5 Examples of People Being Completely Irrational With Money

Quick question.

A baseball and a bat cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?

Quick!

Answer!

You probably said $0.10 cents. And you're wrong. The correct answer is $0.05.

Don't feel bad if you got this wrong. Psychologist Daniel Kahneman says more than 50% of students at Harvard and MIT can't answer the bat-and-ball question correctly. I've heard it a dozen times and know the right answer, but I'm still tempted to blurt out "10 cents!" It just feels right. And what feels right is more common than what is right.

Math is hard. Money is emotional. Put the two together, and you get some crazy results. In economic textbooks, consumers are portrayed as rational decision makers who calmly calculate optimal outcomes. In real life, they more often resemble a couple drunks wandering around a bar, bumping into each other. They're sure of their decisions, but have no idea what's going on.

Take these five examples:

1. The $500 $20 bill
I have a $20 bill. I'll sell it to you for whatever you want. Bidding starts at $1 and moves in $1 increments.

But there's a catch. Other people get to bid on this $20 bill. If someone outbids you and you throw in the towel, you still have to pay me your final bid. You get nothing in return.

How much are you willing to pay for my $20 bill?

Psychologists have been conducting this experiment for years, usually on students. It always goes the same way. People get excited at first at the prospect of bidding $1, or $5, or $10, for a $20 bill. It's free money. At around $17 or $18, a bidding war arises between two players who realize they could end up having to pay a lot of money for nothing in return. Not wanting to lose, they each bid higher and higher.

Eventually, someone bids $21 for a $20 bill -- which actually makes sense, because at that price the winner loses $1 while the loser is out $20.

Things blow up from there. The bidding war becomes a fight to lose the least, rather than to win the most. And as psychologists know, people hate losing more than they enjoy winning. It's called loss aversion, and it pushes bids for a $20 bill to absurd heights.

Wharton management professor Adam Grant, who plays this game in consulting sessions, says a military officer once paid close to $500 for a $20 bill. Harvard Business School professor Max Bazerman claims to have earned $17,000 auctioning $20 bills to his students, with at least one student paying $204 for a $20 bill. Guys, I think we found the culprit of the student loan bubble.

2. Insuring your stupidity
The insurance market is a breeding ground for poor decisions because it combines money with the fear of something bad happening. Those two mix like gasoline and flames.

Take a 1993 study by four economists from Penn State, Temple University, and the University of Pennsylvania. They asked a group of participants how much they'd be willing to pay for $100,000 of travel insurance on a trip from the U.S. to Thailand. Participants were given two options. One, they could buy insurance covering death caused by acts of terrorism. Two, they could buy insurance covering death for any reason.

For terrorism insurance, the average participant was willing to pay $14.12. For insurance covering all causes of death, they were willing to pay $12.03.

Yes, people were willing to pay more for insurance covering terrorism than they were for insurance covering everything... including terrorism.

In his book The Science of Fear, Daniel Gardner wrote: "Logically that makes no sense, but 'terrorist acts' is a vivid phrase dripping with bad feelings, while 'all possible causes' is bland and empty." The emotions of hearing the word "terrorism" made people willing to pay more.

3. Incentivizing yourself to failure
Want someone to perform better? Logic says that if you offer a bigger reward, like a bigger potential bonus, they'll work harder and perform better.

But economist Dan Ariely showed it isn't this straightforward. It can actually be the other way around.

Ariely and a few colleagues set up a series of problem-solving games in a rural village in India. The tasks ranged from memorizing random numbers to trying to fit nine quarters into a small square.

Ariely's assistants hailed down participants off the street. Participants rolled a die that determined how much money they could earn for completing the tasks. It ranged from the equivalent of one day of the participants' regular pay to a massive five months' of the participants' pay. (Ariely conducted the experiment in India so he could offer participants the equivalent of a large financial award without it costing a lot of dollars).

