I recently read Vanguard’s article about debt and spending and it was no surprise that it brings up the idea that people are not as rational as economists and authors think.
There’s a reason that so many Americans are in debt and the savings rate is so low.
There are several examples of people acting irrationally. The first example is of MIT students give the opportunity to buy Celtics tickets at auction. Half were told they must pay in cash while the other half could pay with a credit card. On average, the credit car bidders were willing to pay more than twice as much for the Celtics tickets than the cash bidders.
I’ve read about several people who decide to cut up all their credit cards and go with a cash only system, but I had no idea that this was such a big problem for everyone. I’d like to think that I’m immune to the problem, but this study shed some light on situation and is making me rethink whether I too spend significantly more when I use my credit card.
The second situation deals with a windfall. Harvard students who were given a $50 “tuition rebate” spend just $7 in the first week, while those who were given a “bonus” of $50 spent and average of $31 in the same time period.
I know exactly how I’ll spend my “bonus” windfall, and am planning on sticking my entire tax refund (~$400) into emergency savings. While I will only be spending 10% of my bonus on myself, I definitely see the rebate as getting money back because I overpaid rather than a bonus for something I did well, which deserves a reward.
The 3rd example of 68% of respondents being willing to drive 20 minutes to save $5 on a $15 calculator as opposed to 29% who would be willing to drive the same amount to save $5 on a $125 jacket makes no sense to me.
20 minutes is too much of a hassle to save $5 on a calculator. Once I’m in the store, I don’t feel like going so far out of my way for what I need. My solution to this question would be to stay home and find a better price on the Internet.
The last example is of Cornell students in 1985 who, whlie at the beach, were willing to pay an average of $2.65 for a beer when they think it comes from a fancy resort hotel, while only $1.50 if they think it comes from a run-down grocery store.
When I’m out with friends, I’m definitely willing to spend more because it’s part of the experience, while I’d never dream about spending $5 for a bottle of beer when in the comfort of my own kitchen.
We’ve learned some interesting lessons from this, and it’s clear that people aren’t rational with their money. Make conscious decisions about what you spend, the leave the credit card at home if you’re tempted to break it out, and most importantly, for cheap beer, go back to 1985.
This article referenced some of the top colleges in the country, so I’ll end with the only Ivy League joke I know:
A Harvard man and a Yale man are at the urinal. They finish and zip up. The Harvard man proceeds to the sink to wash his hands, while the Yale man immediately makes for the exit.
The Harvard man says, “At Hah-vahd they teach us to wash our hands after we urinate.”
The Yale man replies, “At Yale they teach us not to piss on our hands.”
Even Ivy Leaguers are irrational sometimes.