Wealthy Wednesdays: When We Fall for Our Own Faulty Thinking

“If something costs $1,000, but it’s on sale for $750 and then you decide to buy it, you did not just save $250. You spent $750.” Faisal Khan, banking consultant, a quote I pilfered from a question he answered on Quora.

IMG_4772It was synchronicity that I found this quote on Quora (I love Quora). Seconds before I was writing a chapter in a new book on how to ditch coupons and still save money grocery shopping and I was trying to explain the perception of the “you saved this much money” line often used on store receipts. I have said time and time again…it is never about how much money you think you’re saving, it’s really about how much you’re actually spending. 

Grocery stores highlight savings to show you how much you would have paid if you didn’t have their loyalty card. Other stores do this, too. For example, one popular department store near me instructs cashiers to circle with red pens and often a neon highlighter the amount on the receipt that a customer has saved. Then, the cashier cheerfully and loudly belts out the number to the customer. A customer will say “Oh my goodness, that is SO amazing, thank you SO much!” and walk out with a smile on his or her face. Mostly this is the customer who just walked out with a big bag of loot that was on clearance. But…um…you just spent money to save money?

I recently experienced a friend seriously seeking evidence confirming her decision to buy a VERY expensive chandelier when she had pressing bills. She confidently bought the piece! Photo: Pixabay.com

So why do we focus on the money we think we saved versus the money we spent? It’s the way our brain works, according to Daylian Cain, a professor at Yale School of Management and a behavioral finance expert. Basically it’s because we rationalize our decisions. We skew our decisions so that it looks good for us to do what we’re doing. It’s called “the confirmation bias” and “the overconfidence bias.” In other words, you’ll look for evidence (I’m saving $250!) to confirm that your decision is right so you can be completely confident about your purchase (rather than think about the consequences, such as the $750 hole in your account when you have bills due). These biases become activated, especially while making decisions that give us pleasure.

I once bought an expensive ring (not this one) because I was going through a “situation” and thought I deserved it. Though I don’t regret the ring (I love it, still wear it), I do remember seeking evidence to confirm that I was right to buy the ring! Photo: Morguefile.com

In other words, explains Professor Cain in the film, Thinking Money, “We are all a little full of ourselves.” To avoid this, he suggests playing Devil’s advocate with yourself before making a purchase. Ask yourself if buying the item will prevent you from other goals such as bill paying. As overconfident about our finances as we all are, we’ll probably just say “no.”

~Marilyn, TFF