Mental money laundering: how tainted money becomes clean again
New research explains how people use novel mental accounting techniques to live with ill-gotten gains
In economics, fungibility is the ability of a good or asset to be readily interchanged for another of like kind. Most people would assume that money is fungible, because it would seem odd to imagine differences in character in two identical dollar bills. This belief is generally true, but there are exceptions. For example, researchers have shown that people think differently about money gained through unethical activities. Specifically, people are more willing to give a more significant portion of ill-gotten sums to charity than they would regular, ethically earned income.
New research from Chicago Booth’s Alex Imas, Carnegie Mellon’s George Loewenstein, and Carey K. Morewedge of Boston University builds on previous findings about the mental classification of money to introduce the concept of mental money laundering. This psychological phenomenon occurs when an entity (person or company) passes unethically gained money through an ethical process and thus “mentally cleanses” it. For example, say you embezzled $1M from your employer. Mentally, you would have a negative connection between that money and its source. You might decide that you would feel better if you donated $250K to charity. This need to donate, say the researchers, could be avoided if you invested the $1M in a stock that appreciated in value. The gains from the price raise would “cleanse” the original ill-gotten gains, making the entire sum easier to accept.
As the authors note:
People spend money earned from ethical and unethical sources in different ways. Windfall gains received from questionable sources (e.g., tobacco companies) are more likely to be spent on utilitarian goods such as school supplies than on hedonic goods like ice cream. Money earned through deception or thievery is more likely to be spent on charitable giving than the equivalent amount earned through honest means—at least by those who are not naturally inclined toward these activities.
Interestingly, the negative association with the money is, in the researchers’ opinion, not guilt per se but a general association. In other words, ill-gotten money does not make anyone act more ethically — it just makes someone uneasy about the money itself. As the paper notes, “compensatory behavior is not driven by a general motive to assuage guilt but is specific to the money itself.” Rather, “it appears to be driven by negative associations between the money and its source.”
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