What do you think happened? Here's Ariely:

Those who stood to earn the most demonstrated the lowest level of performance. Relative to those in the low- or medium-bonus conditions, they achieved good or very good performance less than a third of the time. The experience was so stressful to those in the very-large-bonus condition that they choked under the pressure.

All those who stood to make the most money could think about was their bonus, Ariely wrote in his book, The Upside of Irrationality. Those who stood to make smaller sums had less to lose, and could focus more on the task at hand. So they performed better.

4. You'd rather earn less than be poorer than your neighbor
In one famous 1995 study, researchers from the Harvard School of Public Health asked students and faculty which they preferred:

  • Earning $50,000 a year when everyone else around them makes $25,000.
  • Earning $100,000 a year when everyone else around them makes $200,000.

"The researchers stipulated that prices of goods and services would be the same in both cases," Arthur Brooks wrote in his book The Battle, "so a higher salary really meant being able to own a nicer home or buy a nicer car."

Fifty percent chose the first option, leaving $50,000 on the table just to avoid earning less than their neighbors.

5. The Red Cross charged for doughnuts and people never forgave it
"Most of us think of the Red Cross as a pretty mom-and-apple-pie organization," economist Russ Roberts told NPR last year. But Roberts found that wasn't the case. He kept hearing stories about people, particularly veterans, not trusting and holding a grudge against the Red Cross.

Why?

Two words kept coming up: "The doughnuts."

"I swear, you could go to any VFW hall today, mention the Red Cross, they will bring up the doughnuts," Roberts said. NPR traveled to several VFW halls and found exactly that. "The doughnuts," said one veteran. "It was a disgrace."

Here's what happened.

During World War II, the Red Cross built "comfort stations" across Europe that served coffee and doughnuts to U.S. soldiers. All of it was free. The British soldiers had their own comfort stations, but had to pay for their goods. This caused animosity between ally soldiers. It caused so much jealousy that Secretary of War Henry Stimson wrote the Red Cross and asked the organization to charge U.S. soldiers for doughnuts at comfort stations. So it did. For a brief period soldiers had to pay a few pennies for their doughnuts.

Soldiers were so outraged that the policy was soon reversed. But 70 years later, they still haven't found forgiveness.

Once you offer something for free, charging for it completely changes the relationship between the customer and the giver. If a business charges $1 and raises the price to $1.01, you might be annoyed, but you probably won't think differently about the business. But if something goes from free to $0.01, what you thought was a charity now looks like a business. And that changes everything. You suddenly question its motives and its goals. In soldiers' eyes, the Red Cross went from a caring grandmother to a profit-driven corporation. That change, some psychologists propose, made soldiers wonder whether they were in a bait-and-switch scheme. That's a bad feeling to have. And those feelings last a long time.

Here's to more rational decisions. 

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

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Read/Post Comments (68) | Recommend This Article (136)

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  • Report this Comment On October 03, 2013, at 2:19 PM, kyleleeh wrote:

    Is number 4 written correctly? In both cases you make half of what your neighbor makes.

  • Report this Comment On October 03, 2013, at 2:33 PM, TMFHousel wrote:

    ^ Nope, it was wrong. Fixed now. Thanks.

  • Report this Comment On October 03, 2013, at 2:34 PM, KBOKSOFT wrote:

    in #3, they rolled a 'die' not a 'dice'. 'Dice' is plural.

  • Report this Comment On October 03, 2013, at 4:39 PM, kyleleeh wrote:

    Well now that number 4 is fixed, I think some of that may be because people understand that income will drive up cost of living. Someone who makes 50000a year in rural Arkansas can have a better living standard then someone making 100000 living in Manhattan.

  • Report this Comment On October 03, 2013, at 4:48 PM, TMFHousel wrote:

    ^ Important part below the numbers:

    "The researchers stipulated that prices of goods and services would be the same in both cases," Arthur Brooks wrote in his book The Battle, "so a higher salary really meant being able to own a nicer home or buy a nicer car."

