Psychic Costs vs. Monetary Costs

Daniel O'Connor  |  Integral Ventures, LLC

In a recent post on VentureBlog, Keven Laws discusses the importance of psychic costs--in contrast to monetary costs--in market exchange: 

Chris Anderson of Long Tail fame recently posed a question in a post on the economics of abundance: what happens when it costs almost nothing to produce and stock one more item?

One surprising result is that non-monetary costs dominate the transaction. Most of you are familiar with monetary costs - pay $0.99 to download a song from iTunes (or $0.10 from AllofMp3). However, as the monetary costs fall, the most important impediments to a transaction are non-monetary: search costs and psychic costs.

Some of you may have studied the concept of "search cost" in college economics. It is the cost of finding the item you need - often measured in time and effort, rather than money. When sorting through the list of all music ever released, it would take you forever to find that piece of music you'd actually enjoy. Even at $1 a CD, you'd probably buy nothing, because you'd give up long before finding anything you'd like.

Psychic costs are less well known and more difficult to measure. They are not the $3.99 a minute it costs to get your fortune read over the telephone - that cost is very monetary. No, psychic costs measure the stress of having to think about a transaction.

My take-away: In an increasingly-knowledge-based economy with decreasing marginal production costs and expanding consumer choice, such psychic costs, particularly search costs, are becoming all the more significant in people's market decision making.  We can well imagine the monetary costs to produce one additional unit of some informational good trending toward zero, while the psychic costs to choose from among the dizzying variety of such goods trending toward infinity.  Hence the growing importance of psychic costs.

See Also:

• Freedom's Tyranny?
• The Psychic Cost of Opportunity Lost
• Market Learning Costs
• The Neuroeconomics of Time
• The Neuroeconomics of Fairness
• The Neuroeconomics of Trust
• The Economics of Sharing
• Four Sides of the Same Coin

Comments

[Mike Linksvayer]

It isn't clear at all that search or psychic costs are increasing, let alone trending toward infinity. Take shopping at Amazon vs. a bricks and mortar bookstore. It's way easier to find what I want on Amazon and their huge inventory is no distraction. Actually doing the transaction is also far less stressful -- no driving, no dealing with cashiers.

Possibly non-monetary costs are getting relatively more important (clearly they must be doing so in cases where monetary costs are actually trending toward zero), but that's completely different from "I can't take all this choice, whaaaa!" (Not accusing you of the latter view.)

[Daniel O'Connor]

I think we agree on all the points you made. I would simply add that I think people's capacity to pay attention, concentrate, and learn from experience are the scarce resources in this emerging knowledge economy. These are some of those "psychic costs" that interest me.

[Geoff Fitch]

It seems like life used to be like this: you got up in the morning, realized you needed a hammer, then went out and got one. There were certain transaction costs associated with that. It seems more and more (in the information economy) it's like this: I spend my entire day expending effort *avoiding transactions* as my attention gets snaged throughout the day. Like, right now, whatever I was doing a few minutes ago, I am here writing this message (not getting my hammer.) A major tranaction cost seems to be these days something I would call filtering.

It's more the cost of maintaining attention on the transaction and has more to do with the background, more of a generalized overhead. It also seems to be the inverse of psychic costs associated with a transaction - it's so easy to do transactions now - that some amount of energy is required to avoid them.

[Daniel O'Connor]

Geoff,

Thanks for the thoughts and sorry for the delay in responding... been traveling.

I agree and I think that there has to be a way of incorporating into our treatment of psychic costs these counter-intuitive costs you describe. Careful framing of the choice and its associated transaction costs and opportunity cost seems like the place to start.

I am reminded of the movie Minority Report in which people are bombarded by personalized advertisements as they walk through a mall, having just passed through a retinal scan that identifies them so that a database can access their past purchases. "Hello Geoff... don't you think you should buy a back-up system for the computer you recently purchased?"

We're not too far from that sort of immersion in ad-space, such that the ability to concentrate and pay attention to what really matters becomes a very valuable mental capacity. The harder it is to do so, one might argue, the greater is the psychic cost of the choice one makes to concentrate on this exchange or that conversation. Then again, if you really do want that back-up system and appreciate the reminder, your psychic costs may be that much lower for that particular transaction, having expended little effort on search.

[ANNE]

HOW DO I CACULATE OPPORTUNITY LOST