The human being is definitely a funny creature. We all tend to think that, usually, we take our decisions based on our own rationale and limited frame of reference. We identify our needs, look at the options possible, compare them with pros and cons and then, we take a decision based on the “best” possible option. All this seems logical. Now, look at the following example:

You go to the office supply store to buy a pen. After looking at different sizes and colors, you pick the one you like and go to checkout. Once you are there, you realize that this pen is $14! You remember seeing it for $7 at another store. Therefore, logical choice, you put back the pen where it was, smile at the cashier (or tell her how evil they are to rip off people like this 😉 ), get back in your car and go to the next shop to save your $7 to buy the same pen.

Now let’s take the same example but with a different product:

You go to the computer store to buy a laptop. The price of the laptop you want is $1,999. You came to the store with one of your friends and before going to the checkout, he tells you that you can get the very same laptop for $1,992. Therefore, “logical” choice again, you decide it’s not worth it to waste another 45 minutes just to save $7. After all, $7 on 2k is only 0.35% of the price.

The question is: Why is saving $7 on a pen worth it while saving $7 on a laptop is not?

You should agree with me that, technically, $7 is $7 no matter where you save it. However, this little example was taken from research in 1974 by Amos Tversky and Daniel Kahneman called Judgement under Uncertainty: Heuritics and biases, clearly stated that most individual will save 50% on the price of pen but will gladly pay 0.35% more on a laptop even though it’s the same amount that comes back in your pocket.

The same reasoning would apply to an individual that would more likely pay an extra $3,000 to have leather seats in his $45,000 new car than pay $3,000 for a leather couch for his living room.

When it comes to money management, we all tend to think in term of percentages, not in absolute dollars. I think it’s important to take a second step and look at the real numbers to make sure that what you do to save a few bucks really make sense.

A quick tip

When I’m about to go the extra mile to save money or to avoid spending money, I always think about how much my time is worth per hour. If I think I could use this extra hour to make more money than I would save, I will spend the money and concentrate on making more using this extra hour that I would have used anyway. So far, it’s working pretty well but you must be very disciplined to use this hour to do something productive instead of using it to relax in front of the new computer ;-).

image credit