Bottom-Dollar Effect - The Decision Lab

Why do we transfer negative emotions about being broke on items that we purchase?

The Bottom-Dollar Effect, explained.BiasWhere this bias occursWhere this bias occursIndividual effectsSystemic effectsWhy it happensWhy it is importantHow to avoid itHow it all startedExample 1Example 2SummaryWhere this bias occursIndividual effectsSystemic effectsWhy it happensWhy it is importantHow to avoid itHow it all startedExample 1Example 2Summary

What is the Bottom-Dollar Effect?

The bottom dollar effect describes our tendency to dislike products and services that exhaust our remaining budget. We are less satisfied with our purchases if they cause a strain on our finances.

Where this bias occurs

The bottom dollar effect occurs for purchases that deplete our remaining budget. That can be for any purchase made near the end of our paycheque funds but can also occur when a purchase diminishes our allocated budget for a particular type of activity or product.

For example, imagine that you budget $150 a month for dinners out at restaurants. It is near the end of the month, and you have $40 left in that budget, so you decide to go out for dinner with friends. Your group decides to go to one of your favorite restaurants and you spend the remainder of your budget on a menu item that you usually love. Yet, at the end of the dinner, you feel less satisfied with the meal than you normally do, even though the food was the same. Your negative experience is caused because the dinner, in your mind, ends up representing the last of these positive experiences for the month. Your negative emotions associated with running out of money are transferred onto the experience itself, which is known as the bottom dollar effect.

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Sources

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1. Tharp, D. (2017, January 23). The Bottom Dollar Effect And The Behavioral Advantage Of AUM Pricing Over Retainers. Kitces. https://www.kitces.com/blog/bottom-dollar-effect-and-behavioral-finance-bias-for-aum-over-retainer-fees
2. Soster, R. (2014, June 16). ‘Bottom-dollar effect’ makes shoppers blue. Interview by C. Kissel. Bankrate. https://www.bankrate.com/finance/smart-spending/bottom-dollar-effect-makes-shoppers-blue.aspx
3. Coglode. (2020, September 1). Bottom Dollar Effect. https://www.coglode.com/gem/bottom-dollar-effect
4. Soster, R. L., Gershoff, A. D., & Bearden, W. O. (2014). The bottom dollar effect: The influence of spending to zero on pain of payment and satisfaction. Journal of Consumer Research, 41(3), 656-677. https://doi.org/10.1086/677223

About the Authors

Dan Pilat

Dan is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. Dan has a background in organizational decision making, with a BComm in Decision & Information Systems from McGill University. He has worked on enterprise-level behavioral architecture at TD Securities and BMO Capital Markets, where he advised management on the implementation of systems processing billions of dollars per week. Driven by an appetite for the latest in technology, Dan created a course on business intelligence and lectured at McGill University, and has applied behavioral science to topics such as augmented and virtual reality.

Dr. Sekoul Krastev

Dr. Sekoul Krastev is a decision scientist and Co-Founder of The Decision Lab, one of the world's leading behavioral science consultancies. His team works with large organizations—Fortune 500 companies, governments, foundations and supernationals—to apply behavioral science and decision theory for social good. He holds a PhD in neuroscience from McGill University and is currently a visiting scholar at NYU. His work has been featured in academic journals as well as in The New York Times, Forbes, and Bloomberg. He is also the author of Intention (Wiley, 2024), a bestselling book on the science of human agency. Before founding The Decision Lab, he worked at the Boston Consulting Group and Google.

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