Money and Psychology: How We Misunderstand Finances & Smart Spending Tips | Personal Finance, Budgeting, Saving Money for Everyday Life

What’s not to like when the co-author of this book describes himself as “just another Princeton-educated lawyer turned award-winning comedian, author, speaker, and advocate for behavioral economics.”Here are my two take-aways from this book:#1. I’ve been misthinking about money. Yikes. This book has immediately changed the way I think about how I spend money—and I’m not a spender.#2. Besides being well-researched and very practical, this book is hilarious!Fifty pages in, I started marking the funny lines with an exclamation point. No joke: my well-underlined pages include more than 100 exclamation points. (LOL!)THE BIG IDEA: “…this book is about the odd, wild, and yes, completely irrational ways we approach spending decisions and about the forces that cause us to overvalue some things and undervalue others.”After laying out a very convincing case, Dan Ariely (the professor) and Jeff Kreisler (the funny guy) invest their final five chapters on how to “build on the shoulders of flawed thinking.” Insightful ideas.Examples of flawed thinking:--“Some people go on a $10,000 vacation but spend twenty minutes each day looking for free parking.”--JCPenney’s short-lived CEO, Ron Johnson, “paid a high price for failing to understand the psychology of pricing,” when he instituted “fair and square” pricing and eliminated “sales, bargains, coupons, or discounts.”-- “Had Albert Einstein been an economist rather than a physicist, he might have changed his famous theory of relativity from E = MC2 to $100>Half Off of $200.”--According to “loss aversion” research, when doctors frame survival options as “there’s a 20 percent chance of survival,” you’ll go for the remedy. But more people decline the option when framed as “there’s an 80 percent chance of death.” Flawed thinking!--On “investing effort,” Ariely and two other researchers dubbed one money phenomenon, “The IKEA Effect—so named after the meatball restaurant/umlaut factory/children’s playland that moonlights as a furniture store.”The chapter, “We Lose Control,” begins, “Rob Mansfield will be able to retire shortly after pigs fly.” With little or no retirement savings—many are thinking they must work until they’re 80 (“even though our life expectancy is 78”). Why the flawed thinking? Making sense of the IRS and IRAs and 401(k)s and 403(b)s, “can be intimidating and confusing. It’s like trying to think of another word for ‘synonym’ or what the best thing was before sliced bread.”But…I’m way ahead of myself. One of my favorite “Wall Street Journal” columns, several Saturdays each month, is “Ask Ariely,” a Q&A feature by Dan Ariely, professor of psychology and behavioral economics at Duke University, and founder of the Center for Advanced Hindsight (and he’s not the funny guy!). The questions are practical and his answers are research-based. So when this book was published in November, I bought it and it’s already on my hot list for Top 10 books of 2018.What changed my thinking about money? Check out the chapter titles in the section, “How We Assess Value in Ways That Have Little to Do With Value.”--We Forget That Everything Is Relative--We Compartmentalize--We Avoid Pain--We Overvalue What We Have--We Worry About Fairness and Effort--We Believe in the Magic of Language and Rituals--We Overvalue ExpectationsI highlighted about a zillion one-liners and concepts:-- “No one ever went broke underestimating the intelligence of the American people.” (H.L. Mencken)-- “Don’t believe everything you think.”-- “We stand on the shoulders of giants . . . even if those giants are the giant mistakes we ourselves have made.”--In the commentary on confirmation bias, a restaurant consultant notes that the highest-priced items on a menu “actually generate revenue by getting people to buy the second-highest-priced items.”By the way, don’t put too much stock into fairness and effort in your money calculations. Apparently, we’re willing to pay more when we see the effort someone has put into a product or service—but bristle when a locksmith unlocks a door for us in a minute—but charges $200. More flawed thinking!And when asked how much work a husband and wife do around the house, researchers have found it adds up to over 100 percent! (The authors warn against borrowing the PowerPoint progress report from work to document progress on household chores.) “Or should we just make a lot of deep sighing sounds—so our spouses will value us more?”Would you pay more for a cheeseburger described thusly: “Artisanal goat fromage graces hand-crafted grass-fed bovine composite, with heirloom vine-ripened ‘tomate,’ curated greens, and special reserve spice blend, parsed for variance by expertologists.” Most will.There’s more:-- “The leading practioners of language manipulation may be winemakers.”--Copy writers: read Chapter 10 on the magic of language. (All together now, sing the Big Mac jingle: “Two all-beef patties, special sauce…”)--What was the “Mona Lisa” painting worth before July 1911? “In August 1911, it was stolen from the Louvre. While the authorities tracked it down, there were suddenly huge lines of visitors waiting to view the empty space where the painting had hung.” What’s it worth today?-- “About 16 percent of NFL players file for bankruptcy within 12 years of retirement, despite average career earnings of about $3.2 million.”--Comparing apples to oranges—turns out—is very helpful. “What’s hard is comparing apples to money.” Flawed thinking twists how we value an apple.--On the illusion of wealth: “In one set of experiments, when we gave people a salary of $70,000 but framed it as hourly earnings of $35 an hour, they saved less than when we defined it as a yearly sum of $70,000.”-- “We react differently to ‘Oh, this coffee is $4 a day’ than to ‘Oh, this coffee is $1,460 per year.’”--To save for the future, we should manage our money with our “future self” in mind. “Maybe our pay stubs or credit cards should have a picture of our face morphed to look older.”Who should read this book? Parents, grandparents, students, co-workers, and anyone who buys or sells anything. Did you know that the first price you see (or previous prices you’ve paid) influences your future purchases (see the must-read section on anchoring—you won’t believe the research).I hope you buy this. I can’t stop talking about this book, or dropping in the witty one-liners in almost every conversation!