A Course in Behavioral Economics (3ED) by Erik Angner

Author:Erik Angner [Angner, Erik]
Language: eng
Format: epub
ISBN: 9781352010817

Figure 7.4 Integration vs. segregation of gains. Illustration by Cody Taylor

An analogy might help. If you are in a totally dark room and you turn on a light bulb, there is a huge difference: you can see, which is wonderful if you would rather not be in the dark. If you add a second light bulb of the same wattage, you will experience a small change in brightness, but the difference is not going to be that large. It is certainly not going to be as large as going from zero light bulbs to one: going from one to two makes a much smaller difference than going from zero to one. Something similar occurs with money. Winning a small amount is good. Winning ten times that amount is much better, obviously, but does not feel ten times as good. As a result, ten small gains are experienced as more impressive than the one gain that is ten times as large.

The fact that gains are valued more when segregated helps explain a variety of phenomena. For example, it explains why people do not put all their Christmas presents in one big box, even though that would save them time and money on wrapping: the practice of wrapping each present separately encourages the recipient to segregate the gains. The analysis also suggests that it is even better to give separate presents on separate nights, as on Hanukkah, rather than delivering all presents on Christmas Day, since this would do even more to encourage recipients to separate the gains. The analysis indicates that it is better to give people multiple small presents over the course of the year than to give them one big present once a year. While it is in good taste to give your spouse a present on your anniversary, you may wish to save some of the money and buy smaller presents during the rest of the year too. Similarly, segregation explains why fancy meals are served up dish-by-dish, rather than all at one time: chances are the eater will enjoy it more that way. In addition, the effect of segregating gains explains why workers receive end-of-year bonuses: receiving a $50k salary plus a $5k bonus encourages the segregation of gains in a manner that receiving a $55k salary does not. Finally, the value of segregated gains explains why people on daytime television try to sell pots and pans by offering to throw in lids, knives, cutting boards, and so on, rather than simply offering a basket consisting of all these goods. This practice too encourages the segregation of the gains.

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