Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Treats a Frequent Flyer Mile as Real Money
Transcript
- Lucas: So back in September 2023, Delta Air Lines announced a pretty aggressive devaluation of its SkyMiles program. Suddenly, a domestic round-trip that had cost 25,000 miles was 35,000. And the reaction was something you'd expect from a utility price hike, not a loyalty program change. Social media blew up, there were articles with headlines like 'Delta's Miles Are Now Worth Less Than a Penny.' Luna: I remember that. People were genuinely angry. But here's what's interesting—Delta could have just raised the cash price of those same tickets by forty bucks, and I bet the reaction would have been a fraction of that. Lucas: Exactly. And that's the behavioral economics puzzle for today. Why do we treat a mile—something with zero intrinsic value, created by an airline's accounting department—more preciously than actual cash? It's a perfect case study in the endowment effect and mental accounting. Luna: So the endowment effect is the idea that we value things more just because we own them. But I've never owned a mile the way I own a coffee mug. I can't touch it. Lucas: Right, but you have it in an account with your name on it. Richard Thaler, who won the Nobel for this stuff, showed that people mentally segregate assets into different buckets. Cash is in one bucket—fungible, easy to spend. Miles are in a 'rewards' bucket, and we treat that bucket as sacred. We assign a higher value to it because it feels like a prize we earned, not income. Luna: There's also the pain of paying. Drazen Prelec and George Loewenstein's research on credit cards showed that paying with cash hurts more than paying with a card. Miles take that to the extreme—you don't even feel the transaction. So when you lose miles to a devaluation, you feel the pain of a loss without ever having felt the pleasure of spending them. Lucas: That's a key insight. The devaluation makes you realize you had an asset you weren't tracking. And loss aversion kicks in—losing 10,000 miles of purchasing power feels worse than gaining 10,000 miles felt good. Delta essentially created a liability on people's balance sheets that they didn't know they had. Luna: Right. And there's a great study from the University of Chicago a few years back. They gave participants the choice between a $100 gift card to Amazon or a $100 balance in a fictional airline miles program. When asked to sell the gift card, people wanted about $85 in cash. But for the miles, they wanted $120. They literally valued miles more than face value. Lucas: Because miles feel like potential. An Amazon gift card—you know exactly what you're getting. You can buy a Kindle or some books. But a mile is a ticket to anywhere. The option value is huge, and our brains inflate it. That's why when Delta devalues, it's not just a price increase—it's the destruction of a fantasy. Luna: And Southwest Airlines actually handled this differently. Their points are tied to the dollar price of a ticket—roughly one cent per point. So devaluation is built into the system automatically when fares rise. But they rarely have those dramatic, announced devaluations. Their points feel more like cash, less like a lottery ticket. Lucas: Southwest's approach is smarter from a behavioral standpoint, because it avoids the 'announced loss' moment. Delta's devaluation was a huge endowment effect trigger. Suddenly, people realized their 100,000 miles wasn't a business-class ticket to Tokyo anymore—it was a domestic coach seat with a layover. That hurt. Luna: So if I'm a loyalty program manager, what do I take from this? Don't devalue dramatically, or do it like Southwest where it's invisible? Lucas: Essentially, yes. But there's another lesson: make the points feel less like property. Some programs expire points after a year of inactivity specifically to prevent the endowment effect from building up. They want you to spend them, not hoard them. Because hoarded points become a liability on their books as well as a psychological anchor for you. Luna: And the irony is, the more you hoard, the more painful the eventual devaluation. I've got friends who have hundreds of thousands of miles and never redeem them because they're waiting for the perfect trip. They're sitting on a time bomb of disappointment. Lucas: Exactly. So the behavioral fix is: spend your miles like cash. Don't get attached. But that's hard because our brains treat them as a trophy, not a tool. And honestly, if today's episode made you think about your own loyalty points differently—maybe even worth the price of a coffee to you? That's the link. It's buy me a coffee dot com slash fexingo. Small thing, but it keeps the show ad-free and lets us keep digging into these weird corners of decision-making. Luna: Yeah, it's a nice way to support the work. I'll throw in a coffee too. Lucas: Appreciate it. So back to the research. Another angle on this: the 'pain of paying' isn't just about the medium of exchange. Prelec and Loewenstein found that the pleasure of consumption and the pain of paying are simultaneous when you pay cash—you feel the loss as you get the benefit. But with miles, the pain is deferred until you earn them, and the pleasure of spending them is muted because you don't feel the cost. Luna: Which means the devaluation creates a double whammy. You feel the pain of losing miles without having gotten the pleasure of spending them. It's like paying for a meal you never ate. Lucas: Right. And that's why airlines love miles. They create a loyal customer base that is willing to pay more to earn them, and then they can pull the rug later. But the backlash from the Delta devaluation was so strong that they actually walked back some of the changes a few months later. They introduced a cap on how many miles you could redeem per flight, but they also said 'we hear you.' Luna: So the endowment effect is powerful enough to force a corporate reversal. That's not nothing. Lucas: It's rare. Usually loyalty program changes stick. But the visceral reaction—people felt robbed. And that word 'robbed' is telling. They didn't say 'Delta raised prices.' They said 'Delta stole my miles.' That's the language of property, not pricing. Luna: So to wrap up, the takeaway is: if you're a consumer, spend your points. Don't let them become a psychological hostage. And if you're a company, be careful about how you frame loyalty currency. Make it feel like cash, not like a lottery ticket. Lucas: And if you're a behavioral economist, it's a reminder that the endowment effect isn't just about mugs and pens. It applies to anything we feel we own—including digital points that can be changed with a stroke of a pen. That's a powerful thing to know about your own brain.