The Question of Windfall

Before you read today’s blog, please answer the following question:

I think this is a great question about human behavior. The logically “correct” answer is that you’d choose the monthly payments for a total cashflow of $1,200. That’s 20% higher than the $1,000. The odds that you could make a 20% return over the next 12 months is slim to none.

And yet getting $1,000 today is fun. It would certainly be better for the economy–you’d be much more likely to go out and spend that money on an impulse buy. Back in Japan, where I studied abroad, many large companies pay employees nearly a third of their salaries in one lump sum around the holidays. It’s a huge boost for the economy during those times.

Personally, I’d choose the monthly payments. I end up with more, and I don’t need $1,000 today (some people might). What would you choose? Why?

If this kind of question interests you and you live in St. Louis, I would highly suggest going to Dan Ariely’s reading on Monday, June 14 at the county library (plus, I’ll be there!). His work inspired my series on sex psychology earlier in the year. It’s great stuff.

12 thoughts on “The Question of Windfall”

  1. I picked the lump sum today. The reason is because I would be more inclined to save part of the lump sum than the monthly installments. If I splurged with 10-25% of the lump sum, the remaining sum could be invested, grow and feed my future, and I could still have some fun today. If I were paid in installments, I would be much more likely to just spend it.

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    • Interesting. I’m the opposite–if I receive money in smaller batches, I’m less inclined to all of a sudden feel “rich,” and thus less inclined to spend that money.

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  2. Monthly payments gets my vote, I’m blessed to not be strapped for cash so just a little extra each month would be fine with me. I didn’t notice that there would be a little extra as well, so bonus for me, more goodies for my cat lol.

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  3. I don’t think I have $200 worth of patience. I would definately fritter part of the $100/month away before collecting the whole amount. The inverse is obviously using Credit to buy anything. You can give me the $1000 in your pocket now, or $100/month for 12 months. Either way, you can have Item X now. We know the answer, because we can see the Credit crisis into which the America has fallen.

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    • True, but look at the poll…the majority of people chose the logically “correct” answer. Although, readers of this blog probably represent a class of people without an immediate need for a lump sum of money.

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  4. I agree with Rebecca about the lump sum. It would be easier for me to save a big chunk of the money if I received it all at once, rather than trying to save that extra $100 per month and separate it from the rest of my income. When I receive a substantial amount of money at one time – such as a holiday bonus or taxes – I often save at least 75 percent of it, if not all of it, because I consider it an “added bonus” to my regular income – and for me, any added bonus to my regular income is much more valuable in the bank (allowing me to save and earn interest), rather than spending it on something I wouldn’t have bought if I didn’t have the $1000 in the first place. Maybe I’d treat myself to a new pair of shoes or a dinner out, but other than that, I always like to put extra money in the bank – and the lump sum would really encourage me to do that!

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    • This is an interesting response, namely because of the word “treat.” I think you’re more likely to treat yourself to something expensive if you’re given that $1,000 than if you’re given $100. Like, say you’ve been coveting a new $500 TV. If I give you $1,000, there’s a decent chance you’ll buy that TV (and perhaps the joy of that TV is worth more than the extra money you’d otherwise receive). But if I give you $100 every month, you’re not buying a TV with that, increasing the chance that more of that money ends up in the bank.

      Perhaps what I’m missing is what I just said about the value of happiness. I think if we always put every penny we earned or every bonus check we received in the bank right away, we’re probably missing out on some good times (hopefully not too many good things/objects, but to each his own). So perhaps a balance is necessary.

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      • Hmm, you’ve given me a lot to think about with your response. 🙂 I wanted to respond, because it’s interesting how people think about these things in different ways! So …

        When you said that someone would be more likely to buy an item with the $1000 lump sum, but would save money if they received $100 payments, I see what you’re saying. That makes sense. I think I’m the opposite, though. I would be more likely to save that $1000 lump sum, but fritter away those $100 payments. This is my reasoning: The thought of a whole $1000 going straight into my savings account at once excites me. It’s hard to save $1000, so that much of an increase in my savings account at one time would be awesome. The thought alone would encourage me to put it in the bank, because I know it would make a big difference. In regards to the monthly payments, if I received an extra $100 each month, it would almost seem to just be absorbed into the rest of my monthly income, and I’d have a hard time separating it out and saving it – therefore it would be more tempting to just spend it – which is not what I’d want to do with that extra money at this point in my life. Which actually leads me to my next thought: I think everything depends on where a person is at in their life – that determines what they might do with the money. For me, I want to save for my future –that’s where I’m at right now, so that’s really important to me. Because I don’t want or need a new $500 TV, or any other large expensive item, I get more pleasure from knowing that I’m saving money and building a good life for myself, rather than spending it on something big that I don’t really want or need at the moment.

        About the balance and happiness and maybe missing out on some good times when putting every penny in the bank: I agree with you that it’s good to have balance – and maybe for some people their happiness would come in the form of buying that $500 TV, or whatever other item they’d like. That’s cool. I just wouldn’t choose to do that right now. Again, it goes back to the fact that I’m currently in saving-mode. But don’t worry, I do still have fun. 🙂 That little bit of leftover I talked about would be where I’d have my fun – in the form of the small “treat” that I mentioned … shoes or dinner or whatever … as well as in other ways that don’t cost a whole lot, or are maybe even free (like a trip to the Botanical Gardens, the park, a museum, etc.) That sounds good to me. But everybody’s different, so they can choose to do whatever they want with the money. Am I getting too analytical about this? 🙂

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        • Great response. I think we have different approaches to this scenario, but your explanation definitely lets me see the flip side of the coin.

          I should run this experiment on the blog sometime. If only I had $1,000 to give away.

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  5. Also, I wonder how people’s instincts change as the money gets higher or lower. I mean, if we’re talking about $10 now or $12 over the course of the year, I’ll just take my money now. At the same time, $100,000 now (versus ($120,000 over the course of the year) is awfully tempting…I’d say I’d probably still stick with the latter, because even then you’re still getting $12,000 today.

    Reply

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