  • Report this Comment On October 03, 2013, at 4:56 PM, starpark88 wrote:

    I'm not so sure this nicer neighborhood/smaller salary conundrum is irrationality. Maybe it is due to those who want to be a big fish in a small pond being smarter. Kahneman's work shows, all else equal, those who surround themselves with poorer neighbors are happier than richer folks in more upscale neighborhoods. Kahneman also shows happiness tends to not flatten out until making $70-80k, dependent of course on location. I could see $50k in Arkansas making you a lot happier than $100k in NYC, even if the cost of goods was equivalent.

  • Report this Comment On October 03, 2013, at 4:59 PM, starpark88 wrote:

    http://content.time.com/time/health/article/0,8599,1974718,0...

    Writeup on being richer than your neighbors making you happy

    http://content.time.com/time/magazine/article/0,9171,2019628...

    Writeup on Kahneman's study of happiness flattening out around $75k

  • Report this Comment On October 03, 2013, at 5:07 PM, kyleleeh wrote:

    <<The researchers stipulated that prices of goods and services would be the same in both cases," Arthur Brooks wrote in his book The Battle, "so a higher salary really meant being able to own a nicer home or buy a nicer car.">>

    But are brain is wired to know that's not how things work, so instinct tells us that 100k in a 200k neighborhood will not go as far as 50k in a 25k neighborhood. This may not be an example of how we are irrational with money but rather how our brain can rationalize between what we are told will happen and what we know will really happen.

  • Report this Comment On October 03, 2013, at 5:08 PM, TMFHousel wrote:

    ^ Here's somewhat of a rebuttal to the money/happiness argument by economist Justin Wolfers:

    http://www.brookings.edu/research/papers/2013/04/subjective-...

  • Report this Comment On October 03, 2013, at 5:09 PM, TMFHousel wrote:

    (That last comment was for starpark88)

  • Report this Comment On October 03, 2013, at 5:43 PM, starpark88 wrote:

    Interesting study Morgan. Thanks for the link!

  • Report this Comment On October 03, 2013, at 5:47 PM, AnsgarJohn wrote:

    You don't have to look further than: http://caps.fool.com/Ticker/WHX.aspx

  • Report this Comment On October 03, 2013, at 5:58 PM, ybckorea wrote:

    I want the .05 cents explained. Sounds like math made up to confuse. Kind of like the architects who draw pictures that only look like they make sense until you look deeper.

    A ball = one ball

    A bat = one bat

    $1.00 + .05 is not equal to $1.10

    A statement made is not necessarily equal to truth.

  • Report this Comment On October 03, 2013, at 5:59 PM, ybckorea wrote:

    Took me 30 years to get that monkey off my back!

  • Report this Comment On October 03, 2013, at 6:00 PM, TMFHousel wrote:

    The bat cost $1 more than the ball. So the ball is $1.05 and the ball is $0.05.

  • Report this Comment On October 03, 2013, at 6:07 PM, EvanBuck wrote:

    Another very interesting article, Morgan. Thanks for the read!

  • Report this Comment On October 03, 2013, at 6:22 PM, rac065 wrote:

    bat and ball is basic algebra.

    if x= cost of ball

    x+1 = cost of bat

    x + x+1 = 1.1

    2x = .1

    x = 0.05

  • Report this Comment On October 03, 2013, at 8:20 PM, TradewindRider wrote:

    Speaking of Dan Ariely, I just finished his book <u>Predictably Irrational</u>. Full of stories about how people make crazy decisions, especially when money is involved. Every Fool should read. Go buy it. Now.

    BTW I am auctioning off an ice cream sandwich with the face of the Virgin Mary on it (if you hold it just right)...

  • Report this Comment On October 03, 2013, at 9:58 PM, KCDEMOMD wrote:

    For the fool with the algebraic reference, which I enjoyed, I would like to bring to his attention that the price of the "bat" can not be x+1 but 1.10-x. I will leave the rest of the solution to you, which I hope you enjoy it!

    Your Fool friend KCDEMOMD. Don't take it seriously, have fun! I don't have the answer either!

