{"id":755,"date":"2020-11-12T20:31:11","date_gmt":"2020-11-13T04:31:11","guid":{"rendered":"http:\/\/www.mitchelljoe.com\/blog\/?p=755"},"modified":"2020-11-12T20:32:23","modified_gmt":"2020-11-13T04:32:23","slug":"money-101-12-try-to-be-rational-about-money","status":"publish","type":"post","link":"http:\/\/www.mitchelljoe.com\/blog\/2020\/11\/12\/money-101-12-try-to-be-rational-about-money\/","title":{"rendered":"Money 101 (#12): Try to be rational about money."},"content":{"rendered":"\n

DISCLAIMER: I am not a financial advisor and this should not be taken to be financial advice. You should consult a financial professional for advice. I am a financial amateur. These are my thoughts and opinions on money that I have recorded here for my children, with the hope that my thoughts might help them. They are responsible for the results of the advice they choose to follow. Always worth keeping in mind: Past performance is no guarantee of future results. Your mileage may vary. The map is not the territory. Keep your eyes open. Smell it before you take a bite. <\/strong><\/p>\n\n\n\n

To my children: <\/p>\n\n\n\n

A lot of the issues around money are about math. Math is objective and so you should try to be rational about it. Here are some ways that people tend to be irrational about money. This list is not exhaustive so keep your wits about you. <\/p>\n\n\n\n

People spend more with credit cards than with cash. <\/strong><\/p>\n\n\n\n

A dollar is a dollar is a dollar but people spend more when they pay with a credit card than when they pay with cash. Credit cards make it easier to pay and it\u2019s somehow treated as a less direct connection with money but the dollar going out of your wallet is the same whether it leaves in a plastic or paper form. <\/p>\n\n\n\n

Bonus money or gift money<\/strong><\/p>\n\n\n\n

When you receive a bonus at work or when someone gives you money for your birthday or when you find money on the ground, you might think of this as free money. You weren\u2019t expecting it and now it\u2019s yours. You might not have been counting on it to pay the bills and now you have it so it seems like extra. When you think of it as new, extra money, then you might be more likely to go spend it on something than you would be otherwise. But a dollar is a dollar is a dollar. What makes you spend it should be how much you need or want the thing you\u2019re thinking about buying relative to how much money you have. It doesn\u2019t matter where the money came from. <\/p>\n\n\n\n

Sunk costs fallacy<\/strong><\/p>\n\n\n\n

A sunk cost is a cost that has already occurred and there\u2019s no reversing it or getting it back. The money is gone. It shouldn\u2019t affect your decision but it seems to. If you bought a non-refundable flight and something came up and now you would rather stay home, then the fact that the flight is already paid for is no reason to get on the airplane. How much something cost you, when there\u2019s nothing you can do about it now, should not affect your decisions about what to do now. You should not sink with your sunk costs. You should walk away and come back the situation afresh. <\/p>\n\n\n\n

Buying items on sale<\/strong><\/p>\n\n\n\n

The fact that an item is 90% off is no reason to buy it. None. Consider: 90% off of scuba gear that is at the bottom of the ocean. Sales are great, IF you want the item anyway. If you weren\u2019t thinking about buying it before it was on sale, why would you think about buying it simply because it\u2019s on sale. Consider: Free elephant. Free shipping included with free elephant. <\/p>\n\n\n\n

Marketing<\/strong><\/p>\n\n\n\n

Whenever you are being marketed to, be aware that marketers might be playing into human tendencies to be irrational in certain ways. Here are some examples.<\/p>\n\n\n\n

Marketing: Anchoring<\/strong><\/p>\n\n\n\n

Suppose that peanuts are offered on a restaurant’s menu for $2. And you\u2019re not particularly interested in the offer of \u201cpeanuts for $2\u201d. Anchoring is placing another, high point of reference next to the other options to make them look more attractive. When the menu says, \u201cMacadamia nuts $20, Peanuts $2\u201d, people are more likely to buy peanuts than when the menu says only \u201cPeanuts $2\u201d. That makes no sense. Peanuts cost $2 no in both cases. Don\u2019t get distracted by the macadamia nuts. <\/p>\n\n\n\n

Marketing: Free stuff<\/strong><\/p>\n\n\n\n

\u201cBuy one, get one free\u201d is more successful for marketers and businesses than \u201cBuy 2 and get 50% off\u201d because free stuff is attractive. \u201cBuy one, get one free\u201d also appears to lower the bar\u2014you only have to buy one item to get something good, whereas the other phrasing makes it seem like you have to buy two items to get something good.<\/p>\n\n\n\n

Marketing: Volume discounts<\/strong><\/p>\n\n\n\n

That jumbo 32-ounce soda never costs twice as much as the 16-ounce soda, so it seems like a good deal. And it is, IF you really want 32-ounces of soda. If you don\u2019t, then just order the 16-ounce one and save some money by buying only what you originally wanted. <\/p>\n\n\n\n

Bottom Line: A dollar is a dollar is a dollar. Be careful of anything that may distract you from what you intend to do with your dollars. Humans are not perfectly rational. For better and for worse.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

DISCLAIMER: I am not a financial advisor and this should not be taken to be financial advice. You should consult a financial professional for advice. I am a financial amateur. These are my thoughts and opinions on money that I have recorded here for my children, with the hope that my thoughts might help them. … <\/p>\n

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