Economic Decision Making

Some of our work has explored economic choices, that is, how people decide to spend money. Here we also find that various psychological factors play a role that go beyond the processes that could be attributed to rational decision making alone. In one line of work we showed that how people cognitively represent different monetary options determines which one they choose. More specifically, temporal discounting describes the phenomenon that people often prefer a relatively small monetary reward that they can receive immediately over a larger reward for which they would have to wait for some time. One way to explain this is that people are effectively comparing “apples and oranges”: The immediate reward is tangible and therefore very concrete and vivid, whereas the later reward is hypothetical and remote.

One way to get people to make more financially lucrative decisions is to induce them to cognitively process those options in similar ways: Either think of the immediate reward in more abstract, remote terms, or think of the future reward in more concrete terms (Kim, Schnall, & White, 2013). Indeed, under these conditions participants were more willing to wait for the larger reward. One interesting aspect of this work is that when making decisions for a distant other, people also maximised their pay-off by being more patient rather than going for the immediate small reward. This, however, was only the case when deciding for a stranger, rather than somebody close (e.g., a close friend, or family member) because people cognitively represent close contacts as similar to oneself.

In a related finding, when participants had to decide on behalf of another person whether to reject small amounts of money because they involved unfair transactions, they were also more willing to accept the smaller amount, therefore securing better financial outcomes (Kim, Schnall, Yi, & White, 2013). Overall this work suggest that taking a step back, and therefore subsuming a perspective with more psychological distance, can help people focus on better economic pay-offs.

Recently we have also started to explore the role of psychological and embodied factors in economic decisions make in real world contexts with substantial financial consequences. In particular, we analysed thousands of risk assessment decisions by credit loan officers in a major bank, that is, evaluations of whether to grant a loan to a customer. We find that these decisions are less optimal than might be expected if credit management was purely based on objective criteria. Importantly, this allows us to quantify the losses incurred by banks because psychological influences are neglected, therefore suggesting ways to improve decision accuracy for the benefit of banks and customers alike.