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Post No.: 0163money

 

Furrywisepuppy says:

 

The following is a selection of some of the peculiar irrationalities we exhibit when it comes to money. You might say it continues on from Post No.: 0020 about how people sometimes behave irrationally when they see the word ‘free’…

 

Money is typically viewed in relative terms e.g. when purchasing a £25,000 car, £1,000 extra for leather seats doesn’t seem so bad – but when purchasing a £500 sofa suite, £1,000 extra for the leather option suddenly seems ridiculous, even though the sofa is larger and people might sit on it more than in the car! Spending an extra £5 on something priced at £100 feels easier than spending an extra £5 on something priced at £10, even though it’s £5 extra in both cases and £1 is £1, whether you are spending or saving money on a latte or a laptop i.e. money should be viewed in absolute terms when it comes to spending and saving; and it should also be rationally valued and treated the same wherever it comes from, wherever it currently is or whatever form it is in, in present value terms (e.g. whether it is in vouchers, cash or credit).

 

Well sometimes, depending on which side of the negotiating table you’re sitting on, it is advantageous to think (or really get the other side to think) in terms of percentages rather than absolutes (‘it’s only a small percentage difference’), or vice-versa (‘it’s only a small cost in the bigger picture’), depending on which perspective is more persuasive. ‘Diminishing sensitivity’ is when e.g. losing 10 out of 20 bets feels worse than losing 10 out of 100 bets, even though the losses are absolutely the same.

 

The hardest part is getting your wallet out to spend something in the first place, but once you’ve gotten it out, it gets easier to spend more (and more) afterwards e.g. if you’ve gambled £1 and find out you’ve got nothing from it, you’ll more likely spend another £1 in the hope of getting a return because at this point it is perceived that £2 to get something is better than spending £1 with nothing to show – but of course you may end up spending £2 with nothing to show, and so on and on… yet always remaining irrationally optimistic in thinking that ‘this next £1’ will be ‘the last one’ you’ll need or want to spend on this particular thing to get a return on your investment (this is the ‘sunk cost fallacy’ of investing more money, time, etc. into something that’s not doing well because you’ve invested a lot into it already, when you should really accept and cut your losses rather than think you can still make what was originally invested worthwhile). This is why businesses frequently use ‘teaser rates’ or other methods to get you to spend what seems like only a little initially, knowing that you’ll probably spend more because they’ve managed to get you to get your wallet out for them. This is also because consumers can be very lazy and/or trepid at switching or in the face of change, even if it’s for their own benefit.

 

In a similar way, if we’ve paid for a subscription for one year’s ‘free’ delivery from an online store but haven’t used it much, then we can rationalise to ourselves that we ought to buy some things from that store (i.e. spend even more money) in order to not feel stupid about paying for that initial subscription. So we can throw more money at something in order to not feel stupid and wasteful for throwing some money at something in the first place!

 

Some people will drive a long way to source some fuel that saves them a few pence per gallon, thus wasting their own fluffy time, fuel itself and increasing wear-and-tear on their vehicles in the process. This is because, whilst the fuel price is clearly quantified with a cash value, one’s time and the depreciation of the vehicle is less easy or clear to quantify thus we fail to account for these things in a similar way. (It may still be overall worth it but these considerations must be calculated.) At the extreme, when we cannot easily quantify something, we can neglect it altogether to concentrate on the things we can more objectively measure and compare with other people (e.g. the value of our health versus our bank balance). Concretely and accurately quantifiable gains/costs influence our decisions more than abstract gains/costs – which is especially worrisome in contexts such as looking after environmental ecosystems versus short-term economic interests.

 

Working out how many grocery bags we need and therefore working out the cost of these bags comes after we’ve rung through the shopping itself – hence can feel more like a tax (which in essence it is in some countries) than an integral part of the shopping itself, hence we’re more motivated to save on these few pence than a few pence elsewhere in our shopping (e.g. a few pence off the box of teabags or toilet paper). But in this context it’s the desired behaviour because we want people to reuse bags and produce less plastic waste.

 

Humans can be incredibly inconsistent with money e.g. using up every last bit of toothpaste in a tube before throwing it away yet constantly throwing partially off fruit or vegetables away. Maybe we shouldn’t expect humans to be rational or consistent! Woof!

 

The price £9.99 or £9.95 sounds considerably more than merely £0.01 or £0.05 cheaper than £10.00 respectively, even though it is indeed just £0.01 or £0.05 difference respectively (the ‘left-digit effect’ and ‘charm prices’). And prices that end in .50, such as £9.50, are often associated with discounted or reduced prices too so customers often jump to that conclusion. In the context of gains more than costs – being e.g. rewarded 1,002 coins in a video game feels much better than merely 4 coins in difference compared to receiving 998 coins. (We must note here that the decimal (base 10) number system we use is arbitrary! If the above numbers were in base 14 then 518 (which is 1002 in base 10) wouldn’t seem that much more at a glance than 514 (which is 998 in base 10).)

 

Price sensitivities can depend on if products are easy to compare with one another (i.e. like-for-like), who ultimately pays (e.g. via your employer or you), if there is a separation of time between the consumption and the paying (e.g. ‘buy now, pay later’ versus pre-paid), paying via certain methods (e.g. credit card versus pre-purchased credits), prices that end in certain numbers (e.g. £4.83 can signal that a price has been discounted to its bare minimum, or at least that can be the assumption, which can have a dramatic effect on the number of sales), and if there are quality inferences to the price or brand but the customer does not have the personal expertise to distinguish them (e.g. the quality of lawyers or wines, hence to someone with little experience and knowledge of these things, a higher price tends to inductively infer a higher quality, when this isn’t always the case). The prices of associated products may signal whether a product is ‘budget’ or ‘premium’ too (e.g. you can inductively infer the value-for-money of a new product by the price of its easily-comparable-to-the-existing-market sundries, add-ons or complimentary products, but again this heuristic isn’t always reliable).

 

Inductive logic is not as reliable as deductive logic, and retailers who understand customer behaviours and habits (maybe because they collect a lot of individual data about their customers) can intentionally exploit all of the above assumptions.

 

People tend to value reducing a risk to zero more highly than any other comparable reduction (e.g. reducing a risk from 5% to 0% is more valuable than reducing a risk from 20% to 15%, or even from 50% to 40%), hence many people go for extended warranties or free no-obligation trials (but once you’re in, you might find it hard, or you might simply forget, to cancel the service even if you don’t really need or use it).

 

Certainty is more important than the expected value of a transaction in some cases e.g. most people would rather take an 80% chance of losing £4,000 (which has an expected value of –£3,200) than accept a certain loss of £3,000 (which has an expected value of –£3,000); yet most people would rather accept a certain gain of £3,000 (which has an expected value of +£3,000) than take an 80% chance of gaining £4,000 (which has an expected value of +£3,200).

 

I will go into more detail in future posts regarding the ways that we can be so unsurprisingly yet alarmingly illogical and irrational when it comes to money! But this post serves to highlight some examples of this in action through experiments and instances found in the real world.

 

Woof. It’s wise to learn about your psychology and to keep your wits about you!

 

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