Econstudentlog

Everyone has a price, but there’s a limit? What will people (not) do for money?

“Questions: Would most people you know kill their favorite pet for $1 million? What about you?
Answers: Most people: Yes (23%) No (72%);
Yourself: Yes (11%) No (83%).”

A recent Vanity Fair poll, via Robin Hanson (whom I no longer read on a regular basis, but still visit once in a while). Hanson claims that you’d take the million. The survey and the responses made me start thinking about what people will actually do for money, what they won’t and which variables impact that decision process. Some general remarks:

i. Financial vulnerability/poverty lowers ‘your price’ and increases the choice set of stuff you’d do to get money.

ii. ‘Status effects’ matter – Hanson of course covers this. A few remarks: People usually know what ‘the right answer’ to these types of questions is supposed to be, and the more costly it seems to ‘do the right thing’, the higher the status value of professing that specific belief. It’s a bit like when dealing with religious tribes; the more crazy the idea is, the more credible the signal. This observation also in my mind leads to a related hypothesis: To make it more costly (in terms of time, effort, money) to ‘do the right thing’ in the hypothetical does not necessarily make it any less likely that people will ‘take the money’ – actually it can have the opposite effect, because the value of the signal goes up as well; perhaps the value of the signal increases even faster than the hypothetical costs, especially above a certain threshold where people decide that their choices will have no real-world consequenses. Paradoxically, by making one of the options so attractive as to be borderline absurd you can end up making sure that a lot of people will give you the opposite answer – i.e. ‘the perceived right answer’.

iii. Framing effects matter. Framing effects persist when people deal with real money in real-world settings, rather than hypothetical questions with no real-world consequences, but people usually act more rationally when they have more ‘skin in the game’. This, I think, lends support to the hypotheses that people will both a) treat the two scenarios – i. the hypothetical case, ii. the actual situation – as completely different in their minds given aforementioned threshold effects, and b) be more subject to framing effects (i.e. be less ‘rational’) in the hypothetical case. Unless you show up with a million dollars and an axe to kill the dog, the people you ask will only ever deal with the first scenario and those answers will not give much insight into what people would actually do if you came around with a check and an axe.

iv. Related to i., but still worth mentioning: There are likely threshold effects at work when dealing with choice set limitation. Poor people will be more likely to do some act X for a given amount of money Y than rich people will – but maybe it’s also the case that given some income level Z, some options simply go off the table altogether, given any price. Would a parent of three kill all their children for X dollars? This is probably where stuff like Maslow’s hierachy of needs and similar stuff from psychology come into play. Money is a claim on ressources. Still, people probably underestimate how important such claims on ressources can become.

v. Related to the last part of iv. above, correspondence bias probably play a role here when it comes to how people answer and how the hypothetical choice set limitation looks like. If correspondence bias is important, it’s probably safe to say that people who’ve answered the question as if they considered it (subconsciously, perhaps) a test of their support of the tribe/allegiance/trust will be unlikely to accept the idea that they’d act perhaps even radically differently in the real-world-scenario.

vi. “The report titled “The Big Payoff: Educational Attainment and Synthetic Estimates of Work-Life Earnings” […] reveals that over an adult’s working life, high school graduates can expect, on average, to earn $1.2 million; those with a bachelor’s degree, $2.1 million; and people with a master’s degree, $2.5 million.

Persons with doctoral degrees earn an average of $3.4 million during their working life, while those with professional degrees do best at $4.4 million.” (link)

A third way to frame the question: You’re an average Joe with a master’s degree. You’re 25 and currently expect to work another 40 years on the labour market before you retire. If you choose to kill your dog today, you get 16 years of income tomorrow. You’d be able to retire at the age of 49, instead of at the age of 65 (this is disregarding discounting, compounded interest ect.; so the ‘subjective true value’ of that money will likely be even higher than that). Next, repeat the question using the high school grad numbers. A million dollars is a lot of money and it can buy you a lot of stuff.

I assume most readers of this blog would assume that they’d take the money in a real-world setting (though it’s impossible to be sure ‘unless [someone] show[s] up with a million dollars and an axe to kill the dog…’). If you think you wouldn’t take the money in the real-world scenario, please comment below!

Appendix (added after swissecon’s comment):

A factor I didn’t include above is the ‘love of the pet’ variable. This one is a double-edged sword as well because there are relevant tradeoffs here too: The longer you’ve had the pet, the greater attachment you’ll feel towards it (ceteris paribus), but also the less time the pet has left of its life. All pets die, and if you’ve had your dog for a decade even though you love it very much you’ll know that it probably doesn’t have a lot of years left. The pet’s life has to end in a few years anyway. Lots of people who have pets that they love end the life of the pet before nature would by paying a vet to kill the pet, to ease the suffering of the pet. I’m not saying it’s an easy decision to make, I know it’s not, but lots of people do it all the time. How hard would it be to push that decision, say, 2 years ahead and get paid a million dollars to do it? 3 years? These aren’t questions I just bring up to make people uncomfortable – the point is that questions like these will be perfectly natural to ask yourself if the guy was actually standing in your yard with that 1 million dollar check and an axe. And it’s because of questions like those that I think people are lying to themselves if they claim that they’re relatively certain they would never kill the pet.

