THE WHEEL OF PERSUASION

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Value

Value

Mental Accounting

“We assign money to ‘mental categories’, and we spend money according to these categories.”
We find it too difficult to think about every possible alternative purchase, when making a purchase decision. This effect is called ‘Opportunity Cost Neglect’. Rationally, we should consider the fungibility of all our expenditures. But we don’t.

Instead we assign money to specific categories – known as mental accounts. Both the sources and uses of money are labeled according to these categories (housing, holidays, food, etc.). Some categories are broad, others are narrow. Some cover years, others only a short time. Balancing of these accounts happens daily for

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Hyperbolic Discounting

“We show a preference for rewards that arrive sooner rather than later”
When we consider a choice between two rewards, we tend to prefer the readily available one. We have a stronger preference for more immediate payoffs relative to later payoffs. In other words: the current is incredibly more powerful than the future. Imagine we can choose between one candy bar right now, or two in a month time. We might prefer the readily available candy bar (instead of waiting a month for an extra bar). However, if we have to wait 12 months to get one candy bar, and

Present Focus Bias (or Immediacy Effect)

“We show a preference for rewards that arrive sooner rather than later”

When we consider a choice between two options or rewards, we tend to prefer the readily available one. In other words: the current and near future are incredibly powerful. Dan Ariely explains the present focus bias as the ‘Adam and Eve problem’: “You can ask yourself how many of us would sacrifice eternity in the Garden of Eden, for an apple? Well it turns out we do it, and we do it all the time”.

So if we have to choose between an option right now, and a better