the marginal utility of the additional $200, those making $500 or less a month were significantly more willing to wait several hours for the voucher. Those making at least $5,000 a month were significantly less willing to wait.
This research shows that people would make more prudent financial decisions when considering their existing wealth and the marginal utility of acquiring additional wealth; it offers an opportunity for marketers and even policy makers to achieve better results in influencing consumer or constituent behavior.
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