How our brains lie to us about money

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I got hungry for a snack the other day. So I decided to get some tarts from this shop round the corner of my house. It’s my go-to stop for an after dinner snack now. After several visits to this shop, I noticed a fascinating sales technique employed by the Chinese woman at the counter.

Since the tarts are small, most people get 2 or 3. Every time these customers approached the woman, she would say, “Oh, why not get 4? We can put that in a box for you.” And sure enough, people “upsized their meal” and got a box of 4 tarts. The price for a box of 4 tarts is $4.80. And the price of 1 tart is 1.20. Do you notice the math? Yup, the price of a box of 4 tarts is the same as 4 tarts individually. Did everyone suddenly get hungrier? Or did they really want an ugly cardboard box?

Our brain tries to save resources

brain lies

I don’t think so. You see, we like to think we are rational all the time. Evolution hasn’t allowed our brain to develop that way unfortunately. Conscious thinking consumes lots of resources. Our brains value these resources so it finds shortcuts to save time and effort. You are thinking about what you’re reading now (well, at least I hope so!). But in fact, your thoughts while reading this article is a tiny fraction of what your brain is actually doing.

Your conscious thought is like the CEO of a large multinational corporation. Do you think the CEO is aware of every single nut and bolt of the organization? No! He gives instructions about the long-term strategy of the company and people come to him when there’s a major crisis. But he isn’t aware of every single thing going on. Your brain decides resources and delegates. Once we have repeatedly performed a certain act, your brain devotes less and less resources to doing it for the sake of efficiency. Over time, an action can become so effortless that it’s actually harder for you to do while thinking. For example, try brushing your teeth while thinking about every single movement. Did you poke yourself in the mouth?

Our brains stores shortcuts to save resources

Stop running away brain!

Like any good company, our brain rarely bothers CEO “Conscious Thought”. he experiences we have in the past are used to build mental rules to shortcut our decision making process. Our brain uses these rules to make quick decisions that work great most of the time, but lead us down the wrong path when we least expect it. Psychologists call these rules heuristics . Herbert A Simon coined the term and he borrowed the concept from computing. With “the mystery of the 4 tarts”, our brains are relying on past experiences with similar purchases. It uses these experiences to decide it’s value. We’ve all bought a set, combo, extra value, bundle or “3 for 1” meal in our lives. How could you not? We’re practically throwing away money when we DON’T get that extra fries and cold drink to go with our burger. So when someone tell us, “Why not get 4? We could put that in a box.”, our brain doesn’t go, “Hmmm… let me think…is 4.80 divided by 4 greater than 1.20?”. Nope, it goes whoopee, I’ve seen this before! 4 in a box equals extra value!

What has this got to do with my money?

Heuristics lead us down the wrong path when we least expect it. This is really evident in what I call “imagined savings”.

Pay attention this Cyber Monday

Let’s assume that you bought a TV on a 50% discount this Cyber Monday, instead of $1000, you paid $500. Immediately, your brain starts planning how to use this savings on some other item. Maybe you should splurge it on a pair of new shoes. What about spending on a new soundbar that goes with the TV. The problems is you’re now making purchases you didn’t plan on making in the first place and spending more than the $500 you “saved”.

Peter Tufano, professor of consumer finance at Harvard Business School, says that many people confuse getting a discount (50% off a TV) with saving money. “It’s not savings until you save it,” he says.

Spending less does not equal savings unless we take action!

Action steps for savings to happen

By now you should have automated your savings and investments. Use these 3 steps to do deal with your unexpected windfall

  • First, is it a one-time or  recurring event?
  • Decide how much you should be saving
  • Choose where it should go based on your goals.

What to do for recurring amounts

It’s the same thing for a recurring amount. Let’s say you finally decided to look at your company’s corporate mobile plan and discovered you could save $15 with a phone call. It’s tempting to believe that now you just have to sit back and relax. The money will be sitting in your bank account and growing.

It never works out that way.

If you’ve “saved” $15 on a monthly bill, simply increase the amount to one of your automatic saving goals each month.

Once you’ve taken action, and the cash is going where you want it to go instead of sitting idly in your bank, then you can sit back and congratulate yourself. You nabbed yourself a good deal, and you actually went ahead and saved it.

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