Note: This is Part 2 of a two-part article on the psychological effects of using point-based currencies like Microsoft Points or Nintendo Points. Part 1, which you can read by executing precision clicking acts here, dealt with the psychology of waste. Below, I’ll look at how research on anchoring and consumer behavior using foreign currency suggests other psychological factors at play.
In a way, buying things with Microsoft or Nintendo points feels like spending money in a foreign currency. Tourists have long noticed this “Monopoly money” effect where the unfamiliar bills and coins with funny little holes in them don’t seem as real as the currency back home. This has to do with the fact that they don’t usually put the mental effort into doing the conversion every time they buy something.
“Though travelers know the exchange rate, it’s too much trouble to do the math for every little purchase,” says William Poundstone, who writes about the psychology of spending in the book Priceless: The Myth of Fair Value.1 “There is thus a zone of uncertainly about how much you’re ‘really’ spending, and this makes it a little harder to feel so bad about splurging. By setting 80 points to the dollar, Microsoft intentionally makes it hard to do the mental conversion! They could just as well have made it 100 points to a dollar, or 1 point = $1.”2
This mental error also happens because people often pay more attention to the face value of the foreign currency (i.e., the number of Microsoft Points in this case) when estimating how much they spend. This is called “anchoring” in psychological parlance, and while I’ve discussed it before in the context of Steam sales I’ll repeat a quick illustration from one classic study by Kahneman and Tversky.3 In the experiment, the researchers asked some subjects to estimate this product:
Then they asked another group to estimate this product:
Look closely at both of those. Those of you who understand how multiplication works know that these products are equal –40,320 to be exact. Yet the average estimate for the group that was given the problem starting with “8″ was 2,250 while those who saw a “1″ at the beginning of the problem had an average estimate of just 512. Why? Because one group anchored on a high number and the other anchored on a low number. It turns out that anchoring can really screw with our estimations of everything from crime statistics to hardware failure rates to how much things cost in a foreign currency.
But you guys! Wait! At an exchange rate of about 80 points per 1 dollar, that means that anchoring on the number of Microsoft Points should lead us to feel that we’re spending more than we really are. Because while 1,200 points may equal $15, the 1,200 number is more salient and through the magic of anchoring its magnitude systematically nudges our estimations of cost upwards. Indeed, studies comparing spending where the exchange rate for foreign currency is a multiple of the dollar (e.g., 1 US dollar = 4 Malaysian ringgits) to exchanges where the currency is worth a fraction of the dollar (e.g., 1 US dollar = 0.4 Bahraini dinar) have shown underspending in the former and overspending in the latter.4 And if spending MS Points is like spending Malaysian ringgits in that 1 dollar gets you 80 points, Microsoft could actually be letting us off easier than they could if they gave you just .8 points for a dollar and charged 12 points for a new game. But shhhh! Don’t tell them!
So there you have it. Maybe you’ll be a little better informed next time you plunk down money for MS Points, Playstation Network funds, or Nintendo Points. Hey, if you really do want something and think it’s a good price by all means do what you need to do to buy it! Just consider everything above first.