Note: This article got a little out of hand, so I’m breaking it up into two related posts. Enjoy Part 1 below, and Part 2 here. Doesn’t that feel like you’re getting more for your money? Woo psychology!

Ever bought something from Xbox Live Arcade? The first time you may have been a bit bamboozled by the process because Microsoft doesn’t just let you put $15 on your credit card to buy a new game; purchases are done in “Microsoft Points” that you deposit into a virtual wallet. Then you spend the points on stuff.1

Gamers possessed of equal parts suspicion and curiosity may wonder why our gaming overlords adopted such a strange system instead of just letting us pay real money for our purchases. Sure, it lets parents put finite funds in kids’ accounts and lets you buy points on gift cards, but are there psychological factors at play with these kinds of point-based systems that affect how we spend our money? I’m glad you asked, because yes there are. Let’s take a closer look.

Wait, I think I'm going to have some points left over in my account...

Leaving money on the table or in our Xbox Live account2 makes most of us a bit uncomfortable because it feels wasteful. Hal Arkes, who pioneered the study of the psychology of waste, theorized that this is a holdover from what’s called “the sunk cost effect.”3 This is when not losing unrecoverable money you’ve already sunk into a losing proposition becomes the main justification for throwing new money in.

But at this point the more clever among you may be thinking “But that doesn’t really apply to unspent Microsoft Points and their ilk because they can be spent whenever you want. They’re not sunk; they’re still fungible.”4 True. But ingrained habits (or in this case, decision-making biases) die hard, and we are averse to, as Arkes says, “insufficiently utilize the item that has been purchased.”

For example, in one unpublished study5 researchers Lisa Bolton and Joseph Alba presented subjects with a scenario where a business traveler laid over in a city decided to buy a one-month gym membership for $75 and enjoy a workout, even though he was only able to use it one night. Relative to the man in another scenario who paid $75 to get an equal amount of enjoyment out of a baseball game, people saw this traveler as “less intelligent,” “foolish” and “less sensible.” This despite the fact that the two people enjoyed their evening equally for the same cost.

So, following this logic, we see that gamers may dislike leaving money sitting in an account because it represents waste, especially if you’re considering spending real money on a disk based game. So you’re a little more likely to get rid of those 400 Microsoft Points by buying something on sale that you normally wouldn’t, or even by buying an additional 800 points so you can pick up another full digital game that you might not have been interested in otherwise. It’s similar to overeating at a buffet or doubling your paper towel use after buying the 124 roll jumbo pack. Even though you could just let those paper towels or Nintendo Points sit there until you have a good reason to use them, spending real money on something else seems wasteful.

So there’s waste aversion. But there’s one other psychological phenomenon at play with Microsoft Points (and their ilk) that I’d like to point out, and curiously enough it may actually be leading us to spend less instead of more. For more on that, come back next week for Part 2. BAHM-BAM-BAAAAA!

Go ahead and read Part 2 of this article by performing semi-precise clicking actions here.