Valuing Money and Things: Why a $20 Item Can be Worth More and Less than $20

Management Science, Vol. 56, No. 5, pp. 816-830

15 Pages Posted: 19 Apr 2010 Last revised: 6 Mar 2012

See all articles by A. Peter McGraw

A. Peter McGraw

University of Colorado at Boulder - Department of Marketing

Eldar Shafir

Princeton University

A. Todorov

affiliation not provided to SSRN

Date Written: April 18, 2010

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

McGraw, A. Peter and Shafir, Eldar and Todorov, A., Valuing Money and Things: Why a $20 Item Can be Worth More and Less than $20 (April 18, 2010). Management Science, Vol. 56, No. 5, pp. 816-830. Available at SSRN: https://ssrn.com/abstract=1592029

A. Peter McGraw (Contact Author)

University of Colorado at Boulder - Department of Marketing ( email )

United States

Eldar Shafir

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

A. Todorov

affiliation not provided to SSRN

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