A Psychologist Explains How to be Better with Money

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Think absolute, not relative

Multiple studies have shown that the more an item costs, the more careless we tend to be about its price. Sound wrong to you? To illustrate this, imagine you’re on a seaside holiday and you decide to hire a bike to cycle along the coast road. You walk along the promenade checking out the prices. The first hire shop you find is charging £25 a day, but you see a sign for another shop that offers a bike for just £10 a day. The second shop is a ten-minute walk away but with a price difference like that, maybe it’s worth checking out the cheaper bikes. As long as they look roadworthy you can hire one of those instead and congratulate yourself on saving £15, enough to pay for a second day’s cycling or a nice lunch in a café on the cliffs.

Now imagine you are back home and are buying a new car. The first dealer has one you like for £10,010. You want to make sure you’re getting a good deal so you go to a second showroom, which has the same car for £10,025. Is it worth going back to the first place to save £15? You’d almost certainly decide it’s not. Yet the sum you could save is the same as in the bike hire example.

Countless studies have shown that we make judgements like this, viewing a saving as a proportion of the total cost rather than an actual amount of money with a determined spending power. This is called relative thinking and is particularly common among more affluent people.

Always pay with cash, not a card

When you can, use actual money for your purchases. Researchers in the US monitored the food shopping of 1,000 households for six months. Taking all sorts of factors into account, the researchers found that when people were paying by credit or debit card, they tended to make more impulsive purchases of unhealthy foods such as cakes or chocolate. It seems our propensity to indulge in guilty pleasures increases when we don’t have to hand over cash. So it seems going contactless might expand our waistlines while slimming down our bank accounts.

When we use a card our thinking changes. We’re less likely to remember the amount we paid and more likely to add a bigger tip. We’re even more likely to spend more on the same goods, as a psychology experiment at Massachusetts Institute of Technology showed. Students had to bid on how much they’d be prepared to pay for a basketball game ticket. Half of them were told they’d have to pay in cash and the other half were told they could pay by card. So how much would they offer for the tickets? The difference was striking. Those paying cash bid, on average, $28 but the card payers were prepared to offer more than double that amount – $60.

Why splitting the bill isn’t fair

No-one likes that bit at the end of a group meal in a restaurant when you work out what everyone had and what they all owe. But doing it that way could be the most economical way to eat out, according to the economist Uri Gneezy. He performed a study in which he divided students into groups of six and gave them the opportunity to go out for dinner. Students were told beforehand how the bill would be calculated. When they were instructed that each individual would pay for whatever they ordered, they tended to choose a reasonably priced meal from the menu. But if they knew that the bill would be split equally, suddenly the more expensive items on the menu seemed appealing.

Price doesn’t equal quality

The idea that we think that a product is superior because it’s expensive was explored in a study published in the Journal Of Marketing Research where two groups of students were told to buy energy drinks that were advertised to improve concentration. Both groups were sold the same drink including the same ingredients. The only difference was that one group was charged $1.89 for a can while the other was told that because the university had managed to obtain a bulk-buy discount they would only be charged $0.89.

The two groups were then given a list of anagrams to solve, and the group that paid the higher price for their drinks solved more. Why? The researchers concluded that the more expensive the drink, the more the consumer wants to believe that its supposed benefits – in this case improving concentration – are real.

5 Money Saving Tips

  1. Think in cash to save cash. When you’re about to buy something on credit card, imagine taking the same money out of a cash machine. Would you still want to spend it? Only if you would should you go ahead and buy the item.
  2. Break the negative cycle. If you want to get better at saving, it’s no use just saying you’ll turn over a new leaf. Appreciate that the same patterns repeat themselves and find a new way of doing it instead.
  3. Be objective when selling. If you are setting an asking price for something that you want to sell, imagine that you don’t own it.
  4. Always start a negotiation. In negotiations, always name your price before the other person does, unless you really have absolutely no idea what is appropriate.
  5. Seek out the small pleasures. If you suddenly find that you’re a millionaire, don’t go immediately for the best money can buy. If you do, everyday pleasures will start to pale in comparison. Instead, buy lots of little indulgences.

Mind Over Money by Claudia Hammond (£9.99, Canongate) is out now, buy on amazon.co.uk