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Rebate Psychology - New York Times
10/27/10 11:00 PM
January 31, 2008
OP-ED CONTRIBUTOR
Rebate Psychology
By NICHOLAS EPLEY
Chicago
THE House of Representatives passed a bill on Tuesday that would try to stimulate the economy,
in part, by sending “tax rebates” to more than 100 million families. The logic of a tax rebate is
that people will spend more money if they have more to spend. Unfortunately, psychology may
interfere with that logic.
Research on decision-making demonstrates that describing a financial windfall as a “rebate” —
instead of something equally accurate — increases the likelihood that people will save it. If
Congress and President Bush want to increase consumer spending, they should have pitched
these $600 and $1,200 checks as “tax bonuses” instead.
Changing the way that identical income is described can significantly affect how people spend it.
In an experiment I conducted at Harvard with my colleagues Dennis Mak and Lorraine Chen
Idson, participants were given a $50 check. They were told that this money came from a faculty
member’s research budget, financed indirectly through tuition dollars. Roughly half of the
participants had this money described as a “rebate,” whereas the others had it described as a
“bonus.” When unexpectedly contacted one week later, participants who got a “rebate” reported
spending less than half of what those who got a “bonus” reported spending ($9.55 versus $22.04,
respectively).
We observed this same pattern in other experiments when participants were asked to keep a
written record of their spending, as well as in experiments in which the participants were allowed
to purchase items in the lab. “Rebates” are understood to be returns from money already spent. A
rebate, psychologically speaking, is the return of a loss of one’s own money rather than a pure
gain provided by someone else, so it is unlikely to be seen as extra spending money.
Getting a rebate is more like being reimbursed for travel expenses than like getting a year-end
bonus. Reimbursements send people on trips to the bank. Bonuses send people on trips to the
Bahamas.
http://www.nytimes.com/2008/01/31/opinion/31epley.html?pagewanted=print
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Rebate Psychology - New York Times
10/27/10 11:00 PM
This is more than merely a matter of political spin. Decisions depend very heavily on how
people’s options are described.
People are more willing to treat 600 people infected with a deadly virus when they are told the
treatment will save 200 of those lives, than when they are told that it will kill 400 of them. People
are more likely to donate to a charity when the cost is described in terms of pennies per day
instead of dollars per year. And more people say they could live on 80 percent of their income
than say that they could save 20 percent of their income.
Descriptions are the psychological equivalent of a camera lens. Psychologists use the term
“framing effects” to describe their influence. An investment banker who is delighted by saving $5
on a pair of shoes but disgusted by receiving $1,000 for a year-end bonus has experienced the
power of framing effects.
If the current proposal for tax rebates sounds familiar, it’s because we have indeed been here
before. In 2001, Congress and President Bush returned $38 billion to taxpayers in the form of
$300 to $600 tax rebates, with the hope that Americans would stimulate the economy by
spending them. But research conducted by two University of Michigan economists, Matthew
Shapiro and Joel Slemrod, found that only 28 percent of the people in a national survey reported
that they spent most of their rebate checks soon after receiving them. In a country where the
personal savings rate has become negative by some accounts, people seem remarkably able to
save at the very time their government needs them to spend.
In another experiment my colleagues and I conducted, taxpayers asked to recall the 2001 tax
rebate reported that it seemed more like “extra income” when researchers described it as a tax
bonus but more like “returned income” when it was described as a tax rebate.
This is exactly the kind of difference in perceptions that would increase spending of bonuses
relative to rebates. Describing the checks as rebates highlights that this is simply one’s own
money being returned. A bonus, however, is extra cash to be spent.
Under the House plan, the checks that would arrive in people’s mailboxes would go to those who
pay the least income taxes, or even pay no income tax at all. Saying the checks are bonuses — or
anything else that would call to mind thoughts of receiving a gift rather than getting a
reimbursement — may not only be a more effective description for this stimulus package, but it
may also be more accurate.
A hamburger can be described as 10 percent fat, but you had better call it 90 percent lean if you
want your dinner guests to eat it. Politicians are thought to be expert spin doctors, able to choose
the right words to fit any occasion, but they do not seem to be paying attention to how to sell the
http://www.nytimes.com/2008/01/31/opinion/31epley.html?pagewanted=print
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Rebate Psychology - New York Times
10/27/10 11:00 PM
stimulus package so that consumers spend with patriotic abandon.
Nicholas Epley is a professor of behavioral science at the University of Chicago Graduate School
of Business.
Copyright 2008 The New York Times Company
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