For those of you who are not familiar with Behavioral Economics, it can be understood simply as the field that studies the way that thinking, feeling, and social influences impact how people and institutions make economic and financial decisions. In my opinion money is one of the most emotionally charged aspects of life as well as one that is most susceptible to confused thinking. However, for most of us there is a massive amount of denial about how vulnerable we are to poor decision making because of emotional or distorted thought.
It wasn’t until I was planning my wedding that I began to fully appreciate how distorted thinking around money can become. I’m sure that I could write an entire book on the subject, but for the purpose of this post I will focus on how distorted mental accounting almost led me and my husband to spend $800.00 on the stands for the table numbers at our reception.
Mental accounting is a term from behavioral economics that refers to the tendency for people to place differing value on a dollar depending on the mental category in which that dollar will be spent. If we as humans were rational beings, a dollar would be perceived the same way whether we were buying a pack of gum or a computer. The reality is that most of us would think twice before buying a pack of gum that suddenly cost $2.25 when we were used to paying $1.25. Maybe one would even go all the way to a different store to buy a pack of gum at the normal price. However, when buying a computer, I don’t imagine many of us would leave and go to a different store upon learning that the computer we wanted cost $901.00 at the store we were at and only 900.00 at the store down the street.
Now this brings me to the incident of the $800.00 table number stands. Like most couples planning a wedding, my husband and I had to get used to spending many hundreds of dollars here and many thousands of dollars there to create our special day. By the time we reached the week of the wedding, when it came to expenses for the big day, a dollar had begun to look more like 10 cents. And worst of all, like a crab in a slowly heating pot, I did not even notice until two days before the wedding when my husband presented me with the following question: “Do you think we should use the table number holders that Christine (wedding planner) recommended? They cost $800.00 but Christine says that they will be beautiful.” For anyone who is not either extremely wealthy or currently in the clutches of the wedding industrial complex, this is a crazy idea. My husband, who is one of the most financially responsible people I know, under any other circumstance would not have entertained it for a second. However, at that point the mental accounting category of “the wedding” was so distorted that we actually considered it for a solid 20 minutes. Thank goodness rationality broke through the overwhelming haze of wedding preparation, in end we spent $20.00 on barely visible table number stands. In retrospect, I can only imagine the sum our distorted mental accounting cost us on any number of minor decisions.
There are many times in life in which spending larger sums of money will distort the perception of a dollar. To avoid unnecessary cost I recommend the following.
1) Remind yourself of your understanding of the value of a dollar in smaller purchases
2) Avoid add-ons: e.g. How much do you really need the $1000.00 seat heaters added to your new car if you live in Southern California?
3) Practice giving yourself time to evaluate decisions
4) Think about how much you make per hour of work and ask yourself: Am I willing to work X number of hours to have this or that?