Big Money

There’s a not-so-strange tendency for people make really poor financial decisions when there’s a lot of money involved.

If you’re buying a $50,000 car that comes with 17″ aluminum wheels, but the salesman offers you the fancy 18″ chrome wheels for only $500 more, a lot of people would accept.  After all, you’re getting the better product for only $500.  What’s an extra $500 when you’re already spending $50,000?

People do this with colleges as well.  The fancy private school is going to charge you (or your parents) $250,000 for a diploma.  The State school one county over will sell you an equivalent diploma for free, on a scholarship.  And yet, thousands of people choose to spend a quarter of a million dollars for the fancy private school degree.  What’s going on?

There are a couple different things at play here, but here’s two of the most interesting.

First, we have a problem with large numbers.  What is $50,000?  What is $250,000?  None of us have ever held that much cash in our hands before.  We have a vague idea of what it could buy, but it’s not a relatable amount of money.  It’s just a number.

Second, we have a problem thinking in terms of percentages.  And extra $500 on a $50,000 purchase is a lousy 1%.  Who cares right?  When we abstract it, it becomes meaningless.  But it’s still $500.  It’s still an amount of money you wouldn’t ordinarily spend on Amazon without doing some serious research about whatever it is your buying.  But, in the context of the $50,000 purchase, it’s pretty easy to justify the 1% impulse buy.  Dealerships are counting on it.

The easiest way to avoid these money traps is to break the amounts down into relatable figures.  The $500 chrome wheels aren’t 1%, they’re $500.  They’re that super fancy new espresso maker you’ve been wanting, or that weekend in San Francisco you’ve been planning.  That $250,000 isn’t a number in a bank account.  That’s your own Subway franchise, a brand new BMW, and three years rent.  That’s two and a half years of traveling around the world, spending $250 each and every day.

If you keep this in mind, you won’t be left struggling to decide between what you think you want and some abstract number in a bank account.  You’ll be deciding between one version of the thing you want with another version.

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