  • Report this Comment On October 03, 2013, at 10:10 PM, TheCommodore wrote:

    The price of the bat is $1 more than the price of the ball (x), therefore it is x+1. Rac065 is right, and X gets the square. KCDEMOMD, you are just restating the formula in a different way.

  • Report this Comment On October 03, 2013, at 10:22 PM, TheCommodore wrote:

    And also, good article Morgan. The ball and bat one is easy, but partly because of the fact that you're asking it. I mean you basically offered up the fact that you need to think your answer through just by including it in the article. But that kind of proves your point to begin with. You should ALWAYS think through your answers. Which is why it took me about two seconds to realize that I would never play the $20 game to begin with. Unless, of course, I was colluding with the other player... :)

  • Report this Comment On October 03, 2013, at 10:33 PM, Travelintime wrote:

    I love the $500 $20 bill. It goes to show the very nature of how we think. I believe we all know this to be true, but to come to terms with it, may be a little more difficult.

    Thanks for putting this out there. I will be sure to share this amongst the people I know in academia , with the hope that they will share this with their students too.

  • Report this Comment On October 03, 2013, at 10:57 PM, malclave wrote:

    TheCommodore is right about the $20 bill game.

    Someone buys the bill for $1, and then everyone playing splits the $19 profit.

  • Report this Comment On October 03, 2013, at 11:08 PM, rrlemur1 wrote:

    I agree with starpark's comments. And Morgan, I think the paper you provided doesn't really rebut those comments. I didn't read it in detail, but from what I read, it simply showed that having more stuff makes you happy. But it didn't address the question of relative wealth compared to others around you: does it make you happy, and how happy does that make you compared to having more stuff. Maybe I missed something though.

  • Report this Comment On October 03, 2013, at 11:28 PM, KCDEMOMD wrote:

    This is an apology for an oversight on my part in the previously reported algebraic solution by a fellow fool of the following problem:

    a bat and a baseball cost $1.10. The bat was bought for $1 more than the ball. How much the ball cost? The proposed solution by the fellow fool was correct and it was my misunderstanding which caused the confusion. Sorry and I hope I didn't hurt any feelings. Yours KCDEMOMD

  • Report this Comment On October 04, 2013, at 6:49 AM, nivekluap wrote:

    Number 4, the neighbor thing, reminds me of the last election when some were saying "tax the rich". To me, it sounded as if making good money is a bad thing. Instead of being jealous, shouldn't we ask those people how we can improve our lot in life? I raised my children to think for themselves and hoped they would learn from my mistakes and be better people than my wife and me. When they bring out the game of Settlers of Cattan (sp?) my losing to them 99% of the time proves I did something right,,,,but it makes me mad to lose :-)

    That's the biggest reason I've had a membership with Stock Advisor for 5 years....if you don't know how, maybe you should ask someone to show you.

    KD

  • Report this Comment On October 04, 2013, at 9:23 AM, dsalhany73 wrote:

    "Quick!

    Answer!"

    Sorry, Morgan.

    I actually took my time and thought it out before answering :)

  • Report this Comment On October 04, 2013, at 9:54 AM, cjbold wrote:

    I enjoyed the article and baseball example. I also didn't get the answer correct in the baseball example until is was further explained by comments. All things considered I guess I'm in good company with those 50% from Harvard and MIT. good fun!

  • Report this Comment On October 04, 2013, at 10:38 AM, rajeshjohn wrote:

    The bat costs $1 more than the ball. Okay

    If ball costs 0.05 dollars it means the bat costs 0.05 + 1.00 USD i.e. one dollar more than the ball cost.

    It was difficult.

    I feel very slow witted.

  • Report this Comment On October 04, 2013, at 12:41 PM, AltReality11 wrote:

    A more recent example is real estate, specifically homes.

    When the price of a house exceeds 10x the annual earnings of the people who reside in it, and those same people live inside with little furniture and a dream that this "investment" will double in 3-5 years, well, that's being "irrational with money."

