Dollars and Sense: How We Misthink Money and How to Spend Smarter
by Dan Ariely
27 popular highlights from this book
Key Insights & Memorable Quotes
Below are the most popular and impactful highlights and quotes from Dollars and Sense: How We Misthink Money and How to Spend Smarter:
“We don’t think about saving money very often. When we finally do think about it, our thoughts rarely lead us to save more. To test the extent that the design of digital wallets could influence behavior, Dan and his colleagues conducted a large-scale experiment with thousands of customers of a mobile money-saving system in Kenya. Some participants received two text messages every week: one at the start of the week to remind them to save and another one at the end of the week with a summary of their savings. Other participants got slightly different text reminders: It was framed like it came from their kid, asking them to save for “our future.” Four other groups were bribed (formally known as “financially incentivized”) for saving. The first of these groups got a 10 percent bonus for the first 100 shillings that they saved. The second group got a 20 percent bonus for the first 100 shillings that they saved. The third and fourth groups got the same 10 percent and 20 percent bonuses for the first 100 shillings that they saved, but they got it together with loss aversion. (In these conditions, the researchers placed the full amount of the match—10 or 20 shillings—into their account at the beginning of the week. The participants were told that they would get the match based on how much they saved, and that the amount of the match that they did not save would be taken out of their account. Financially, this loss aversion approach was the same as the regular end-of-the-week match, but the idea was that experiencing money leaving their account would be painful and would get the participants to increase their savings.) A final set of participants received those same text messages plus a golden-colored coin with the numbers 1–24 engraved on it, to indicate the 24 weeks that the plan lasted. These participants were asked to place the coin somewhere visible in their home and scratch with a knife the number for that week to indicate if they saved or not.2 At the end of six months, the treatment that performed spectacularly better than every other was—drumroll please!—the coin. Every other treatment increased savings a bit, but those who received the coin saved about twice as much as those who only received text messages. You might think the winner would have been the 20 percent bonus or maybe the 20 percent bonus with loss aversion—and this is in fact what most people predict would be the most effective way to get people to save—but you’d be wrong.”
“Now that we know that many commercial interests are after our time, our money, and our attention, we may think there’s something we can do about it. After all, we believe ourselves to be reasonable and rational beings. So don’t we just need the right information with which to make good decisions, and we will immediately make the right ones? We eat too much? Just provide calorie information and all will be well. We don’t save enough? Just start using a retirement calculator and watch our savings grow. Texting and driving? Just tell everyone how dangerous it is. Kids drop out of school? Doctors don’t wash their hands before checking their patients? Let’s just explain to the kids why they should stay in school and tell the doctors why they should wash their hands. Sadly, life isn’t that simple. Most of the problems we have in modern life are not due to lack of information, which explains why our repeated attempts to improve behavior by providing additional information often fail.”
“Consider the experience of buying a stereo system, as conveyed by Shane Frederick, Nathan Novemsky, Jing Wang, Ravi Dhar, and Stephen Nowlis in an aptly named paper, “Opportunity Cost Neglect.” In their experiment, one group of participants was asked to decide between a $1,000 Pioneer and a $700 Sony. A second group was asked to pick between the $1,000 Pioneer and a package deal where for $1,000 they could get the Sony plus $300 to be spent only on CDs. In reality both groups were choosing between different ways of spending that $1,000. The first group chose between spending all of it on a Pioneer or spending $700 on a Sony and $300 on other things. The second group chose between spending all of it on a Pioneer or spending $700 on a Sony and $300 on music. The results showed that the Sony stereo was a much more popular choice when it was accompanied by $300 of CDs than when it was sold without them. Why is this odd? Well, strictly speaking, an unconstrained $300 is worth more than $300 that must be spent on CDs because we can buy anything with the unconstrained money—including CDs. But when the $300 was framed as being dedicated to CDs, the participants found it more appealing. That’s because $300 worth of CDs is much more concrete and defined than just $300 of “anything.” In the $300-for-CD case we know what we’re getting. It is tangible and easy to evaluate. When the $300 is abstract and general, we don’t conjure up the specific images of how we’re going to spend it, and the emotional, motivational forces on us are less powerful. This is just one more example of how when we represent money in a general way, we end up undervaluing it compared to when we have a specific representation of that money.1 Yes, CDs are the example here, which nowadays is like thinking about the gas efficiency of a stegosaurus, but the point remains: People are somewhat surprised when we simply remind them that there are alternative ways to spend money, whether it’s on a vacation or on a pile of CDs. That surprise suggests that people don’t tend to naturally consider alternatives, and without considering alternatives, we can’t possibly take opportunity costs into account. This tendency for neglecting opportunity costs shows us the basic flaw in our thinking.”
