incentives, behavioral-economicsNot sure how to say that more clearly, but I’ll try–
There’s a classic incentive pattern is to make something easy/hard in proportion to how frequently you want it to happen. But I think this only makes sense in relative, not absolute terms–_e.g._ getting your towed car back needs to be expensive proportional to the risk and inconvenience of illegal parking, but does not need to be related to the trouble of brewing your own coffee. Sure, we spend money on all of these, but our coffee-dollars are obviously spent in a different mindset than our parking ticket dollars, and this means that they are functionally different currencies. Related, this means you can open up markets by changing people’s relationship with a product class–_e.g._ I started consuming software like candy because of the App Store. Now software needs to be cheap relative to candy, but not to “software in a box.”
I assume there’s a name for this idea, and hopefully a long and fertile tradition of thought exploring it. What is it?
One of the defining characteristics about a currency is that it retains its nature after being used in a transaction.
Your definition of a functional coffee-dollar doesn’t fit that: of the money spent on a coffee drink, very little will then come out of the coffees-shop till and go on to be immediately spent on another coffee drink. Some will be spent on coffee beans, but the rest will go on wages, taxes, rent, equipment and so on. So it’s ceased to be a coffee-dollar at the time of transaction.
Nevertheless, there is something in what you’ve said. The [tag:behavioral-economics] tag here is absolutely spot on: and we must remember that although many of the concepts that behavioural economics analyses have been known to confidence tricksters / people in marketing for ages, they were outside the scope of classical economics, and have only been brought within the formal remit of the study of economics relatively recently.
Here’s a quick romp through some of the concepts I’ve come across that are congruent with what you’re saying.
Within transport economics, there is sometimes discussion of a travel budget - a relatively stable pot of time and/or money that is allocated to a household’s travel, that might get switched between different journeys, but is less likely to be switched to a non-travel use.
This is partly wrapped up in the idea of satisficing: that because finding the optimum incurs a transaction cost, it’s actually optimal to settle for a near-optimal outcome, and that switching preferences only happens when a step-change is reached in external conditions. So, we get used to spending £X per week on food, £Y per week on travel, £Z per week on utility bills, because that’s proved to be a reasonably viable allocation of our budget. And that ends up giving us a food budget, a travel budget and a utility budget that gets reinforced by habit.
And there’s the concept of price anchoring: when we’re looking to estimate a number, we’re very suggestible. Any context-specific number we hear, anchors our expectations around that number. So, if we’re used to spending, say £100 on one software licence, that’s what we expect the next software licence to cost. If someone wants to pitch software at us that’s £1000 for a licence, they need to re-anchor our expectations, and one way to do that is to portray their software as being in a very different category to the one we’re used to buying from. That way, they can re-anchor the price expectation at a different level.
And finally, the sunk cost fallacy: once we’ve spent a lump of money on the car, then we tend to be happier to spend more money on maintaining the car and keeping it operating, so that we don’t feel we’re wasting the lump sum already spent on it. This can end up with us throwing good money after bad: we make irrational sub-optimal decisions to pay high maintenance costs, even though the lump sum already paid is gone and may be only recoverable in very small part.
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