Dear Readers,
Dan Ariely is mainly known for his researches on the human decision behaviour. In the book “Small Change, Money Mishaps and How to Avoid Them”, he and Jeff Kreisler argue our worst monetary decisions and they try to show the ways we can avoid them. I strongly recommend reading this book.
The best way to spend money is to try to measure the opportunity costs we see in the transaction. We all should know that the spending money on one thing is a trade off spending it on something else. However, this thinking is too abstract, too hard and therefore we don’t think like this.
Let’s show what the psychological mistakes we make while we spend money.
1- Mental Accounting
The people tend to behave money differently when the context is different.
Let’s consider these examples.
We would be reluctant to spend money when we go for a family holiday. However, if we go for a business travel and will make speech there, this means that we will earn money and we will be more in favour of bringing the family with us.
Whenever the people buy funland tickets or casino chips, since they have already spend the money, they think that they can spend at any place without any harm.
Moreover, if the money is earned from an unethical place or business such as lottery or gamble, to launder it, the people tend to pay their debts or donate to a charity. This is called as emotional accounting.
Whenever the time of purchase and the time of use are different we tend to feel that the service is free since we dont pay at the time of use.
Despite the above statements, we shouldnt treat money differently since it is same everywhere. One dollar is not more or less than another one dollar if it is gained or earned in a different place.
2- The Price of Free
We are immediately getting tempted by free offerings even they have ultimately cost for us.
3- The Pain of Paying
It is proved that our brain shows the same reactions while we pay and we experience pain. This means that the payment is like a pain in our body.
To avoid pain we use credit cards. Because a credit card transaction doesnt make us to feel the same pain than we are paying with cash. Plus, since the payment time and the transaction time are different we dont feel that we pay we make the transaction with the credit card.
Like the credit cards, when we use fast payment services such as QR code or NFC, we again feel very comfortable.
This shows that the credit cards and new generation payment services increase our tendency to buy more.
Moreover, if we pay upfront when we use the service we dont experience pain. This is why the shows, games etc. are accepting payments before we use the service. After we use the service, the psychological effect will not be negative for us.
Think about Amazon. They force us to use Amazon prime which has an initial cost for free shipment throughout the year. Since we pay upfront, whatever we buy afterwards make us to feel that we are getting a free shipment.
4- Relativity
The People tend to compare the sale price with the original price from which a discount is made. If the people see the original price as 100 USD and the last discounted price as 60 USD. This automatically triggers a thinking on a saving of 40 USD. However, the price has been already stated as 60 USD but the client doesn’t know about it. This means that if a retailer states the price at 60 USD rather than a discounted price at 60 USD, the customer reaction will not be positive like the second option.
This proves that we always compare to find the right alternative.
In a big purchase such as buying a car from a dealer, we always tend to add the supplementary items which are very low in comparison to the initial purchase. For example, 25.000 USD car and 200 USD CD changer. However, if we just want to buy a CD Changer at 200 USD, we wouldn’t agree with the price.
There might be also decoys which immediately direct us to the option that the seller wants to sell. Think about this one:
There are three options for economist subscription. First option is just online for 59 USD, second option is just printed journal for 125 USD and the last option is online and printed journal together for 125 USD again. Most of the people choose the last option. However, if the seller doesn't show the second option most of the people tend to buy the first one.
When we have no idea about the cost we go for the middle option to feel safe.
5- Language
Language can make us pay extra attention to what we consume and direct our attention to specific parts of the experience. Language has the magical power to change how we view the food to get it to command a price that fits the way it is described. When it comes to creating value, the restaurant environment, the social situation and the description of the food, all enhance the experience.
Moreover the rituals also increase the experience and enjoyment.The rituals we undertake during consumption make the experience special.
6- Overvalue Expectations
We value the same good differently in different contexts. If you drink the tea in an ordinary glass, you tend to pay less than you drink in a crystal glass.
7- Overtrust
If there is an asking price, the people tend to estimate the price regarding this listing price. According to an experiment the real estate experts estimated the property price always regarding to the listing price. This shows that the people’s mind always work regarding to any anchor given upfront. However the vast majority of the estate agents claimed that they didn’t consider the asking price at all when they are making their estimates.
The anchoring occurs when we are drawn to a conclusion by something that shouldn’t have any relevance to our decision. It makes irrelevant information to pollute the decision-making process. Therefore anchoring is the irrelevant starting point which become for the basis for future decisions from this point forward.
Sometimes the people go with the crowd since they assume that the crowd correctly thinks that the decision is good or bad. Sometimes regarding to our decision in the past we assume that this is correct and regarding to this decision we are making our future decisions.
8- Overvalue
We usually overvalue what we have. Ownership of an item no matter how did ownership came to be makes us overvalue it. When a family wants to sell their own home they tend to price it more than its fair price. Because they unintentionally add their experiences, memories in that place to the price which doesn’t have anything related with the buyer.
Whenever you go to any retailer you see that they try to make you feel that you own the good that you are asking for. They make you to try the item so that you will feel the ownership of the good.
Moreover we have sunk costs. Once we have invested in something we have a hard time giving up on the investment. Since it is very hard to give up the initial investments the companies tend to invest more in the businesses that they will not be successful in the future.
9- Fairness
Think about a scenerio where the locksmith opens your door. If he comes and opens it in a very short period of time and requests 100 USD for that it will be seen unfair for you because you are spending 100 USD in a very little time. However if he comes and opens it in a long period of time after making several trials on the door and requests 100 USD you might think this more fair than the first scenario. However you will not think that in the first scenario you enter your home in a very short period of time compared to the second scenario.
When the people spend money they want to think that the amount of the payment will be equal to the fairness of the transaction. We are willing to pay more when we see the costs of production, people running around, the efforts involved.
To fight against all mistakes the people do while they spend money, the people can
1- Try to value the items regarding their opportunity costs
2- Try Odyssey’s Contract where they tie them for not making further monetary spending.
3- Try not to use fast payments such as credit cards or new generation payments.
4- Add special frictions for them while they make payment.
Teşekkürler.
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