    But the NAR said this was a good deal, various financial people in the media said the same, and a lot of government officials got right in line and made it happen for us.

  • Report this Comment On October 04, 2013, at 2:04 PM, hbofbyu wrote:

    The Doughnut Syndrome:

    Service stations used to offer free air and water. Something inside me absolutely refuses to pay $1.00 to put air in my tire. So much that I end up driving 5-10 miles away just to go to the station that is offering it for free even though it probably cost me more than $1.00 in time and gas to drive my car there. It only hurts me, but I can't bring myself to give a penny to those shysters selling air.

  • Report this Comment On October 04, 2013, at 2:16 PM, pancratski wrote:

    A fool and his money ... bids on those bidding sites. Those ads for bidding sites where your bids cost 1$ must have more losers than winners.

    Like bidding on that 20$ bill.

  • Report this Comment On October 04, 2013, at 2:27 PM, mikecart1 wrote:

    Amazing that people are questioning the $1 ball and bat logic.

    It reminds me of the news today that people bid on TWTRQ thinking it was the Twitter IPO. It is scary to think that there are thousands of investors that don't read beyond a ticker symbol when it comes to investing.

    Makes you wonder the big picture and how many stocks are overvalued or undervalued due to investors not understanding what they are buying or selling.

  • Report this Comment On October 04, 2013, at 2:39 PM, hbofbyu wrote:

    ^ All the time I meet people who think a stock is expensive because it is over $100.

  • Report this Comment On October 04, 2013, at 5:20 PM, rac065 wrote:

    no feelings hurt, KCDEMOMD

  • Report this Comment On October 04, 2013, at 5:40 PM, AkaThePerfessor wrote:

    I'm quite sure I wouldn't be taken in by ANY of these six (I got the $.05 question right at the beginning.)

    MAYBE I've seen my performance impacted in some occasions when the stakes were raised, but I've also prevailed in some stressful, now's-your-only-chance situations. Pennies for doughnuts? Pah! Pay more for less insurance? Puhlease. Earning less money when prices are the same? You've got to be kidding.

    No wonder most of America is impoverished.

  • Report this Comment On October 04, 2013, at 5:44 PM, AkaThePerfessor wrote:

    I'll add that driving ten miles for free air isn't just about gas cost. It's TIME cost.

    I put a dollar cost on my time. I have a walking commute because it saves me time AND money to not have a car and have a short commute, even though it's somewhat more expensive, but not that much more, to live within a walking commute. Time is money.

  • Report this Comment On October 04, 2013, at 5:51 PM, KBOKSOFT wrote:

    I am pondering what this means to the stock market. In a perfectly efficient market, none of this would matter a bit. The computer programs that make most of today's trades would never buy $20 for $500 (unless KCG wrote the program -- hehe).

    Alas, the market is ultimately governed by human idiosyncrasies.

    But how much of an "oversold" stock or market is the result of "loss aversion"? How much of an "overbought" stock/market is about example #4 (trying to keep up with your neighbors' stock gains)?

    This article makes me think about WHY I am buying/selling. Am I the chump who's dumping out of fear of loss? Am I the chump who's buying to "catch up" with my neighbor's gains? Or am I positioning myself to take advantage of others' unavoidable psychological biases?

    If we Fools are going to beat Wall Street and rooms full of supercomputers, we will need more articles like this.

    Thanks.

  • Report this Comment On October 04, 2013, at 5:51 PM, Johny205 wrote:

    If you have something you want to give away for free, nobody wants it. If you put that item out on the curb with a sign that says $50, someone will steal it! I've done it before, it works good.

  • Report this Comment On October 04, 2013, at 5:57 PM, KBOKSOFT wrote:

    To beat a dead horse: I think the bat/ball question is just strangely worded -- not an insight into math competence.

    I remember a "word question" on a grade school math test:

    "What is ten divided by one half?"

    Most kids answered "five". The answer is "twenty". (Try it on a calculator: 10 divided by .5)

    Just a dumb question. Good article, though.

