Money Habits

Say we encounter something we’ve always wanted. Let’s call it a widget (a common term in traditional economics textbooks representing a generic product designed both to obscure the fact that it has questionable value and to torment readers of traditional economics textbooks). Our widget is on sales! Fifty per cent off! Exciting, right? But stop for a second. Why do we care about the sale? Why do we care about what it used to cost? It shouldn’t matter what the cost was in the past since that’s not what it cast now. But because we have no way of really knowing how much this precious widget is worth, we compare the price now to the price before the sale (called the “regular” price), and take that as an indicator of its high current amazing value.

Bargains also make us feel special and smart. They make us believe we’re finding value where others haven’t. To Aunt Susan, saving $40 on a $100 shirt seemed like getting $40 to spend elsewhere. On a more rational level, we shouldn’t measure the value of what we are not spending-the $40-but rather the $60 we are. But that’s not how we operate and that’s not what we do.

Another place we see this kind of comparison is with quantity (so called bulk) discounts. If a bottle of expensive shampoo is $16 and one twice the size is $25, all of a sudden the larger, more expensive bottle looks like a great deal, making it easy to forget the question of whether we really need that much, or that brand of, shampoo in the first place. Moreover, the bulk discounting practice also serves to hide the fact that we have no clue how to value the cocktail of chemicals that make up shampoo.

Had Albert Einstein been an economist rather than a physicist, he might have changed his famous theory of relativity from E = MC 2 to $100>Half off of $200.

Dollars and per cents

We might look at those examples and think, “Okay, I understand how using relativity is a mistake.” That’s good! “But..” you’re probably saying, ‘Those choices make sense because, as a percentage of what I’m  spending, the extra expenditures are tiny.” Well, yes, but a dollar should be a dollar, no matter what else we’re spending or doing. Spending $200 on a CD player just because we happen to be buying a $25.000 car is the same irrelevant reasoning as spending $200 on a CD player just because we happen to be wearing a checked shirt. It just doesn’t feel as irrelevant.

Imagine we set out one Saturday morning with two errands. First, we’re going to buy the running shoes we’ve been eyeing for a while. We go to the shop and pick up the $60 trainers. The person helping us confides that at another shop down the road the same exact pair is on sale for $40. Is it worth driving five minutes to save $20? If we’re like most people, the answer is yes.

Now that we’ve got our shoes, we embark on our second errand. We’re going to buy patio furniture because it’s finally spring!  We find the perfect set of chairs and an umbrella-topped table at the garden centre for $1,060. Once again, an employee tells us of a sale at another location that’s five minutes away. We can get the same set there for $1,040. Do we spend five minutes to save $20 this time? It we’re like most people, the answer, this time, is no.

This is an extract from Dan Ariely and Jeff Kreisler's Small Change published by Bluebird