May 15, 2011 12:00 AM |

[Continuing his regular look at game-related psychology issues for GameSetWatch, Jamie Madigan looks at how points-based purchasing systems affect how we think about money.]

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 kind of virtual wallet. Then you spend the points on stuff. 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.

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. And what’s more, Microsoft may be missing a chance at getting us to pay more. Let’s take a closer look.

The Psychology of Waste Aversion

Leaving money on the table or in our Xbox Live account (or our Playstation Network account or our Wii Shop account) 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.” 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. Those costs aren't sunk.” 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For example, in one unpublished study researchers Lisa Bolton and Joseph Alba presented subjects with a scenario where a business traveler laid over in a city decided to buy a one-month gym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.

But there’s one final psychological phenomenon at play with Microsoft Points that I’d like to point out, and curiously enough it may actually be leading us to spend less instead of more.

Conversion Factors

In a way, buying things with 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 largely has to do with the fact that they don’t usually put the mental effort into doing the math.

“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. “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.”

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 I’ll repeat a quick illustration from one classic study by Kahneman and Tversky. In the experiment, the researchers asked some subjects to estimate this product:

8x7x6x5x4x3x2x1

Then they asked another group to estimate this product:

1x2x3x4x5x6x7x8

Those of you who know how multiplication works understand 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 rates 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. 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.



[Jamie Madigan examines the overlap of psychology and video games at PsychologyOfGames.com and for GamePro magazine. He can be reached at [email protected]]

REFERENCES

Arkes, H. (1996). The Psychology of Waste. Journal of Behavioral Decision Making, 9 213-224.

Bolton, L. & Alba, J. When Less is More: Consumer Aversion to Waste. Unpublished Manuscript Submitted for Publication.

Raghubir, P. & Srivastava, J. (2002). Effect of Face Value on Product Valuation in Foreign Currencies. Journal of Consumer Research, 29 335-347.

Tversky, A. & Kahneman, D. (1974). Judgment under Uncertainty: Heuristics and Biases. Science, 185, 1124-1131.