Notes from the lab


THE PSYCHOLOGY OF MONEY

People's complex attitudes toward money often defy economic theory. So says Drazen Prelec, associate professor of management science at MIT's Sloan School of Management.

Professor Prelec's studies of consumer behavior focus on the irrationalities people exhibit toward money -- why they buy lottery tickets and insurance at the same time, for instance. Although his work is designed primarily to help firms understand how pricing and payment systems affect consumer buying decisions, his findings offer a glimpse into our own complex relationships with money.

Professor Prelec said our spending habits are based on an accumulation of rules, like "I never buy high-priced gourmet foods." Those rules, he says, keep us out of financial trouble, and we suffer a sting of guilt whenever we break one. But he added that companies could do more to lessen the sting -- by adopting bundled pricing schemes or "flat-rate" arrangements.

"When items in a bundle are not priced separately, then no individual item is 'responsible' for the cost; hence, it feels free," he said. "And that provides a genuine mental benefit. An ideal pricing system should minimize the psychological burden of payment but should also allow for a correct accounting of costs. The paradox is that the consumer wants to know how much everything costs but does not want to unduly have to think about these costs." His work is sponsored by the NSF.

ANCIENT NILE PROVIDES CLUES TO EL NI������O

Hydrologists at MIT used records of the Nile River's height to put recent occurrences of El Ni�o into historical perspective.

Elfatih Eltahir, associate professor of civil and environmental engineering, and graduate student Guilang Wang compared records of the Nile River -- which indicate years of flooding or drought -- with records of the temperature of the Pacific Ocean -- which indicate El Ni�o years -- from 1872 to 1997. They found that 30 percent of the natural variability in the Nile's water level fluctuations could be linked to El Ni�o. Based on that information, they analyzed ancient records (kept since 622 AD and measured with a simple gauge, the nilometer) of Nile water levels for the past 1,000 years.

Using the Nile's height as an indicator of El Ni�o years, Professor Eltahir and Mr. Wang determined that El Ni�o has occurred more often and with longer duration in the past two decades than in most similar periods during the last millenium. Continuation of this trend for a few more decades would indicate a shift in global climate, but Professor Eltahir cannot say whether that shift is the consequence of human activity.

This research, funded by NSF, NASA and the Alliance for Global Sustainability, was published in the February 15 issue of Geophysical Research Letters.

A version of this
article appeared in the
April 14, 1999

issue of MIT Tech Talk (Volume
43, Number
26).


Topics: Earth and atmospheric sciences, Economics

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