Understanding the Screwy Ways We Think About Money

Eric Barker wrote a terrific summary of Dan Ariely’s new book Dollars and Sense: How We Misthink Money and How to Spend Smarter. There are many great anecdotes. A few that stuck out to me were:

Ignore “on sale” signs as well as making price comparisons on a relative basis. It doesn’t matter if an item is a ‘bargain’ if you have no use for it in the first place. Additionally, value each component of a purchase on its own. This is where add-ons to an already large purchase get downplayed because we are spending so much.

— If you want to spend less, pay for things with cash. Paying with cash actually has a similar neurological effect as physical pain.

Instead of considering if the price of something is fair, ask yourself how much you personally value that thing.

Put in place an automatic trigger to re-route some of your income into a savings or 401(k) account when you receive a paycheck. One study showed a group that did this increased their savings by 81% that year.

Don’t let the merchant set the anchor that you compare to the “sale” price (e.g. this sweater used to be $150, but now it’s only $59!). Before shopping for something, go in with a mindset of what you expect to pay and use that as your comparison instead.