### Unlearning Lesson #18: Don’t Follow the Money

Posted in Unlearning

Education is one of the few things a person is willing to pay for and not get.” –William Lowe Bryant

Question #18: This is another two part question: a) does \$50 always equal \$50; and b) which amount of money would you prefer to earn over a three year period \$110,000 or \$150,000?

While it is true that \$50 will always equal \$50 and \$150,000 is, of course, more than \$110,000; it is also true that many people ignore these obvious facts and work contrary to their financial interests.  If you see a little of yourself in either of the below examples, you may need to unlearn some of your financial behaviors.

Let’s first consider the case of the \$50. If you were about to purchase a \$100 mobile phone and then suddenly learned the same model was being sold for \$50 on the opposite side of town would you drive across town to save the extra \$50? When surveyed an overwhelming number of people stated that they would.

So far so good.

When the scenario was switched, however, and the product in question was a \$40,000 automobile and they were informed the same model was available at on the other side of town for the price of \$39,950—or the exact same \$50 savings—a majority of people indicated they wouldn’t make the trip.

The reason is that a \$50 savings off a \$40,000 product is miniscule compared to its overall price. Whereas, from the perspective of a \$100 product, a \$50 savings is quite significant. The reality is that a \$50 savings is a \$50 savings and a person’s wallet or bank account doesn’t know or care how they accumulated the extra savings. In a perfectly rational world people would work to save \$50 regardless of the situation.

One real world manifestation of this behavior can be found in retail shops. It is a well known tactic that if a person were to go into a high-end retailer and tell the sales clerk they were interested in buying some socks, shoes and a suit the clerk would first attempt to get them to buy the suit. Why? Because if they are successful at selling the customer a \$1500 suit, a \$300 pair of shoes and \$40 for a pair of socks suddenly seem less consequential. If, however, the customer were to begin shopping for socks first, not only would be less likely to spend \$40 on socks, he would also likely to think longer and harder before dropping any money on expensive shoes and suits.

The second question stems from another fascinating study in which people were provided a choice between two different scenarios. In the first, they earned \$30,000 in Year One; \$40,000 in Year Two; and \$50,000 in Year Three. In the other scenario, they earned \$60,000 in the first year; \$50,000 in the second; and \$40,000 in the third.

When asked to select which scenario they would prefer, a surprising number chose Option 1. This is in spite of the fact that they would earn only a total of \$30,000 less. (In Scenario 1 the total equals \$110,000 and in Scenario 2 it equals \$150,000). It is well documented that many people experience the pain of losing money more (as is experienced in Scenario #2) and will go to great lengths—including missing out on an extra \$30,000—to avoid that pain.

For a real world implication of this behavior, consider the case of a bargain flight from San Francisco to New York. Imagine the price is \$300 on Monday but suddenly jumps to \$400 on Tuesday. Many people will skip the deal. If, however, the same flight was originally \$800 and then dropped to \$600, more people would rush to book the flight because it was a “deal”—even though it is \$200 more expensive than the first scenario.

Often, people prefer the illusion of a good deal (a \$600 flight that was \$800) to the reality of a much better deal (a \$400 flight that was \$300). My advice: Don’t always follow the money because sometimes it can lead you astray.

Homework assignment #18: Which are you more likely to sell: A \$50 stock that has appreciated \$25 or sell a \$50 stock that has declined by \$25? Explain and defend your answer.

P.S. If you would like to read 38 additional “unlearning lessons,” consider picking up a copy of my new book, Higher Unlearning: 39 Post-Requisite Lessons for Achieving a Successful Future. The eBook is now only \$2.99!

Interested in some other free “unlearning” lessons? Check out these older posts:

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