In Going Broke,I discuss Nicholas Epley’s studies of how thinking differently about a windfall influences what we do with it. In a series of laboratory studies, Epley found that money described as a “bonus” was more likely to be spent than money described as a “rebate.”
A bonus feels like extra income, whereas a rebate feels like lost income that is being restored: a reimbursement. In “Rebate Psychology,” an excellent op-ed piece in today’s NY Times, Epley points out that the proposals for an economic stimulus package fail to take advantage of his findings. If politicians are hoping to encourage spending, they would be better off describing the $600 and $1200 disbursements as bonuses, not tax rebates. Thinking about money differently can greatly influence whether we hold on to it or let it slip away.
Epley’s research is a good example of what psychologists call a framing effect, but the larger question is, should consumers spend or save their rebates? Many Americans would be better off saving their rebates or using them to pay down debt. As a result, I am glad that Epley’s framing effects have been ignored in the current proposals. Spending a “bonus” might be good for the stock market, but for many consumers, saving the tax “rebate” would be a much wiser course of action.
Thursday, January 31, 2008
Rebate or Bonus?
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2 comments:
In your "Prisoner's Dilemma" blog, you make a critical observation:
"These recommendations may not help the economy as a whole, but generally ‘the economy’ is defined as the stock market—the current value of the portfolios of wealthy investors."
I am deeply disheartened by the fact that the financial ruin of America's middle and working class--to say nothing of the millions living in poverty--has been completely ignored, but a bumpy run in the stock market warrants enlarging an already super-inflated national debt. Even more amazing is the nerve of the Feds asking us to spend, spend, spend to put money back into the pockets at the top, while doing NOTHING to help us achieve lasting stability. The Feds seem to be missing the fact that this is a short-term “fix” which will only increase America’s great wealth divide. And the bigger and higher the balloon gets, the more likely it is to pop.
While paying down our personal debts is an important goal, the bonus/rebate will cover only a small portion of the average American household debt—and guess where the majority of the money will go? Right into the same pockets. The only way to protect ourselves is to stick it in the bank—or in our mattresses, which seems like a safer investment these days—and save it for the bumps in our own financial roads. Otherwise, we will be stuck following the bad example our government is setting and increasing our own deficits.
(Post Script: On second thought, the financial ruin of the rest of the country was not completely ignored. The 2005 bankruptcy reform was enacted to protect credit card companies from our failures.)
This past holiday season, gift cards soared in popularity. Many businesses, such as Starbucks and Dunkin Donuts, have well-developed systems of gift cards that you can put additional money on, like a debit card. I'm wondering the existence of gift cards influences consumer thinking. Is it similar to credit cards, or somewhat different?
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