  • Report this Comment On October 04, 2013, at 6:18 PM, Johny205 wrote:

    I also think that it is funny how people will buy crap they don't need and will probably never use, just because they got it on sale or it was a good deal. Good article Morgan.

  • Report this Comment On October 04, 2013, at 11:35 PM, blablableh wrote:

    I will never get back the time i spent reading this garbage.

  • Report this Comment On October 04, 2013, at 11:46 PM, jolcath2001 wrote:

    "You probably said $0.10 cents. And you're wrong."

    I see this all the time. Either you write ten cents or write $0.10.

    Anytime you include the $ with cents, then you just stated that it is 1/10th of a cent.

    You see on it convenience store signs too. Buy a 20-oz drink for $0.99 cents! That's 99/100th of a cent! It's either $0.99 or 99 cents.

  • Report this Comment On October 05, 2013, at 9:21 AM, kevplank wrote:

    Answer quick ...

    The ball is .05 ... 5 cents.

    The bat is a dollar MORE than the ball. So the bat is $1.05. I'm amazed at some of the math I'm seeing on here with the answers.

  • Report this Comment On October 05, 2013, at 10:47 AM, knighttof3 wrote:

    Irrational does not equate wrong, though a lot of academic studies seem to imply that, being judgmental implicitly. Right and wrong are bigger concepts. And yes, sometimes they are relative.

    So anyway, what is the correct amount to bid for $20? I can't laugh at people who bid $204 unless I know they are wrong. Apparently, all the academics have no such qualms.

    I'd guess 0 or even negative. WIth two competitors, if you bid $x and win you'll get $(20-x). If you lose you're out $x. Assuming equal probability (a very big assumption, but possibly true by symmetry) - your expected earnings are $(20-x-x)/2 = $10 - $x. So the more you bid the less you will earn, so the ideal bid is 0.

  • Report this Comment On October 05, 2013, at 1:35 PM, marco555 wrote:

    More like ...

    Read Daniel Kahneman

    Thinking, Fast and Slow

  • Report this Comment On October 05, 2013, at 7:30 PM, kiplin wrote:

    Math may be hard, algebra is not. Take your time, write it down. X + (X + 1) = 1.1. Solve for X. So, 2X = 0.1. X = 0.05. Reminds me of investing, which I guess is the point...

  • Report this Comment On October 05, 2013, at 8:30 PM, maniladad wrote:

    I was just wondering about the economics of setting up an experiment in India to avoid the higher costs of the rewards in the US. IF you have to pay transportation for yourself and assistants plus living accommodations, eating out, etc., it MIGHT be more rational to do the experiment in Arkansas (the example used elsewhere for a less expensive environment in the US). Of course, there might be some considerations other than economics for getting grant money to pay for a working vacation in India. Which MIGHT be rational after all!

  • Report this Comment On October 05, 2013, at 11:38 PM, ScottAtlanta wrote:

    I agree with KBOKSOFT.

    I too was thinking about the wording of the ball and bat question. I think it's creates more confusion by the numbers used. The Bat is ONE dollar more, the ball and bat is ONE dollar and 10 cents. The symmetry of it pulls for you to pair the ONE dollar on each side of the equation, subtract it, and blurt out 10 cents.

    To which the self-satisfied academic giggles in delight...FOOLED you, Tricked YOU! Your WRONG! Do you see how stupid you are?

    When really you're being efficient by focusing on the similarity on both sides of the equation and subtracting them.....this perceptual process efficiently helps us solve most visual/perceptual problems where focusing on similarities and singling out the dissimilar works 99% of the time.

    If the numbers were different...you don't activate this reflexive "similarity" process as easily....say the Bat is just about any number greater than the ball....and you have to work it out. even numbers tend to pull for wrong answers...but you have to be deliberate in your thinking and you get the right answer.

