By Alex Yang

Imagine receiving $100 for your birthday. How would you decide to use it? Would you splurge on an extravagant meal, deposit it into a savings account, or put it towards monthly expenses? Behavioral economics suggests that you’re more likely to spend this money impulsively compared to money you earn through your salary.

This tendency is explained by a concept known as mental accounting, introduced by economist Richard Thaler. Mental accounting refers to the way individuals categorize and value financial transactions based on their source or intended use. Rather than viewing all money as fungible, people often divide it into mental “buckets”, such as expenses, savings, entertainment, or travel.

Sorting money into different mental accounts may seem like a sensible process, but mental accounting can drive individuals to make irrational, often arbitrary decisions. Take, for example, someone who maintains a savings account earning little to no interest while also carrying substantial credit card debt. Despite the high interest rates on credit cards, they may be reluctant to dip into their savings to alleviate their debt, ultimately reducing their net worth. Here, the money in savings is treated differently compared to the money used for repayment, despite the financial gains that may result from using the savings.

Thaler identifies three key components that form the basis for mental accounting, the first of which covers how individuals perceive outcomes. Thaler gives the example of his friend who went to buy a double-sized bedspread. The department store offered double, queen, and king-sized bedspreads priced at $200, $250, and $300, respectively, all discounted to $150 due to a sale. Although needing a double-sized bedspread, the woman ultimately chose to purchase the king-sized one, perceiving more value in the $150 discount than the $50 she would have otherwise “saved”. Her mental account weighed the deal more heavily than the fit or practicality of the item.

The second component involves how people assign finances. Expenditures are grouped into categories and assigned different mental accounts, with individuals placing more emphasis on some accounts than others. The earlier example of an individual juggling a savings account and a mountain of credit card debt illustrates this well. Having dedicated one portion of his funds to savings and another to repayment, this individual failed to recognize the financial benefits of using the savings to pay off his debt. A bias stemming from this is the windfall effect, or the tendency to spend unexpected income more impulsively. Case in point: Tax returns. Individuals often treat tax returns as “found money”, or funds that don’t fit into their financial plans, and spend them lavishly. Despite the fact that tax returns represent overpaid money returned to the taxpayer, many individuals treat the funds as disposable income, spending them on entertainment or travel instead of allocating them thoughtfully as they would regular income.

Additionally, mental accounting involves choice bracketing – how frequently people evaluate their mental accounts. These accounts can be assessed daily, weekly, or yearly, and can be defined narrowly or broadly. The scope at which an account is balanced can provide substantially different anchor points and significantly influence decisions. For instance, a college student buying a cup of coffee every day may consider the $5 spent per day as a negligible purchase. However, considering their yearly $1825 expense and thousands of extra calories consumed, the consequences are no longer so insignificant. 

Another important aspect of mental accounting is the pain of paying, which refers to the emotional responses associated with spending money. This pain varies depending on the timing and method of payment. For example, using cash tends to produce more psychological discomfort than swiping a credit card or using a digital wallet, which feels more abstract and less immediate. Additionally, many consumers experience less pain when a payment is separated from the moment of consumption, such as preordering an expensive product, making the item feel “free” when it is received. Similarly, subscription services reduce the pain of paying, as the cost is mentally written off after the initial payment, hiding any subsequent payments and undermining the true cost of the service. These dynamics highlight how mental accounting can influence not only what we buy, but how we feel when we buy it.

While mental accounting offers a useful lens for observing our everyday financial decisions, it may also distort perceptions and override logical decision-making. Understanding mental accounting is imperative to combating consumer biases and leads to a more rational approach to weighing financial decisions.  

By Shalin Bhatia

In the United States, health disparities contribute significantly to economic inequality and mortality rates. According to the Centers for Disease Control and Prevention, low socioeconomic status is positively correlated with an increased risk of developing and dying from cardiovascular diseases. The correlation exists in terms of mental health, too; low levels of household income per capita, as well as parental education, are directly associated with increased mental health problems in children and adolescents. The connection between low-income levels and greater health problems is deeply rooted in systemic social inequalities, often perpetuated by the privileges or disadvantages assigned to different communities.

Social inequality manifests in numerous forms, including stark differences in living conditions. Neighborhoods facing higher poverty rates often lack access to nutritious food, clean water, adequate healthcare, and safe living environments. These factors increase the likelihood of illness as well as reduce overall life expectancy. Consequently, people living in underprivileged areas face a disproportionate burden of diseases like diabetes, asthma, and hypertension. The health problems exacerbated by these living conditions not only lead to premature deaths but also hinder economic productivity. Those who are frequently ill or have family members needing constant care are often unable to work consistently, which reduces their lifetime earnings and limits economic mobility.

