TEXT OF INTERVIEW

Tess Vigeland: We've had plenty of fun already this week with my financial habits, what with cheapskate Jeff Yeager offering to get me into a program. So why not go a step further and introduce my husband, Dan. Here we present a re-creation of a conversation the two of us had a couple of weeks ago.

Vigeland: Hello dear. You look handsome today.

Dan: Well, thank you. I hope you had a great day.

Vigeland: I did! What do you want to do with our credit card points?

Dan: What are the choices?

Vigeland: Well, for 12,000 points, we can get $100 cash back. For 14,000 points, we can get a $100 gift card to Amazon or iTunes or any number of your favorite retailers.

Dan: Gift card, please.

Vigeland: OK. But you understand we are giving up more points for the exact same amount of money,. Two thousand points, in fact, which equals $2,000 that we spent.

Dan: Gift card, please.

Vigeland: Yes dear.

Seriously -- that's pretty close to how it went. And it's the kind of interaction that leads us to ask:

Comedian: What the hell were you thinking?

What were you thinking? It's our look at why we do what we do with our money. Today, I'm joined by Suzanne Shu. She's a marketing professor at UCLA business school. Thanks for coming in to the studio.

Suzanne Shu: Thank you very much. It's a pleasure to be here.

Vigeland: Alright so, what is this? And I will say right off the bat, that honestly, had I made this decision and not left it to my husband to make the decision, I probably would have done the same thing -- which makes absolutely no financial sense, whatsoever. But I want that gift card.

Shu: From an economist's point of view, your absolutely right. It just doesn't make sense, 'cause cash can be just as good as a gift card, if not better, because you can spend it anywhere.

Vigeland: Right. Or you can pay down that credit card bill.

Shu: Absolutely. It's what we call fungibility. Cash is much more fungible. It allows you to spend it on a lot of other things you need. The problem that we all have, and this goes back quite a ways in the behavioral economics literature, one of the first papers in behavioral economics written by Richard Thaylor was written on an idea called "mental accounting." The problem that we face as consumers is that we need to exert self-control on our finances. And so what he hypothesized was something that you see a lot of people do, which was mentally take that income and put it into buckets: This is the money for my rent, this is the money for my groceries, this is the money to go out and have fun with. And by doing that we can control our spending a little bit.

Vigeland: Even if we're not actually, consciously thinking about that, we're kind of doing that in our heads.

Shu: Absolutely. So if you go back, people would actually put cash in envelopes marked with these titles. Now, today we have credit cards, but mentally we're still doing this. We're still trying to control our spending and hit that right balance between having fun and not going overboard.

Vigeland: So where do the buckets come in to this decision to, with our points buy a gift card -- because you really are kind of buying it -- rather than the same amount going right back to pay that credit card.

Shu: If you took the money as cash, either to pay the credit or just somehow put into your larger bucket of income for the month, so to speak, then it gets mixed in and it could end up going towards the mortgage, it could end up going toward the groceries.

Vigeland: How boring.

Shu: Exactly, exactly. What fun is that? Where as if you put it towards a gift card, you've set up a new account of, wow, this is something I've earned and now I get to go have fun with it. And there's also a lot of findings in marketing and behavioral economics that when people feel like they've earned a reward like frequent flyer miles or...

Vigeland: Right, that's exactly what it feels like. That's my reward for spending money!

Shu: Exactly, so you want to go out and have fun with it. Putting it into a gift card is your way of saying I'm making sure that this reward I've earned goes towards something fun. You get to go out and relax your self-control a little.

Vigeland: But, but again, I have to point this out multiple times, because I'm just baffled by my brain on this. We had to spend $2,000 more to get the 2,000 more points to get a gift card instead of the same amount of money in cash back on the card.

Shu: That's true but what you're doing really is paying for that loophole in your self control in some sense.

Vigeland: There's a price for everything, right?

Shu: Exactly. exactly.

Vigeland: Alright, well I guess that is what we were thinking. Suzanne Shu has been with us. She's a marketing professor just down the street at UCLA. Thanks so much for coming in.

Shu: Thank you very much.