Adventures in Behavioral Finance, Points Edition

I had an interesting discussion yesterday with Bill Sweet, our CFO. Given my interest in all things behavioral economics, it is worth sharing.

As a bit of background, Bill is a matter of fact, data-focused accountant who cares little for the narrative story (my kinda guy). You can imagine how he gravitated towards the sorts of evidence-based investment analyses I favor. (See this or this, for issues Bill has written on).

Oh, and he is a retired Army Captain who served in Iraq (no joke).

We were discussing options for corporate travel, and the most efficient way to use cards that offer high-point rewards (e.g., American Express Platinum or Chase Sapphire Reserve) versus the cards that offer cash back.[i]

Unsurprisingly, Bill favors the cards that return 1% of your purchases back to you in cash or via a discount on specific purchases (e.g., 5% off of gasoline purchases, 3% off of supermarket). Discover is probably the best known example, but BofA, Citi, Wells, Amex, have similar programs.

Surprisingly, my preference is the irrational one: even though I intellectually understand that all cash is fungible, and that dollars back are much more flexible than the restrictions placed on points, I prefer them (for personal cards). Despite the limitations, I have learned to enjoy accumulating points on either Amex or Sapphire Reserve cards.

Bill’s approach is rational, but uninspiring; mine is utterly irrational but also more fun.

Irrational, but true. At the risk of Richard Thaler[ii] disinheriting me, here is my rationale for the choice:

Spending points provides any consumer with an opportunity to act as irrationally or even irresponsibly as they like, without the fear of negative consequences. (Spending recklessly on credit cards to accumulate points is idiotic; that is not what we are discussing here). I also am deeply aware of the advantages of purchasing experiences as opposed to the usual materialistic consumer stuff.

I see it not as a lost 1%, an amount I do not imagine I was likely to have noticed either way. Instead, it is an unexpected windfall, providing an excuse to do some things and make some purchases you might not have done on your own, but wanted to.

Example: Prior to switching from Amex to Sapphire Reserve as the premium card, I had accumulated a decent sum of Amex reward points (you have to use them before you close the account or you lose them).

Playing with the rewards website, it is easy to notice most of the deals are not especially great. Using points to pay charges is your worst deal. Getting Amex gift cards was the next worst deal. Most of the shopping sites were about a penny a point, so you need 100,000 points for $1,000. ($100 gift card cost 10,000 points). Some rewards were better, some worse, but they all fell within a similar range.

Except one.

At the time, and for reasons I have yet to deduce, the points at Restoration Hardware were far more generous (that program has since ended). We had been at the RH townhouse HQ in Chicago, and picked out various bedroom pieces that were lovely, but really, were far too expensive to actually purchase. Not exorbitant, but still, much pricier than we were both comfortable with. But the Amex points were a game changer. They were significantly better than anything else offered at the time. They brought down the cost of the RH furniture to roughly the equivalent of an Ikea bedroom set.

Score one for the points.