“A few years ago, Dan and a research assistant went to a Toyota dealership and asked people what they would give up if they purchased a new car. Almost no one had an answer. None of the shoppers had spent any significant time considering that the thousands of dollars they were about to spend on a car could be spent on other things. So, Dan tried to push a little bit further with the next question, and asked what specific products and services they wouldn’t be able to get if they went ahead and bought that Toyota. Most people answered that if they bought a Toyota, they wouldn’t be able to buy a Honda, or some other simple substitution. Few people answered that they wouldn’t be able to go to Spain that summer and Hawaii the year after, or that they wouldn’t go out to a nice restaurant twice a month for the next few years, or that they would be paying their college loans for five more years.”
“El esfuerzo que hace la gente para evitar tener que pensar no tiene límites”
“trabajo es todo aquello que estamos obligados a hacer, sea lo que sea, y que juego es lo que no se nos obliga a hacer.”
“Está claro que para casi todo el mundo un dólar es muy poco en comparación con lo que solemos gastar en cafés, transporte o cuidado personal, especialmente a cambio de algo que enriquece nuestra vida; y, sin embargo, de alguna forma, el cambio de gratis a un simple dólar nos hace preguntarnos si realmente merece la pena pagar por algo que teníamos por nada. No dudamos un segundo en pagar 4 dólares todos los días por un caffè latte, pero ¿pagar 1 dólar por una aplicación que era gratis? Intolerable.”
“A few years ago, Dan and a research assistant went to a Toyota dealership and asked people what they would give up if they purchased a new car. None of the shoppers had spent any significant time considering that the thousands of dollars they were about to spend on a car could be spent on other things. ... Most people answered that if they bought a Toyota, then they would not be able to buy a Honda, or some other simple substitution. Few people answered that they wouldn't be able to go to Spain that summer or Hawaii the year after, or that they wouldn't go out to a nice restaurant twice a month for the next few years, or that they would be paying their college loans for five more years.”
“Fundamentally, when we value effort over outcome, we’re paying for incompetence.”
“Happiness too often seems to be less a reflection of our actual happiness and more a reflection of the ways in which we compare ourselves to others.”
“The cost to rent an apartment in some major cities can climb to more than $4,000 per month, and we don’t seem to blink. The price of gas rises 15 cents, and it can swing a national election.”
“Free is a strange price, and yes, it is a price.”
“This dynamic is key: We are, of course, constantly fighting the complex nature of money and our own failure to consider opportunity costs.”
“Many professional athletes make a lot of money quickly. They also spend a lot of money in a short time and very often declare bankruptcy quickly. About 16 percent of NFL players file for bankruptcy within twelve years of retirement, despite average career earnings of about $3.2 million.9 Some studies say the number of NFL players “under financial stress” is much higher—as high as 78 percent—within a few years of retirement. Similarly, about 60 percent of NBA basketball players are in financial trouble within five years of leaving the game.10 There are similar stories about lottery winners losing it all. Despite their big paydays, about 70 percent of lottery winners go broke within three years.11”
“On Amir and Dan once did a study in which they asked people how much they would pay for data recovery.4 They found that people would pay a little more for a greater quantity of rescued data, but what they were most sensitive to was the number of hours the technician worked. When the data recovery took only a few minutes, willingness to pay was low, but when it took more than a week to recover the same amount of data, people were willing to pay much more. Think about it: They were willing to pay more for the slower service with the same outcome. Fundamentally, when we value effort over outcome, we’re paying for incompetence. Although it is actually irrational, we feel more rational, and more comfortable, paying for incompetence.”
