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).Consequently, it is more likely that those who receive a tax rebate will actually spend it soon if it is referred to as a "bonus" or "gift" rather than a "rebate." The only thing I don't understand about this is that if the term "rebate" implies earning money back that has already been spent, wouldn't someone be more likely to spend it again (since psychologically it's already spent, might as well blow the money)?
Yet another example of how economists should increasingly take psychology into account--in this case, "framing effects"--when crafting policies. The premise that individuals are all rational decision makers is slowly being overshadowed by the one that we are all victim to our own subconscious.
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