Making Better Money Decisions

Daniel Gilbert Puts it in Perspective

We all make stupid decisions about money and numbers, but we may not realize this truth, or the cause behind it. In this mp3 audio file, Daniel Gilbert explains why our numerical judgement is so bad.

It is an intriguing and humbling lecture; I think all of us will identify with at least one of the foibles he points out.

In one example, he suggests you are going downtown to the theatre with a $20 ticket, and a $20 bill in your wallet. When you arrive, you realize you have lost the ticket; most people will not spend the remaining $20 on another ticket. If you had gone downtown with two $20 bills however, and at the theatre realized that you had lost one of the $20’s, you would use the remaining one to purchase your ticket. In the first case, you see the ticket as now costing $40 (way too much!), but in the second case, you see the lost $20 as not being related to the cost of the ticket. In reality, both scenarios are exactly the same.

In another example, people were asked if they would drive across town if they could save $100 on a small item, like a stereo. Most said they would. When asked if they would drive across town to save $100 on a $32,000 car, most said no way! Why? Compared to $32,000, $100 doesn’t seem like much, so the perceived “value” of going out of your way is small. But as Daniel points out, the $100 doesn’t know where it came from; it’s not worth less because it was a savings of a smaller percentage.

Every day we make decisions based on incorrect or out-of-context comparisions rather than the flat-out, objective value of a proposition. It’s a fascinating listen, especially if you’re in the process of making a purchasing decision.

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