People battle to think of money in terms of opportunity, which leads to challenges in how we decide to spend it. We are also wired for short-term benefits and thinking about the consequences of our behaviour is therefore difficult. These were some of the ideas that inspired the creation of 22seven and led us to engage with behavioural scientist Dan Ariely in our early research. Dan and his team spent time with us in thinking of how to apply behavioural economics to help people do more with their money. The research led to interesting conclusions and some practical things that we can do to help shape our behaviour.
As Dan points out in the video below, recorded by Big Think in 2009, the challenge with money is that it can be used for anything. It is fungible and in itself is “just a number”. We also tend to compare apples with apples, so to speak, when making money decisions.
“We went to a Toyota dealership and we asked people, ‘what will you not be able to do in the future if you bought this Toyota?’ … People said, ‘Well, if I buy this Toyota, I can’t buy a Honda.’ So, they were making a substitution from the same product in the same time, but in reality, this is not a substitution,” says Dan.
“They are [really] substituting something [else] in the future. In the future, I will have to give up two weeks of vacation and 70 lattes’ and 1700 books. I don’t know what exactly the translation is but when we do consume something now, something else has to give at some point. What is this thing? What is this value of price? Very hard to think about it,” he explains.
One of the tricks we can use to preempt our decisions is to make automatic deductions into savings accounts or investments before we start spending our money, which Dan points out is a great idea. But we also need to break out of thinking about our spending habits in terms of just what they represent now, instead trying to realise what they prevent us from doing in the future.
This is the ‘big money mistake’ Dan refers to. Instead of comparing one car with another we should try to understand the value of any car versus the other things we want and need. If you’re saving up to go on a holiday, for example, try and think about how much further you could get to achieving that goal if you spent less money on other things now.
I don’t think we should go around life and being miserable all the time and feel the pain of paying. It’s a question of what categories we want to spend more on and what categories we want to feel that we are spending too much on and want to cut down.
This challenge gets more difficult when we have access to credit, allowing us to get something now and pay for it later. We end up paying more for things this way, but in the moment it makes sense to the emotional part of our brain. We see short term rewards with differed payment and can conveniently put off thinking about the consequences.
Put it all together and buying decisions are difficult. But if we understand our behaviour we can work to change it. If we are able to accurately way up our decisions in the moment, we can curb making the wrong ones.
Watch the full video of Dan discussing the big money mistake…