“ Thinking a lot about money would be fine if by thinking more about it we were able to make better decisions.”
Dan Ariely and Jeff Kreisler.
The author of the best seller “Predictably Irrational” which unpicked why people make irrational decisions everyday, recently teamed up with comedian and author Jeff Kreisler for the Book “Small Change: Money Mishaps and how to avoid them” to tackle how this applies to our money decisions.
This book uncovers the funny mental maths that sabotages our financial decisions and how to overcome our natural irrational tendencies.
Broken mental money maths
Failure to think in alternatives
We get a bee in our bonnet about buying that one thing.
And then we start to think of its value to us.
But we think in relative terms. For example we want to buy a car. Should we buy a Toyota or should we buy a ford and where can we get the best deal.
We don’t consider what the alternatives are that we could have spent our money on. An investment in the stock market, our house deposit and so on.
Paula Pant, of the Afford Anything podcast sums it up nicely, “you can afford anything but not everything — and that’s true not only for your money, but also your time, focus, energy and attention”.
Everything you spend has an opportunity cost. Know what it is and choose your spending wisely.
Falling for the thrill of the deal
Studies have shown we get a dopamine rush every time we save money on a sale. This is irrespective of whether or not we intended to purchase the item at full cost in any event.
Similarly, we are thrilled when we find the 3 for 2 deal or some other poorly disguised sales gimmick which when properly analysed may often be the more expensive option. I have fallen for this more times than I would like to admit – online grocery store, you know who you are!
Our dopamine rush is all about the “win of the kill” because we now have “more” cash available to spend elsewhere. At least as far as we see it, justified or not.
And yes we then go and spend our “saving” on something else we didn’t intend to buy.
Numbing the pain of paying
Brain scans show that spending physical cash triggers a pain response.
We numb the pain by using card payments, particularly credit cards which creates a time delay between the spend event and the payment for the item.
Big companies know this about us so they offer perks to spending on our cards, reward points and such. So not only do we avoid the pain of buying we are in fact rewarded for doing so. How is that for supporting the creation of bad habits !
Bias in the language
The book asks the question, what would you rather have:
- 20% less of your salary
- 80% of your salary
Most respondents quizzed selected A, the “lower” loss of salary.
Or is it ?
Watch how questions are phrased and challenge your unconscious cognitive bias before proceeding.
We are further seduced by the marketing language, especially when it “elevates” us to a higher status. “Luxury hot chocolate” as opposed to “Bog Standard Ordinary People’s hot chocolate”, “Slimming tights” rather than “Tights that don’t do anything for your excess weight” or “Artisan Bread” versus “Baked in an ordinary mass production bakery just like every other loaf”.
Overvaluing the familiar
We love brands. They are better, they taste better, work better and we know them.
For me it is my Starbucks versus any other coffee. Starbucks knows what they are doing. They “do” coffee well and so I am ok to pay the Starbucks price which may or may not be double the coffee shop next door.
Similarly pain killers. Nurofen is the business, ordinary ibuprofen doesn’t cut it.
But wait a second. The brand and the “non brand” are exactly the same thing. Any difference in perceived impact is just that. Our perception. Something to think about when we compare the compare the relative cost of the two.
Make an emotional connection with your future self
Many of our instant gratification issues relate to a future us that we don’t know and frankly don’t care about. The future will take care of that “us”. However if we were to “know” and care about what the future us really wants and values we may be more inclined to be worried about that version of us missing out on all those wonderful things.
Connect with the future you. Imagine all the things you want that future you to be able to do. Know your future you is depending on the now you to make it happen.
Understand what your future you will have to face if they cannot have all that you have imagined above. Feel your future you’s pain of loss of not having that vision.
Then feel your happiness and achievement at making that beautiful vision happen.
Build on your pain point of missing out as well as the pleasure point of creating it.
Take control of spending with a Ulysses Contract
The legend is the Greek hero Ulysses had his crew tie him to the mast of his ship to prevent his succumbing to the temptations when passing the deadly sirens. Similarly if you know your triggers, you can put some “Ulysses contracts in place to manage them.
- If credit card debt is a problem, stop using a credit card. Cut it up, freeze it or give it to a trusted partner for safe keeping. And yes, that means disabling it on Paypal as well !
- Automate your cashflows to leave only the amount you plan to spend in your primary current account. And use a debit card to spend it.
Make saving and investing simple and meaningful
Instead of opting for an overly complex budget that is destined to set you up for failure, choose a simpler approach such as the 50:30:20 rule. 50% of your income goes to necessities, 30% to other spending and 20% to saving and investing.
Name your savings accounts and investment accounts to make them meaningful. “The simply awesome vacation plan”, “My financial freedom golden goose”, “The dream house” and so on.
Make your investment and savings accounts easily visible to you. Set up an App on your phone so that you can check your progress towards these exciting goals.