    When it comes to finances, I'd hope that more people than not were deliberate in their thinking, vs. using mostly accurate but reflexive thought processes...which by the way....got you to within 5 cents of the correct answer....close enough for a pointless exercise. Also, close enough to take action while the other dolt is doing algebra -- when time is of the essence but penny accuracy is not. Maybe that's why 50% of IVY leaguers got it wrong...they're not stupid....they relied on symmetry.

  • Report this Comment On October 06, 2013, at 8:32 AM, rando101 wrote:

    "There's a sucker born every minute"

    - P. T. Barnum

  • Report this Comment On October 06, 2013, at 9:59 AM, randallw wrote:

    I can get the majority of people to make irrational decisions too, if given total control over the context (I.e., how the question and background info is framed).

  • Report this Comment On October 06, 2013, at 4:03 PM, brianaua wrote:

    Hello Morgan,

    I would say that loss aversion part was really great and it is true when thinks come for auction and get started with bidding. In origin they start in with a war for nothing.

    Just like $20 bill was sold in $21 sounds great :) Another part was bat and ball really great.

    Thanks for sharing Morgan and do view this http://www.daytradingcoach.com/

    Regards,

    Dr Brian

    (Day Trader)

  • Report this Comment On October 06, 2013, at 7:07 PM, Mathman6577 wrote:

    #1 shows the importance of writing down math problems instead of trying to do them quickly in your head (or using your fingers).

  • Report this Comment On October 06, 2013, at 8:55 PM, cbingham00 wrote:

    It's interesting that people would actually pay money for money. Why want to participate in something where the point of the auction is to run the bid up higher and higher just so you're not losing the most money? When in fact, it was all just for a $20 bill?

  • Report this Comment On October 07, 2013, at 9:12 AM, PanchoAlmeja wrote:

    very interesting article, thank you.

  • Report this Comment On October 07, 2013, at 9:26 AM, Strava wrote:

    Bat and ball.. This one took me awhile.

    Ball $0.10

    Bat $1.00

    Bat must cost $1.00 more than ball. If ball is $.10 then bat is only $0.90 more, while still costing $1.00

    How is this relevant?

    I don't live in a world of economics that demand I pay $1,00 more than the combined price of two items.

    It was amusing to see $0.10 was wrong.

  • Report this Comment On October 07, 2013, at 9:48 AM, PanchoAlmeja wrote:

    uh... what?!

  • Report this Comment On October 07, 2013, at 10:21 AM, bamasaba wrote:

    To Scott Atlanta and everyone else saying that this is just an 'academic example' of using math to fool people, think again. Credit card companies, car salesmen, pyramid schemers, insurance salesmen, and countless others use strangely worded math all the time as a matter of business in order to hide the true costs of an offer.

    This 'academic example' has real world implications that occur all of the time. Any time someone offers you a 'deal,' you need to stop and do the math.

  • Report this Comment On October 07, 2013, at 10:59 AM, ScottAtlanta wrote:

    @ bamasaba....Yes....charlatans of every stripe use deception.

    Stop and be deliberate whenever someone says...ACT NOW! Quick -- Give me an answer! Don't wait! Sign here!

  • Report this Comment On October 07, 2013, at 11:11 AM, bamasaba wrote:

    The only difference between Morgan's 'quick question' and what goes on in then real world is that Morgan gave you the correct answer afterwards. A salesman who swindles you using the same trick will smile at you, pat you on the back, and tell you how smart you were for making a good decision.

  • Report this Comment On October 07, 2013, at 11:39 AM, hbofbyu wrote:

    There has got to be a tie-in here between loss aversion and the current stalemate between congress and the President. Start the bidding for the $20 bill with the statement "I will never back down, I will never negotiate".

  • Report this Comment On October 07, 2013, at 11:07 PM, Nick1Hayes wrote:

    I think the Red Cross problem did start during WWII, but it did not end there. I was a young teenager, when the subject of the Red Cross came up and my Father told me he would never have anything to do with them, because they had charged soldiers for things they had been given to distribute. I think the example he used was cigarettes, and it was during WWII.

