Dollars and Sense

When it is hard to measure directly the value of something, we compare it to other things, like a competing product or other versions of the same product. When we compare items, we create relative values.

The problem isn’t with the concept of relativity itself, but with the way we apply it. If we compared everything to all other things, we would consider our opportunity costs and all would be well. But we don’t. We compare the item to only one other (sometimes two). This is when relativity can fool us.

Sixty dollars is relatively cheap compared to $100, but remember opportunity costs? We should be comparing $60 to $0, or to all of the other things we could buy with $60.

Sixty dollars is relatively cheap compared to $100, but remember opportunity costs? We should be comparing $60 to $0, or to all of the other things we could buy with $60. But we don’t.

Bargains also make us feel special and smart. They make us believe we’re finding value where others haven’t.

When relativity comes into play, we can find ourselves making quick decisions about large purchases and slow decisions about small ones, all because we think about the percentage of total spending, not the actual amount.

Relativity is built on two sets of decision shortcuts. First, when we can’t assess absolute value, we use comparisons. Second, we tend to choose the easy comparison.

Just by including the clearly inferior print-only option—which no one chose—the Economist nearly tripled sales of its $125 Web-and-print version. Why? Because that print-only option was a decoy employing relativity to push us toward the combo deal.

How we spend money depends upon how we feel about the money.

People are likely to spend something like their salary on “responsible” things like paying bills, because it feels like “serious money.” On the other hand, money that feels fun—like $300 million in casino winnings—is likely to be spent on fun things,

if we inherit money from a beloved relative, the money feels good and we are ready to spend it. But if we receive it from a source we don’t like—in their experiment, it was the tobacco company Philip Morris—the money feels bad. So, to clean it of the negative feelings, we first spend some of it in positive ways, like buying textbooks or donating to charity,

we’re rewarding good behavior with bad behavior that directly undermines the good.

we’re rewarding good behavior with bad behavior that directly undermines the good. Saving an extra $100 one week is a good start, but celebrating the saving by spending $50 on something we wouldn’t have purchased otherwise—like a dinner or a gift—doesn’t help our overall finances.

trading $15 for four hours of exhausting work is a bad decision,

depending on the timing of the purchase and the time gap between the purchase and the consumption, we think about the cost very differently.

We think wedding planning should be a mandatory first-date activity: If a couple makes it through that, then they can go see a movie. Otherwise, it won’t work out. We are willing to bet that if starting with wedding plans was the standard courting process, there would be fewer incompatible couples. Marriage is hard! Note: Not all of our ideas are good.

The end of an experience is very important. Think of closing prayers at religious services, dessert at the end of a meal, or goodbye songs at the end of summer camp. Ending on a high note is important because the end of an experience informs and shapes how we reflect back on, remember, and value the entire experience.

We often end vacations on a low note, with things we hate most: paying the hotel bill, shuttles, airports, taxis, suitcases, laundry, alarm clocks, and returning to work. Those ending activities can color how we view the vacation as a whole and paint it in a less positive way.

Avoiding pain is a powerful motivator and a sly enemy: It causes us to take our eyes off value. We make faulty decisions because we’re focused on the pain we experience in the process of buying, rather than the value of the purchase itself.

The fact that we had to invent the helmet. Now why did we invent the helmet? Well, because we were participating in many activities that were cracking our heads. We looked at the situation. We chose not to avoid these activities, but to just make little plastic hats so that we can continue our head-cracking lifestyles.