Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / The Peak-End Rule and How You Remember Your Spending
Transcript
- Lucas: So we've hit episode one hundred fifty. And I thought for this one we should tackle something that explains why you might remember a vacation as amazing even though it rained for four days straight. Luna: Oh, I need this. I got back from a trip last month and the flight was delayed, the hotel had a weird smell, but somehow I'm still telling everyone it was the best week ever. Lucas: Exactly. That's the peak-end rule at work. It was first documented by Daniel Kahneman and his colleagues in the nineties. The idea is that when you recall an experience, you don't average all the moments together. Your brain keys in on the most intense moment, the peak, and the final moment, the end. Everything else gets compressed. Luna: So my one perfect sunset dinner and the fact that the last day was sunny completely outweigh the three days of drizzle and the broken air conditioning? Lucas: Precisely. And it's not just about vacations. Kahneman's cold-pressor experiment is the classic demonstration. Participants held their hand in painfully cold water. In one trial, it was fourteen degrees Celsius for sixty seconds. In another, it was the same sixty seconds, plus an extra thirty seconds where the water warmed slightly to fifteen degrees. Still uncomfortable, but less so. When asked which they'd repeat, a majority chose the longer trial, because the ending was less painful. Luna: That's wild. The longer experience with more total discomfort was preferred, just because it ended better. Our memories really are edited highlights. Lucas: Right. And this has huge implications for how we think about spending. Because we don't actually make decisions based on the moment-by-moment experience. We make them based on our memory of that experience. So if a restaurant gives you a mediocre meal but a spectacular dessert, you'll remember it as great and go back. If the bank's app makes transferring money a chore but the final confirmation screen is a beautiful animation, you'll feel better about the bank. Luna: I've definitely forgiven a clunky checkout process because the thank-you page had a little confetti animation. It's silly but it works. Lucas: And companies know this. Take the way some hotels present the bill. They might include a complimentary bottle of wine on the last night, or they leave a handwritten note at checkout. That's engineering the end of your stay to be positive, so you'll leave with a glow even if the Wi-Fi was spotty all week. Luna: But does this actually change what we're willing to pay? Like, if I remember a trip as great, am I really going to spend more next time? Lucas: Studies say yes. Researchers have found that when people are asked to recall a past experience and then state how much they'd pay for a similar one, the peak and end moments predict that number far better than the average experience. So your memory isn't just a fuzzy record. It's the basis for future economic choices. Luna: So a company that delivers a strong ending can charge a premium next time, even if the quality dipped in the middle. That's a little manipulative. Lucas: It can be, but it's also how we're wired. And being aware of it helps. For example, when you're evaluating a subscription service, ask yourself: am I judging the whole month, or just the one great feature I used on day one and the smooth cancellation process? Those are the peaks and the ends. Luna: That's a good lens. I actually think about this with my gym membership. The classes are great, but the locker room is always a mess. I keep staying because I love the end of class stretch and the high-five from the instructor. Lucas: There you go. And the flip side is that we also forget the pain of paying. That's related to something called the rosy view. When we look back at a purchase, we tend to focus on the benefits and gloss over the cost. That's why a car that constantly needed repairs can still be remembered fondly if the road trips were fun. Luna: So five years from now, I'll probably remember this podcast as brilliant because we're ending on a high note. Speaking of which, we should mention that it's episode one fifty. And if you've been getting value from these conversations, a couple of dollars a month genuinely helps keep the show ad-free. You can find us at buy me a coffee dot com slash fexingo. It's a small thing, but it makes a real difference for us. Lucas: Thanks for that, Luna. And it's true. We've been at this for a while, and listener support is what keeps the lights on, so to speak. But let's get back to the science. Because there's another layer here that's really relevant to anyone investing. Luna: Oh, how so? Lucas: Think about how you remember a stock's performance. If you check your portfolio and see a big jump at the end of the quarter, you might feel great, even if the overall return for the year is middling. The peak of that last week and the end of quarter statement color your entire perception. That can lead to overconfidence or, conversely, panic selling if the last week was terrible. Luna: So our investment decisions are based on edited memories of performance, not the actual data. That's scary. Lucas: It is. And it's why financial advisors often tell clients to avoid checking their accounts too frequently. If you look at your portfolio every day, you're constantly exposed to random peaks and ends, which can skew your risk tolerance. But if you look once a year, you get a more balanced picture. Luna: That makes sense. I've definitely felt that rush when a stock I own hits a new high, and then I'm disappointed when it drops a little, even if it's still up overall. Lucas: Right. And there's a whole industry built around engineering positive peaks and ends for consumers. Think about how a streaming service ends a binge session with a countdown to the next episode. That cliffhanger is a peak, and it's designed to make you feel like you need to continue, which affects how you remember the whole experience. Luna: And how you justify the subscription fee, I guess. 'I watch it every night, so it's worth it.' But really you're just addicted to those cliffhangers. Lucas: Exactly. So as we celebrate one hundred fifty episodes, maybe the takeaway is to be mindful of your own peaks and ends. When you're about to make a big purchase or evaluate a service, ask yourself: is my memory of this being great based on the whole experience, or just a few highlights? Luna: That's a great note to end on. But before we go, I have to ask: what's a peak-end moment for you from the last five years of doing this show? Lucas: Honestly, it's moments like this conversation. The deep dives where we nail a concept and I see it click for you. That's a peak. And as for the end, well, we're ending this episode with a question for our listeners: what's one spending memory you have that's probably skewed by this rule? We'd love to hear about it.