    I always remembered that but didn't think much about it. Then in 1969 I had the chance to visit Hill 327 (Freedom Hill) near the Airport at Da Nang. We had heard that there were American Women who worked at the Red Cross there, so we dropped by to have a chance to speak to an actual American female. As we entered, we were greeted by a couple of American Women and asked if we would like a cup of coffee. We replied that that would be nice, and they got us a cup. When they handed them to us, they said that would be (10 or 15 cents - I do not remember which). The thing that struck me was they charged for a cup of coffee, and I could have gone to the air base and gone to a service club and got a can of cool if not cold beer for 15 cents. I remembered what my Father had told me and have always shared his feelings since that day. Since then, if I want to contribute to an organization I have respect for, I look for the Salvation Army.

  • Report this Comment On October 08, 2013, at 1:55 PM, Turfscape wrote:

    I see quite a few commentators who appear to not understand the underlying point of these examples...it's not about having the "right" answer or being tricked by math. It's about understanding our own behavior and how that impacts our financial and investing decisions.

  • Report this Comment On October 11, 2013, at 3:57 PM, BentMike wrote:

    I didn't see until I was told my $1.00 answer was wrong. Then I knew I had translated the words in to math notation incorrectly. (Math is really a language and that idea eventually makes work problems easier to solve.)

    We were told (and what I failed to grasp at the start) that the difference in cost between the ball and bat was $1.00 (so the answer could not possibly be $1 for the bat).

    $bat - $ball = $1

    And we were told the the sum of the two was $1.10

    $bat + $ball = $1.10

    Two unknowns and two equations! Rearrange one eq to get an unknown equal to the rest:

    $bat - $1 = $ball

    Sub that into the other:

    $bat + ($bat - $1) = $1.10

    2 ($bat) = $1.10 + $1 = $2.10

    $bat = ($2.10)/2 = $1.05

    $ball = $0.05

    To me it is not the algebra that is hard - algebra is really just a bookkeeping exercise - and there is always an answer. It is the translation between languages that is tricky.

  • Report this Comment On October 12, 2013, at 7:31 AM, JolyonKay wrote:

    I am shocked at people's resentment at charging for a Red Cross coffee. Should they not rather be glad of the opportunity to make a small contribution to their work?

  • Report this Comment On October 12, 2013, at 10:10 AM, Strava wrote:

    This is all interesting. I see everyone's point in regards to salesman. I still don't see any relevance to the stock market.

    Hey Pancho do you cares to elaborate. Your remark, if directed at me, implies I might be missing something. Did you want to clarify this to me?

  • Report this Comment On October 17, 2013, at 12:22 AM, sl0j0n wrote:

    Hello, "JolyonKay ".

    Apparently you have *never* been the victim of a con.

    People *really* do not appreciate being made to feel like they've been 'conned' out of anything.

    So, when they had been receiving something for "free", but then they're told it now costs them 'X', they will usually resent it. That's just 'normal' human nature.

    Also, most people will *INSIST* that they be 'allowed' to decide what they will 'donate' to.

    In fact, most people consider it their *right* to make that decision, for themselves.

    Also, I wonder if you know the meaning of the word "contribution".

    One dictionary defines it as, "A voluntary gift".

    How can it be a "A voluntary gift", if it is REQUIRED?

    Hello, Mr. Housel.

    I saw part of this on the editorial page of the local paper, but it was truncated.

    That was in last Thursday's paper [Oct. 13], but I *HAD* to find and read the 'rest of the story'.

    Yes, its *really* that good.

    Thank you very much, for this, and I will be watching for more of your writing.

    Have a GREAT day, neighbors!

  • Report this Comment On October 21, 2013, at 12:07 AM, Rowants wrote:

    Since I can't remember exactly where and when it happened, it gets written off as an urban legend. About 20 to 25 years ago a gas station in Omaha did an experiment. They had bottles of soda for 25 cents each, or 3 for $1. When you took them to the register, they'd ask you how much the soda was. Amazingly, quite a few people said 3 for a dollar. Instead of doing the math, they just assumed it was a deal.

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