The Psychology of Everyday Life: Motivation and the Search For Happiness

The Psychology of Money

How are we biased toward immediate consequences over long-term consequences?

There is clear evidence that the short term generally has far greater influence on our decision making than concerns about the long term. In fact, it takes considerable mental effort to put long-term consequences ahead of immediate gratification. Our use of credit cards provides a perfect example. A 2001 experiment by Drazen Prelec and Duncan Simester shows how the use of credit cards increases our spending, presumably because the money spent seems less immediate. The researchers set up an auction for basketball tickets, in which half the participants in the auction were instructed to pay with credit cards and the other half with cash. As expected, the bids made from credit cards were much higher, in fact twice as high, as those made with cash. In another study, Laurence Ausubel looked at consumer response to two commercial mortgages. The first mortgage offered a low teaser rate (4.9 percent for six months) that was followed by a lifetime rate of 16 percent. The second mortgage offered a higher teaser rate (6.9 percent) but a lower lifetime rate of 14 percent. Ausubel found that consumers chose the first mortgage almost three times more often than the second mortgage. Hence, they chose the mortgage that would save them money in the short run but cost far more money in the long run.


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