There are cases where the love will be very strong, like an 80-year-old with a 13 year old cat. But the combination of advanced age of both the pet and the pet-owner is not exactly the default situation when dealing with pets and pet-owners. Another important factor at play in that situation is also that an 80-year-old will have a lot less use of the money, because a lot of spending options available to young people are no longer available to her or him.

January 11, 2012 - Posted by | economics, Psychology, random stuff

3 Comments »

  1. Doesn’t it all come down to how you feel about your pet?

    For some people, the dog is part of the family, almost like a child. Those people would most certainly refuse to take the money.

    But if you just have a dog or cat like you also have an iPad or a nice watch, why shouldn’t you take the million?

    Comment by swissecon | January 11, 2012 | Reply

    • That matters. But lots of that other stuff also matters, whether people like to think about it or not.

      One of the main problems with a question like this is that 1 million isn’t just 1 million. It’s also all that other stuff you could buy with that 1 million. Like cancer treatments for sick people, perhaps even sick family members. That stiff monthly mortgage payment you’re having trouble with that if not dealt with will leave your family homeless. 10 years of pleasant life travelling the world.

      If there’s even just one way to spend that 1 million that leads to a better outcome in your mind than does keeping the pet alive and foregoing the money, people should rationally take the money and spend it that way instead. As John mentions in his comment over at overcomingbias, Givewell estimates that each $2.000 donation to the Against Malaria Foundation saves a life – so instead of saving your pet you could instead be saving 250 human lives and buy yourself a nice summer home as well (or you could just use all the money to save people and save 500 people). Maybe some people value the life of Fido more than the lives of 500 random strangers, I wouldn’t disregard that possibility out of hand. But I think many others just haven’t really thought through all the consequenses of the decision they’re claiming they’d make. That love of the pet starts to get really expensive once you start to think about all that stuff you could buy with that money.

      Incidentally, some people have killed their parents, others their children, for much less than $1 million.

      Comment by US | January 11, 2012 | Reply

  2. “A third way to frame the question: You’re an average Joe with a master’s degree. You’re 25 and currently expect to work another 40 years on the labour market before you retire. If you choose to kill your dog today, you get 16 years of income tomorrow. You’d be able to retire at the age of 49, instead of at the age of 65 (this is disregarding discounting, compounded interest ect.; so the ‘subjective true value’ of that money will likely be even higher than that). Next, repeat the question using the high school grad numbers. A million dollars is a lot of money and it can buy you a lot of stuff. ”

    All your points are excellent, but this one, I think, takes the cake. Surprisingly many people – judging by the responses, somewhere in the 60-80% range – do not realize what a million dollars TODAY is. Being me, I had to play a little bit with the numbers, so here are some of the results (some rounding for simplicity purposes):
    1) Relaxing some of your simplistic assumptions (not a criticism – you made a point, and I am enhancing it), if our 25 year old with a master’s degree is to earn $2.5 million in lifetime earnings, and assuming his/her income increases, in real terms, by 3% annually (still working for 40 years), he/she starts at approx $34K of annual income, which gives you lifetime earnings $2.56M. If he/she pockets $1M now, he/she still has to earn $1.5M, which would take 29 years, shaving off 11 years of work, and retiring not at 65, but at 54.
    2) However, the first scenario assumes he/she is not saving anything, and will retire on nothing, which is not exactly prudent. If our “master” saves 15% of his/her income, and that income has real return of 5% a year, he/she would have, at age 65, savings of $963K – and since $1M is the widely used rule-of-thumb, close enough. So, if (big, stupidly unrealistic “if”) this $1M is received now, and stuffed under a mattress to earn nothing, he/she will take 27 years to earn $1.5M more, shaving off 13 years of work, and retiring at 52.
    3) Here comes the big kahuna: if he/she just adds the $1M to savings (earning 5% per annum on it), then to reach lifetime earnings of $2.5M (we are treating the $1 as earnings in year 1), it takes only 14 years. He/she can retire at age 39, having earned $2.5M lifetime, and with $2M in savings.
    4) Finally, independent of the first 3 scenarios, the easiest and most straightforward estimate: with $1M today, you can buy an inflation-protected annuity. Assuming life expectancy of 85 years (thus a 60 year annuity), $1M will buy you annual income of:
    $36,132 at real rate of return 3% (say, 6% yield and 3% inflation)
    $44,201 at real rate of return 4%
    $52,828 at real rate of return 5%
    I cannot be bothered to get real quotes on annuities – registration is almost always required – but US 30-year bonds yield about 3% currently, so one should be able to do at least as well, and likely better. With this kind of income, you can retire as a wealthy person in many places (hello, Manila!), and as a median income person just about anywhere, at least on a PPP basis (hello, Copenhagen!).
    Fido or Mittens are definitely getting the knife (or needle, or bullet), status and others’ opinions be damned.

    Comment by Plamus | January 12, 2012 | Reply


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