Dollars and Sense

Dan Ariely is an expert on human psychology and decisions. His book Dollars and Sense is focussed on how to avoid "money mishaps". That can include paying too much for something; buying something that doesn't provide value; or in some cases not buying something that we really should buy.

We can be better spenders of money by avoiding money mishaps. We can get more value for our money - or get the same value for less money.

So what are the mishaps? Here are some highlights.

Opportunity Cost

This is the idea of thinking about what else we could do with money - and whether that's better value. 

In one experiment, people were given the option of (A) a $1000 stereo or (B) a $700 stereo and $300 cash. People chose option A.

Then people where given the option of (A) a $1000 stereo or (B) a $700 stereo and $300 worth of music. Now they chose option B.

In the first choice, people gave up the $300 because they wanted the more expensive stereo. But when forced to think of something the $300 could buy, they decided the expensive stereo wasn't worth as much as something else they could get with the extra money.

Dan once surveyed prospective car owners and asked what they could buy if they didn't get a car. They couldn't really give an answer. He suggests we might think of a car as costing us two Hawaiian holidays - or two nights out each month for the next two years. We might choose differently.

Relativity

We love buying things at a discount. And stores know it. American store JC Penney seemed to discount almost everything. One day their CEO decided to be more straight-forward. Instead of saying "Was $100, Now $60" the items was just simply marked as $60.

Customers were outraged ('bring back our discounts') and the CEO was sacked. So now it's back to "Was $100, Now $60". The price hasn't changed but customers are happier and sales are up because people (perhaps falsely) think they're getting a bargain.

This is completely irrational. The $100 is irrelevant. We should compare the $60 price to how much value we would get from it (which might only be $20). But that's a hard to estimate, so the "discount" trick works.

[Side note: I still have a jacket that I bought at half price. I've worn it maybe 3 times. Probably not worth it]

Relativity Part 2

We pay high prices for small items when they are part of a larger purchase. They authors give the example of $4 for a soft drink when on an expensive resort holiday. I think of overpriced tiny chocolate bars at the supermarket checkout. Or paying for expensive food at a sporting event (compared to the ticket price it seems small).

Decoy prices

People were offered the following magazine subscription options:
1. Online only $59
2. Online plus physical copies $125.
Most people chose the cheaper $59 option. (Why pay double for a second copy?)

Then people were offered the 3 options:
1. Online only $59;
2. Online plus physical copies $125
3. Physical copies only $125.
Nobody chose the third option (it's clearly worse than option 2) but it changed people's mind. Options 2 and 3 are the same price, so it's obvious that option 2 is better than option 3. So now most people chose option 2 (for an extra $66).

Our brains find it easier to choose the better of two similar options - even if they are the worst two options.

Paying for Free

Many city dwellers could go without a car and save money. The cost of public transport, ridesharing and the occasional rental car would be less than the cost of car ownership.

But owning a car makes each trip feel free. Spoiler alert: they're not. They are just paid for in advance, and in large amounts. But because each trip feels free, we chose this option even if it's not the best.

Anchoring

An experiment asked real estate agents to value a property listed for sale. Some estate agents were told the property was listing for 119,900. Others were told it was listing for 149,900. (Obviously at these prices, this experiment was a while ago).

Even though the agents were experts, the listing price they were told had an influence on their estimated value of the property. The first group gave an average valuation or 111,000 and the second group 127,000.

If housing experts were so easily led to value the property 14% higher, how more susceptible would we be?

By the way, this is why restaurants have a ludicrously-priced item on their menu. Maybe no-one orders that item, but it's there to make the second-most expensive item look more reasonable by comparison (and it works).

Ownership

We overvalue items we own. Even items we've just held in our hands. An experiment showed that holding a coffee mug for 30 seconds increases the amount we would be willing to pay for it.

A friend of mine said her dad was a door-to-door salesmen when she was a kid. He would have a range of reasons to get a customer to hold an item, because he knew it increased the chance of a sale.

Today it's free trials. Once we've had a service for a month, we are much more reluctant to give it up.

It's us against them

It's good to know how we think. Advertisers and sellers certainly understand these things. They use that knowledge to increase sales - meaning we end up spending on things that don't give value.

While it's mentally impossible to think about all of these factors for every purchase, if we "recognise what we are doing and why, over time, slowly but surely we'll get the ability to change our decision-making for the better".

A good start is to apply them to the big purchases or to the ones that we make repeatedly, as those will have the most effect.

In short

This is a fascinating book if you're interested in making better money decision - or even interested in how the brain works with money. Knowing how advertisers are tricking us out of our money is half the battle.

Related Reading

If you like the sounds of this, then you might also want to check out Your Money of Your Life.

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