–William Lowe Bryant
Question: This is a two part question: a) does $50 always equal $50; and b) which amount of money would you prefer to earn over a three year period $110,000 or $150,000?
While it is true that $50 will always equal $50 and $150,000 is, of course, more than $110,000; it is also true that many people work contrary to their financial interests.
If you see a little of yourself in either of the below examples, you may need to unlearn some behaviors.
Let’s consider the case of the $50 first. If you were about to purchase a $100 mobile phone and suddenly learned the same model was being sold for $50 on the opposite side of town would you drive across town to save the extra $50? When surveyed an overwhelming number of people stated that they would. So far so good. Yet, when the scenario was switched and the product in question was a $40,000 automobile and they were informed the same model was available at on the other side of town for the price of $39,950 – the exact same $50 savings – a majority of people indicated they wouldn’t make the trip.
The reason is that a $50 savings off a $40,000 product is miniscule compared to its overall price. Whereas, from the perspective of a $100 product, a $50 savings is quite significant. The reality is that a $50 savings is a $50 savings and your wallet or bank account doesn’t know – nor care – how you accumulated the extra savings. In a perfectly rational world people would work to save the money regardless of the situation.
One real world manifestation of this behavior can be found in retail shops. It is a well known tactic that if you go into a high-end retailer and tell the sales clerk you are interested in buying some socks, shoes and a suit they will first attempt to get you to buy the suit. Why? Because if they are successful at selling you a $1500 suit, $300 for pair of shoes and $25 for a pair of socks suddenly seem less consequential. If, however, you were to begin shopping for socks first, not only are you less likely to spend less on socks, you are also likely to think long and hard before dropping big money on expensive shoes and suits.
The second question stems from another fascinating study in which people were provided a choice between two different scenarios. In the first, they earned $30,000 in Year One; $40,000 in Year Two; and $50,000 in Year Three. In the other scenario, they earned $60,000 in the first year; $50,000 in the second; and $40,000 in the third.
When asked to select which scenario they would prefer, a surprising number chose Option 1. This is in spite of the fact that they would earn only a total of $30,000 less. It is a well documented that many people experience the pain of losing money more (as is experienced in Scenario #2) and will go to great lengths – including missing out on an extra $30,000 – to avoid that pain.
For a real world implication of this behavior in action, consider the case of a bargain flight from San Francisco to New York. Imagine the price is $300 one day but suddenly jumps to $400 the next. Many people will skip the deal. If, however, the same flight was originally $800 and then dropped to $600, more people would rush to book the flight because it was a “deal” – even though it is $200 more expensive than the first scenario.
Often, the reality is that people prefer the illusion of a good deal (a $600 flight that was $800) to the reality of a much better deal (a $400 flight that was $300). My advice: Don’t always follow the money because sometimes it can lead you astray.