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When faced with a bad event, most humans have the tendency to look for a “bright side”. This tendency has been captured by popular idioms in many languages, such as “Να χρυσώσει το χάπι” (“to coat the pill with gold”) and “Ουδέν κακόν αμιγές καλού” (“There is nothing bad without a bit of good in it”) in Greek, or “every cloud has a silver lining” in English.

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But what is a “silver lining” in economics? The answer comes from important research published in Marketing Science by Richard H. Thaler (University of Chicago; 1985, 2008). Thaler (among many other behavioral economists) argues that every financial transaction is mentally categorized as either a “gain” or a “loss”, relative to a reference point (usually the status quo). In addition, the perceived value of money is very different depending on how it relates to the reference point. Put simply, not all money is equal. Although an amount of money (let’s say 500 euros) can  buy the exact same things regardless where it comes from, its value for people can vary dramatically. One such variation is the “silver lining” principle. Let me explain this with an example.

Over the past (let’s say 3) years, Greece is experiencing the biggest post-second world war economic crisis. Many Greek citizens have lost large parts of their income, and the amount of this loss is for many something like 500 euros / month. For 3 years, this is a 3 x 12 x 500 = 18 000 euros. Now, the Greek economy seems to be slowly recovering. The Greek Prime minister just announced that Greece had surplus, 500 million of which will be distributed to about a million needy Greek citizens (see here). That is 500 / citizen, on average.

 

 

There are two possible ways to frame this 500. The first, is to “integrate” it in the previous loss: The prime minister, in this case, would say: “From the surplus, we will reduce the loss that the neediest Greek citizens had over the last 3 years from 18000 to 17500”.

Instead, he chose to say, more or less: “From the surplus, we will give to the neediest Greek citizens 500 euros each”. Which one sounds better? Clearly the second. Reducing the huge loss of 18000 by 500, would not make anyone any happier. They would still be losing 17500, roughly equal to 18000. Instead, the 500 windfall gain is presented in isolation from the disproportionately larger loss. Now, everyone is happy to have gained suddenly 500 euros; That is a silver lining.

In general, although traditional economics would say that X euros is always X euros, people do not understand money this way. They seem to be considering mostly “what difference does this amount make?”. For example, very small amounts of money may make a difference in how people pursue their financial goals (see here: http://marketing.blogs.ie.edu/archives/2013/07/improving-versus-maintaining-which-one-is-harder.php*). Or, as the “silver lining” principle suggests, when people face a big loss and a disproportionately smaller gain, combining the two into a slightly smaller loss would not make much difference. In these cases, people will “like” the same amount of money more, if they were treated as gains (i.e., gain 500) than if they are treated as “loss reductions” (i.e., limit a 18000 loss by 500)….and politicians seem to know that J.

 

Antonios (Adoni) Stamatogiannakis, Ph.D.
Assistant Professor of Marketing
IE Business School – IE University

Antonios . Stamatogiannakis @ ie . edu

 

*The Research leading to these results has received funding from the People Programme (Marie Curie Actions ) of the European Union´s Seventh Framework Programme (FP7/2007-2013) under REA grant agreement No. 298420.

Comments

Daniel Huntlaar June 3, 2014 - 10:49 am

That note gives a real luxury feel. A thought is popping in my head that if they make 5K note would they use gold for it. ;) :P

Thanks to Antonios for this informative post.

Daniel Huntlaar June 3, 2014 - 10:53 am

:D :D Thoughts growing up to get shared, if 500 has silver, then 5000 can get gold and 50000 should get diamonds with white gold. The economy is falling over many countries and might be 50000 Euro note can also be needed in near future as overall money is losing it’s price whatever the currency is.

We should think about producing things in cheaper but better in order to keep prices of our needed things within a limit.

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