“One way Dan demonstrates to his students the concept of sunk cost is through a game in which participants bid to purchase a $100 bill. Rule #1: Bidding starts at $5. Rule #2: Bids can only increase by $5 at a time. Rule #3: The winner pays the amount of his or her final bid and gets the $100. The last rule is that the second-highest bidder also pays what he or she has bid, but gets nothing. As the game progresses, the bids rise to $50 and $55, at which point Dan will have made money. (The $55 bidder will pay $55 to get $100 and the second bidder will pay $50 and get nothing.) At some point, someone bids $85 and a competitor bids $90. At that point, Dan stops them and reminds them that the first person will win $10 ($100 minus $90) and the second person will lose $85. He asks the $85 bidder whether they want to continue to $95. Inevitably, they say yes. Then he asks the first person the same question, and he happily agrees to go to $100. But it doesn’t stop there at $100. Next, Dan asks the person who’s bid $95 if they want to go to $105. As before, if they say no, they’ll lose their previous bid: $95. But at this point, when the bidding is over $100, if they say yes, that means they are now actively bidding knowing that they will lose money. This time it’s $5 ($105 bid minus $100 winnings), but the loss will only increase from there. Inevitably, both participants keep bidding higher and higher until at some point one person realizes how crazy this is and they stop (and the person stopping ends up losing $95 more).”
“rather than trying to work hard and figure out an item’s absolute value, when given the choice, we take the path of relatively least resistance.”
“Are these logical choices? No. Are they the right choices? Often not. Are they the easy choices? Absolutely. Most of us take the easy choice, most of the time. That’s one of our big problems.”
“because we have no way of really knowing how much this precious widget is worth, we compare the price now to the price before the sale (called the “regular” price), and take that as an indicator of its high current amazing value.”
“Which would you buy? A dress shirt priced at $60 or the very same dress shirt, priced at $100, but “On Sale! 40% off! Only $60!”?”
“Gran parte de lo que nos desvincula emocionalmente de nuestro yo futuro es el hecho de que ese yo futuro suele estar muy mal definido. A menudo nos imaginamos en el futuro como personas totalmente distintas a las que somos ahora,5 y por ello comprendemos, sentimos y atendemos nuestras necesidades y deseos actuales mucho más que nuestras necesidades y deseos futuros. La recompensa inmediata de un malvavisco, de media caja de bombones o de un equipo de sonido envolvente está muy viva y muy clara, por lo que influye más en nuestras decisiones. La recompensa de aquello que se obtendrá en un futuro desconocido es mucho menos clara, menos tangible y menos real, y por ello influye poco en nuestras decisiones. Es más difícil conectar emocionalmente con un futuro abstracto que con un presente tangible.”
“Los humanos queremos creer que nuestra comida va a ser deliciosa, que nuestras inversiones van a tener éxito, que vamos a encontrar todas las gangas, que nos vamos a convertir en millonarios de la noche a la mañana, y que estamos a punto de comernos un avión.”
“Mientras seamos plenamente conscientes de las elecciones que hacemos para huir del dolor, podemos controlarlas y limitar en lo posible su impacto en nuestras vidas.”
“cuando obtenemos dinero que sentimos como negativo, intentamos «lavarlo» de alguna forma.”
“las personas que se sienten culpables por el modo en que han obtenido un dinero a menudo donan parte de él a obras de caridad.”
“¡Cada vez que se introduce el dinero en cualquier decisión, tal decisión se vuelve más compleja de lo que era!”
“We are in an environment that is ever more hostile to making thoughtful, well-reasoned, rational decisions.”