Thus, health disparities are not only devastating for individuals but also contribute to major economic losses on a national scale. When people in lower-income communities experience poorer health outcomes, their communities collectively face both economic hardship and social decline. Additionally, the country as a whole suffers due to reduced workforce productivity, which directly impacts GDP growth and financial stability. Without addressing these disparities, the status quo remains dire, as inequality in health and economics is interwoven with residential segregation and geographic disadvantage. Living conditions determine access to healthcare, the lack of which frequently leads to early mortality and economic hardship.

Health technologies offer a promising solution to these deeply ingrained problems. These technologies are expanding rapidly, providing innovative ways to increase healthcare access across socioeconomically diverse populations. From telemedicine to mobile health clinics, these technologies reduce barriers to care and help bridge the gaps caused by social inequalities and gentrification. By improving access to healthcare services in underserved communities, health technologies mitigate some of the harmful effects of unequal living conditions. As a result, despite currently holding low adoption rates among lower-income populations, health technologies hold the potential to not only improve individual health outcomes but also protect the United States from further economic downturns associated with health disparities.

Sources

https://doi.org/10.1371/journal.pone.0213700

www.cdc.gov/dhdsp/health_equity/socioeconomic.htm

https://www.cdc.gov/dhdsp/health_equity/neighborhood.htm

https://www.who.int/europe/news-room/fact-sheets/item/health-technologies

https://pmc.ncbi.nlm.nih.gov/articles/PMC6589829/#:~:text=Mobile%20health%20(mHealth)%20technologies%20could,elderly%2C%20and%20populations%20with%20disabilities.

By Ava Karthikeyan

Introduction 

When Charli XCX’s “Brat” became the defining album of the summer, the popularity of other similar fast-paced electronic music rose alongside it. Albums such as Chappell Roan’s “Rise and Fall of a Midwest Princess” and singles by Katy Perry and Kesha signified a shift towards upbeat dance music.  

Characterized by electronic beats in rapid succession and lyrics about partying and letting go, the genre has been dubbed “recession pop.” The term itself isn’t new, finding its popularity during the 2008 recession when Pitbull and Kesha dominated radio waves. Songs such as Rhianna’s “Don’t Stop the Music” and Lady Gaga’s “Just Dance” glamorized clubbing and liberation through dance. Now, Charli XCX’s “Brat” reflects this culture with music rife with recreational drugs, letting go, and partying. However, something is interesting about this recent resurgence: Brat’s popularity didn’t coincide with a recession.  

History 

Although the term “recession pop” was coined during the 2008 recession, the notion behind this concept can be seen in earlier recessions throughout the 20^th century, namely through the creation and popularization of disco and house music. During times of economic crisis, upbeat and danceable music becomes a popular form of catharsis. 

 The economic recession from 1973-1975 saw unemployment rise to 9%, and its effects continued to be felt until the 1980s. This time coincides with the rise of disco, a genre that mixes funk and jazz with upbeat syncopation and carefree lyrics. Americans found escape in Disco, and its underground scene became a place to find community.  

Similarly, the 1980s saw two recessions from 1980-1982 – made worse by policies meant to aid inflation and the energy crisis from the Iranian revolution –  and unemployment soared to 10.8%. House music, one of the earliest forms of electronic dance music, emerged, again featuring uninhibited lyrics and rapid tempos.  

The 2008 and 2020 recessions also featured faster music than times of economic expansion, with the BBC stating that “The average tempo of 2020’s top 20 best-selling songs is a pulse-quickening 122 beats per minute. That’s the highest it’s been since 2009.” 

Implications

Cultural factors have always reflected economic trends in fashion or media consumption. During difficult times, music becomes a form of escape.  

However, this recent resurgence of recession pop indicates that this correlation isn’t an entirely accurate picture of the state of the economy. Despite widespread worries, wages have increased for many people, and Americans are on average wealthier. 

This emergence of recession pop is instead a reflection of the undercurrents of economic uncertainty within the general population. While we technically may not be in an economic recession, Americans are still feeling the lasting impacts of COVID-19 inflation and layoffs. It’s not just negative economic indicators that affect the general mood of Americans; Media headlines have become more pessimistic as the financial press doom-washes the workplace. Although the job market has drastically improved, with over 254,000 jobs added in September and inflation decreasing in recent months, Americans still perceive the economy as doing poorly. According to a Harvard poll, 63% of voters in September believed the economy was on the wrong track, with 62% describing it as weak. 

