‘Mental Money Laundering’ Lifts Constraints on Spending Morally Questionable Income

Numerous experiments have demonstrated that people are more generous with money they’ve earned unethically. For instance, a salesperson who earns a big commission by misleading a client may mentally cordon off that money and be more willing to spend it on others.

But research by Chicago Booth’s Alex Imas, Carnegie Mellon’s George Loewenstein, and Carey K. Morewedge of Boston University finds that there’s a way to avoid this self-imposed penalty: psychologically “launder” the money by obfuscating its source.

Researchers of behavioral finance have spent decades documenting how mental accounting—our propensity to treat money differently depending on things such as where it came from or how we intend to use it—affects decision-making. Mental accounting violates the idea that money is fungible, or perfectly exchangeable: people may treat some of their money more frivolously than the rest of it, for example, if they acquired it easily or by chance. Imas, Loewenstein, and Morewedge’s findings hint at the complicated effects this informal bookkeeping can have, as it can cause people to be generous with dirty money but also to find ways to avoid such generosity.

In a series of experiments, the researchers explored how participants treated ill-gotten gains under various conditions. In one, they set up a game in which some participants were given a monetary incentive to lie to an anonymous and randomly assigned partner. Lying, in these cases, meant maximizing the participants’ own earnings from the experiment but diminishing how much their partners would receive. The researchers then gave all participants the option to donate some of their earnings to charity. The experiment confirmed the finding established in past research that people tend to be more generous with earnings that they have produced unethically.

Imas, Loewenstein, and Morewedge then took the experiment a step further, entering a subset of participants into a lottery in which they risked their experimental earnings but had a very high probability of receiving an identical sum in return. For those whose earnings had come in part through lying, processing the money through this lottery effectively sanitized it: they donated significantly less than those who lied but didn’t play the lottery, and their donation behavior was similar to those who told the truth and then participated in the lottery.