Lousy day,” gripes Tomas (not his real name), a 35-year-old engineer who is operations head of their family’s manufacturing firm in Parañaque. “We needed certain parts for this product. The first two stores carried them, but with a huge markup. We’re not getting them, no way. Good that the third store had better prices for the same parts. But with the traffic, I was late for the executive committee meeting, and my father’s pissed.”
“How long did it take you to visit the three stores?” I asked.
“You know, if the first store was reasonable, I’d have been back by 10 a.m. With all the hassle, I returned to the office at 3 p.m. I even had to go to a drive-thru for lunch. But I saved the company P700.”
“As operations head, wouldn’t five hours of your time be worth more than P700?”
“My father is very thrifty. He wants us to get the best price and to help the company save.”
“Tomas, you flew business class to France last month.”
“The credit card had a promo. And what’s that got to do with my lousy day?”
Tomas committed several common money fallacies, according to economist Dan Ariely and lawyer Jeff Kreisler in their book “Dollars and Sense: How We Misthink Money and How to Spend Smarter.”
Unwise shortcuts
A peso is a peso is a peso, right? Mathematically, yes. Emotionally, no.
Take mental accounting. In Tomas’ case, the P700 he saved falls under the category of Serious Money, on behalf of the company and his father’s values. But the thousands of pesos he has no problem spending for business class is considered as Leisure Money, in return for all his hard work.
My college students commit the same mistake. They spend an hour driving to the photocopying service that can give them P0.50 per page (they need to reproduce five pages), but when I point out their fancy coffee habit of more than P100 a day, they protest, “We need this coffee to study well!”
Ariely and Kreisler give an example that resonates with us: “The cost to rent an apartment in some US 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.”
We forget that everything is relative.
“When vacationing at a posh resort, we often don’t get upset when we’re charged $4 for a soda, even though it costs $1 elsewhere. In part, this is because we [want to be pampered]. But it’s also because, compared to the thousands of dollars we’re spending on the rest of our tropical getaway, $4 seems like relatively small change.”
Tomas does not think twice about spending a lot during his vacation, but he gripes about spending a far smaller amount on necessities.
Credit card addiction
If Tomas has to pay for business-class tickets in cash, he might have chosen to fly economy instead. Promos are fun, especially when we don’t have to pay just yet.
And therein lies the danger.
“Credit cards capitalize on our desire to avoid the pain of paying,” says Ariely. “They create a detachment that makes us more willing to spend … Studies have found not only that people are more willing to pay when they use credit cards, but also that they make larger purchases, leave larger tips, are more likely to underestimate or forget how much they spent, and make spending decisions more quickly…”
Unless we have self-control, credit cards might even lead to addictive behavior.
“In some ways, they are like a drug that blurs our ability to process information and act rationally,” say Ariely and Kreisler. “While we don’t drink, snort or smoke credit cards—at least, not yet—their effect is deep and worrisome.”