Found this interesting digital series from PBS called Two Cents, a series devoted to money matters for millennials and Gen Z. (I'm technically a Xennial or a Gen1 millennial, but who cares?) Anyway, Two Cents has this episode about how there’s this expectation that people would be rational about spending hard earned money. But the thing is, humans can’t quite remove their emotions in the decision making process of spending money. Economist Richard Thaler received the Nobel Prize for Economics for looking at all these totally fallible ways humans are about what should be a totally rational thing. In short, economics is not only about numbers, but about the very human ways decisions are made and how being a mistake prone human needs "nudges" in the right direction in order to modify behavior as well. In short, it's where Psychology and Economics meet.
The good thing is that these money mistakes are predictable so we could actually avoid them. Here’s some of them:
Endowment Effect
The endowment effect is our tendency to assign bigger values to things we already own. Like if we dug up rare single edition Pokemon cards, and discovered that they go for $3k on E-bay, the rational thing to do would be to sell it. Until we decide to hold onto it. Then we see it being sold elsewhere for that amount and decide, eh, that’s just too expensive for a toy.
There’s a Facebook page online for the place I work for. You could sell your stuff on it. For the longest time, a kid has posted the complete series of a certain manga. Most people would sell their stuff less than the original cover price, but this poster insists on maintaining the pristine, brand new price for a set of books that’s already several years old. It’s not that even rare. But one has to admit that the item is quite niche and only a few people would be interested in it.
Sunk cost fallacy
Like if you went to a movie that’s really bad and feel like walking out, but you stay so you can get your money’s worth. The episode also talks about membership clubs (think S&R or Landers) that charge an annual fee and you get perks in exchange. People will buy stuff they don’t need because they want to get their money’s worth.
Sometimes I’m like this with lunch. My break is still within reasonable lunch hours, but usually all the good food would be gone, and only slim pickings remain. One time, all that was left was some stir fried okra (I don’t know what it’s called really) and then egg and cheese omelet. I felt so sad but also hungry, and only have a short break in between so I gotta eat. I ate the omelet, and I feel bad for wasting food (and money), but I just could’t bring myself to eat that okra and dumped it in the trash. Wala na, ayaw na, couldn’t finish na. Sunk cost na.
Transaction Utility
This amount of pleasure or pain that we get from feeling we paid less or more. In short: are we getting a bargain or a rip-off? It’s often totally disconnected from the happiness that you get from the thing itself.
This is how malls sucker us with their never ending sales. You see that big red banner announcing “Sale! 70% off!” We buy it because it seems like there’s a markdown from the original sticker price. So we buy things, and more things that we don’t even need and all because we think we’re getting a discount. Instead, it might be more useful to see it as spending 70% more than 0 if you don’t buy that stuff unless you really need it.
I like shopping End of Season sales. You do get a lot of bargains, lalo na for work clothes. But I make it a point to scout the things I want before the sales so that I know what the “regular” prices are. Then when the sales start and I still need it, or want something, I can check if it’s really going for a lower price.
It’s also useful when you know the cycle of when these sales happen. Last year, my laptop broke down after 7 years. Sulit na. But I still waited for a sale and used my tablet in the meantime. When school was about to start, there’s an Education related sale. But the store was only giving out a 5% discount for the cash amount + freebies. The store has changed their cash sale policy na raw. The last time I bought a computer it was 10% for buying in cash.* I really needed the computer by then, and I still got a discount of 5%. Then two months later, my friend buys a computer. I’ve told her about the cash discount. Lo and behold the cash discount was back to 10%, and there was some freebies, too. You gotta believe I felt real bad because she paid much lower than I did. Oh well. Basta I hope the computer lasts just as long para sulit ang money.
Mental Accounting
There’s also mental accounting, or separating money into imaginary categories in your mind. It’s useful when we think of it in terms of setting a budget. We invent categories like fun, free, expected or serious money. It violates the rule that money is “fungible,” i.e., totally interchangeable. A hundred pesos is still one hundred pesos however way you got it. Lets say you got Php1k on a raffle, should you use it to buy Php1k of shoes, eat out at a fancy place, go travel? But we shouldn’t think of it as free money. How would you spend the 1k if you worked for it? But most of us will just spend it, since we didn’t work for it anyway—it’s free!
I know the episode listed 5 things, but for the life of me, I could only count 4. Or maybe I didn’t watch properly. But really, it was informational for me to see how mostly, it’s a battle between being rational about things or being emotional. Sometimes we know the right thing to do, but the heart still wins. Mahirap mag-abdicate ng emotion—specially if it has something to do with family.
*When work mates noted my new laptop and asked how much it was, I didn’t say that I bought it in cash. Since I have always heard people (even our boss then) used credit cards and paid for the purchase in installments. Everyone was like, nobody has money for that. So I felt a bit ashamed and just said that the overtime check we recently got plus savings were what I used to buy the computer. But now I know better.