There is a disconnect between consumer sentiment and economic data. The emergence of trends such as recession pop, instead of reflecting the realities of the economy, can also express current cultural opinion. But it also is a reminder that even in times of uncertainty, people seek joy, freedom, and connection through artistic expression. 

Sources
https://www.cnbc.com/2024/07/21/recession-pop-explained-how-music-collides-with-
Economic-trends.html

https://www.econlib.org/archives/2014/03/unemployment_wa.html

https://www.brookings.edu/articles/what-irans-1979-revolution-meant-for-us-and-global-oil-markets/

https://www.federalreservehistory.org/essays/recession-of-1981-82#:~:text=Both%20the%201980%20and%201981,known%20as%20the%20Phillips%20Curve.

https://www.bbc.com/news/entertainment-arts-53167325

https://www.cnn.com/2024/10/09/business/economy-voters-election-data/index.html

https://www.cnn.com/2024/10/04/economy/us-jobs-report-september-final/index.html

https://www.conference-board.org/topics/consumer-confidence

By Dhanesh Amin

In today’s economy, consumers face a seemingly endless array of choices. Each of us makes about 35,000 decisions daily. These range from simple choices, like what to eat for breakfast, to complex ones involving relationships, finances, or work. However, due to limited time and energy, many decisions go completely unexamined, and consumers often rely on a preselected default.

Consider an auto-renewing Netflix subscription, automatic retirement plan contributions, or a default web browser. These are all passive selections made simply by using a service or product. Whether consciously or not, consumers make choices merely by allowing the defaults to stand.

In the early 2000s, behavioral economists Richard Thaler and Cass Sunstein popularized the concepts of “nudges” and “choice architecture” to describe how thoughtfully set defaults can encourage certain decisions without limiting personal freedom. This idea rests on people’s preference for simplicity and stability. By eliminating the need for extensive comparisons and deliberation, defaults help conserve valuable resources like time, energy, and even money.

A key principle behind defaults is loss aversion, which suggests that people feel the pain of loss more strongly than the pleasure of gain. Changing from the default can feel risky, creating uncertainty and discomfort that discourages deviation from established norms. This natural tendency stacks the odds in favor of the default.

Choice architects often design defaults that align with beneficial choices for the average person, reducing mental strain and simplifying decisions. While some view defaults as a form of manipulation, they can lead to positive outcomes for individuals and society alike. For instance, companies like Verizon and Boston Consulting Group use an “opt-out” system for retirement savings. Employees are automatically enrolled in a retirement plan at a pre-set contribution rate unless they actively choose not to participate. Contributions are deducted from each paycheck, and although employees can change their contribution rate or opt out at any time, most stay with the default. As a result, many employees end up accumulating substantial amounts they might not have otherwise saved.

Despite these benefits, defaults have also drawn criticism for potential misuse. Some companies and industries set up defaults that favor them and disadvantage consumers. Examples include automatically renewing subscription services that consumers forget about, suboptimal healthcare plans with unnecessary testing, and lax data privacy agreements that sell user data. In these cases, companies sometimes rely on “sludge” — barriers that make opting out or adjusting settings difficult to bypass consumer suspicion. Consumers are often hesitant to read pages of contracts just to receive a service, and many companies rely on this oversight. These hurdles may involve navigating lengthy customer service calls or complex web forms, making it nearly impossible for users to break free from unwanted commitments.  

On Oct. 16, 2024, the Federal Trade Commission announced a final “Click-to-Cancel” Rule making it easier for consumers to end recurring subscriptions and memberships. This new legislation will require sellers to make it as easy for consumers to cancel their enrollment as it was for them to sign up. For consumers, this means greater control over their subscriptions and fewer instances of being charged for services they no longer wish to use.

Defaults, while undeniably effective in shaping consumer behavior, can be a double-edged sword. When used ethically, they simplify decision-making and promote beneficial outcomes like increased savings or improved health. However, when leveraged for profit or manipulation, defaults can trap consumers in unwanted subscriptions or suboptimal choices. 

Ultimately, the key lies in the responsible use of defaults; companies and policymakers must balance the convenience of defaults with transparency and fairness, ensuring that the power of choice remains firmly in the hands of individuals.