Ever bought something from Xbox Live Arcade? The first time you may have been a bit bamboozled by the process because Microsoft doesn’t just let you put $15 on your credit card to buy a new game; purchases are done in “Microsoft Points” that you deposit into a virtual wallet. Then you spend the points on stuff.¹

Gamers possessed of equal parts suspicion and curiosity may wonder why our gaming overlords adopted such a strange system instead of just letting us pay real money for our purchases. Sure, it lets parents put finite funds in kids’ accounts and lets you buy points on gift cards, but are there psychological factors at play with these kinds of point-based systems that affect how we spend our money? I’m glad you asked, because yes there are. Let’s take a closer look.

Wait, I think I'm going to have some points left over in my account...

Leaving money on the table or in our Xbox Live account² makes most of us a bit uncomfortable because it feels wasteful. Hal Arkes, who pioneered the study of the psychology of waste, theorized that this is a holdover from what’s called “the sunk cost effect.”³ This is when not losing unrecoverable money you’ve already sunk into a losing proposition becomes the main justification for throwing new money in.

But at this point the more clever among you may be thinking “But that doesn’t really apply to unspent Microsoft Points and their ilk because they can be spent whenever you want. They’re not sunk; they’re still fungible.”⁴ True. But ingrained habits (or in this case, decision-making biases) die hard, and we are averse to, as Arkes says, “insufficiently utilize the item that has been purchased.”

For example, in one unpublished study⁵ researchers Lisa Bolton and Joseph Alba presented subjects with a scenario where a business traveler laid over in a city decided to buy a one-month gym membership for $75 and enjoy a workout, even though he was only able to use it one night. Relative to the man in another scenario who paid $75 to get an equal amount of enjoyment out of a baseball game, people saw this traveler as “less intelligent,” “foolish” and “less sensible.” This despite the fact that the two people enjoyed their evening equally for the same cost.

So, following this logic, we see that gamers may dislike leaving money sitting in an account because it represents waste, especially if you’re considering spending real money on a disk based game. So you’re a little more likely to get rid of those 400 Microsoft Points by buying something on sale that you normally wouldn’t, or even by buying an additional 800 points so you can pick up another full digital game that you might not have been interested in otherwise. It’s similar to overeating at a buffet or doubling your paper towel use after buying the 124 roll jumbo pack. Even though you could just let those paper towels or Nintendo Points sit there until you have a good reason to use them, spending real money on something else seems wasteful.

So there’s waste aversion. But there’s one other psychological phenomenon at play with Microsoft Points (and their ilk) that I’d like to point out, and curiously enough it may actually be leading us to spend less instead of more. For more on that, come back next week for Part 2. BAHM-BAM-BAAAAA!

1. And Microsoft isn’t the only one –Sony and Nintendo have similar systems, and Valve has even rolled out a “Steam Wallet” for in-game microtransactions.
2. Or our Playstation Network account or our Nintendo Points account for that matter.
3. Arkes, H. (1996). The Psychology of Waste. Journal of Behavioral Decision Making, 9 213-224.
4. Fungible: dictionary.com Word of the Day April 14th, 2008.
5. Bolton, L. & Alba, J. When Less is More: Consumer Aversion to Waste. Unpublished Manuscript Submitted for Publication.

Weeks later when Game A is released, you consider whether to trek down to the store and pay the balance on your pre-order. The thing is, you’ve heard nothing but bad word of mouth and scathing reviews about the game, with one of your favorite podcasts going so far as to say that the developers should be held subject to Megan’s Law. On top of that, you’ve got a lot of other unfinished games in your backlog that you’d frankly rather spend more time with. But, thinking of that $10 nonrefundable deposit you already put down on the game, you decide to pay another $50 to do something you don’t really want to do.

What? Why? Why would you do that?

The answer is a phenomenon that psychologists, economists, and other raving lunatics call “sunk costs,” and the situation described above is a “sunk cost dilemma.”¹ Sunk costs are past expenses that can’t be recovered, like a $10 non-refundable, non transferable pre-order deposit. In a purely rational, economic model of decision-making sunk costs should not factor at all into any future decisions, like whether or not to pay the balance owed on Game A when it’s released. The money is spent, no matter what, so it’s moot.

But that’s not how people’s brains are wired. Most of us would say, “No way! I’ve put $10 towards that game and I don’t want to just lose it!”² But playing that pre-ordered game has no value to you, you’re just going to be throwing good money after bad. This is even more irrational when we could put remaining funds towards something else that actually has value to us, like another game that isn’t terrible.

Besides helping them plan inventory and the ability to invest that $10 you gave them, this is the big reason why retailers want you to pre-order games and will give away freebies to get you to do it: you’re as good as locked in for another $40 to $50 even if advance word on the game says it’s a bomb. Most people can’t help but honor those sunk costs even when they’ve got better things to do with their money.

And you want to know the really insidious thing? Sunk costs continue to dog us even when we’ve put the pound in after the penny. Ever feel compelled to see a game through to its completion or spend some more time with it even though you’re not enjoying it but you feel like you have to justify spending money on it? That’s totally sunk costs at work on you again. But you keep playing because you figure it’s not THAT bad. Robyn M. Dawes even describes in his book Rational Choice in an Irrational World³ how this is pretty much the same logic that a heroin addict would use to avoid treatment before reaching rock bottom. Yeah. Think about THAT.

1. Arkes, H. R. and Blumer, C. (1985). The psychology of sunk costs. Organizational Behavior and Human Performance, 35, 129-140
2. This also ties into another phenomenon called “loss aversion” but I’ll talk about that elsewhere
3. Dawes, Robyn M. (1988). Rational Choice in an Irrational World, Harcourt Brace Jovanovich.