This document summarizes several cognitive biases related to money psychology. It discusses anchoring bias, where the first price seen influences later judgments. The decoy effect is explained, where preferences change between two options when a third is introduced. Mental accounting biases are outlined, such as treating different financial resources differently and the sunk cost fallacy. Hyperbolic discounting and how it relates to choosing immediate over delayed rewards is also summarized. Finally, the denomination effect is covered, where people are less likely to spend larger bills than smaller bills of equivalent value.

1. Psychology of Money

2. Biases concerning money
• Anchoring
• Decoy effect
• Cost of Zero
• Mental accounting
• Pain of direct paying
• Hyperbolic discounting
• Denomination effect

3. Anchoring
A.k.a. “The relativity trap”
The first thing (price) you see colours any that come after that
Explains why you’ll pay €25 for an hour of parking after seeing €30 at a lot down
the street
Turner, B. M., & Schley, D. R. (2016). The anchor integration model: A descriptive model of anchoring effects.
Cognitive Psychology, 90, 1–47.

4. Anchoring

5. Decoy effect
A.k.a. “Asymmetric dominance effect”
Change preference between two options when presented with a third

6. Cost of Zero
The word “FREE” has a magical effect
People react strongly when adding free options
Don’t make your option very cheap,.. make it free!

7. Mental accounting
People are their own irrational accountant
1. Different resources have different purposes
2. Sunk Cost Fallacy (“I can’t cancel the concert, I've already paid”)
3. Discount in % rather than in €

8. Mental accounting
1. Different resources have different purposes

9. Mental accounting
2. Sunk Cost Fallacy

10. Mental accounting
3. Discount in % rather than in €

11. Pain of direct paying
Paying activates brain regions associated with pain
Make payment painless
1. No € signs
2. Timing and methods effects enjoyment
Daniel Ariely
https://www.youtube.com/watch?v=PCujWv7Mc8o

12. Hyperbolic discounting
The desire for an immediate reward versus a higher-value, delayed reward
Why?
Our brain is hardwired in a way that immediate reward triggers more dopamine.
Brainstem and mesolimbic system overpower the neocortex
Hunter-gatherer reaction
https://blog.kissmetrics.com/hyperbolic-discounting/

13. Denomination effect
A cognitive bias relating to currency
1. People are less likely to spend larger bills,
than their equivalent value in smaller bills
2. Once decided to break the larger bill, spending is increased
Bias in theory:
1. Price your product in small bills
(only 5x €10 or even better: vijf tientjes)
2. Make consumers break their big bills

14. Adjustments biases
 Make Denomination effect “Charm pricing” with sub-headers:
 Denomination effect - People are less likely to spend larger bills,
than their equivalent value in smaller bills
 Numerical cognition - €49,99 sells better than €50, -
Rounded figures makes a product or service look more expensive ,
make the prices visually attractive! Asking a rounded amount can give
the impression that you have not carefully figured out what the service or
product should cost.
 Price points - €1.250 looks bigger than €1250
Consumers unconsciously link the length of a word with the size of the
payment.
 Hackl, F., Kummer, M.E., Winter-Ebmer, R. (2014) 99 Cent: Price points in e-commerce. Information Economics and Policy 26 (12-27)
http://www.forresult.nl/i/tip-prijzen-afronden
 Coulter, K.S., Choi, P., Monroe, K.B. (2012) Comma N' cents in pricing: The effects of auditory representation encoding on price magnitude perceptions.
Journal of Consumer Psychology 22 (395 – 407) http://www.psyblog.nl/2013/03/05/prijspsychologie-zo-lijkt-de-prijs-lager/

15. Adjustments biases
 Priming and Spiegelen
 Which of these should be chosen when an ad uses smiling people?

16. Adjustments biases
 Impact and Framing
 Which do you choose when confronted with a broken car in an insurance add?

17. Funfact:
Your Brain Does Really Weird Stuff When It Thinks
About Money
That stomach pain you feel when your money is at risk is real
 Activation of neurons connected with your gut when losing money (Sanfey et. Al. ’03)
Your brain making money looks a lot like your brain on cocaine
 Activation of nucleus accumbens (reward, pleasure, motivation, and addiction) correlated to that of
cocaine users (Breiter et. al. ‘97)
http://static1.1.sqspcdn.com/static/f/588791/11840974/1303404072337/Sanfeyetal_science03.pdf?token=s0kK621g1FBnL
UeWv6vimfc6F%2F8%3D
https://www.ncbi.nlm.nih.gov/pubmed/9331351

18. Kahoot quiz!
 Grab your phone
 Go to kahoot.it
 Enter the GAME PIN
 Good luck!
https://play.kahoot.it/#/?quizId=1282bf89-4884-41bf-8ae0-7a67fe360321
Login name: Reinoudbrenkman ww: paiste101