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Me learning basic economics by accident

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DavidPF

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I'm sure this gets discussed better and more accurately in every elementary economics text, but I haven't read them.

When I'm considering a non-essential purchase, I assign too low a value to the money I already have, just because I already have it. (This idea doesn't seem to apply to essentials like food.)

The example, of course, is a nice knife. It's really nice, it's $400, that's great, I'll take it. But now change the offer: Here's the same knife again, and beside it is four $100 bills. I can take either but not both. I easily choose the cash.

Something is not calculating properly in my brain.
 

Barmoley

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Maybe it's because you feel like if you add $400 to what you already were willing to spend you could buy something even more expensive. Or could be that when you buy online you are not spending "real" cash and so it is easier, a classic credit card problem and the reason they work for credit card companies.

In theory the $400 knife is equal or slightly higher in value to you than the $400 cash otherwise you wouldn't buy it. Would you feel the same about the purchase if you went to the store and could only pay $400 cash, would you then buy the knife?

For me if someone offered me $400 cash or $400 knife that I wanted, I would take the knife every time. The only scenario where I wouldn't, would be if I actually wanted a $800 knife more and the additional $400 would allow me to buy that instead.
 

stevenStefano

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Depends on the knifes, but any I've had customised are pretty much priceless to me. They're one-offs, they're in some ways a reflection of myself because I've decided a lot of what makes them
 

LostHighway

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I'm sure this gets discussed better and more accurately in every elementary economics text, but I haven't read them.

When I'm considering a non-essential purchase, I assign too low a value to the money I already have, just because I already have it. (This idea doesn't seem to apply to essentials like food.)

The example, of course, is a nice knife. It's really nice, it's $400, that's great, I'll take it. But now change the offer: Here's the same knife again, and beside it is four $100 bills. I can take either but not both. I easily choose the cash.

Something is not calculating properly in my brain.
It isn't just you, there is a whole field of behavioral economics that looks at issues like this. You might read Daniel Kahneman's Thinking, Fast and Slow (I haven't read his newer work Noise) which is IMO both interesting and approachable. Richard Thaler, Kahneman, and Kahneman's late research partner, Amos Tversky were among the founding thinkers in behavioral economics and hedonic psychology.
 

DavidPF

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... could be that when you buy online you are not spending "real" cash and so it is easier, a classic credit card problem and the reason they work for credit card companies.
My initial guess was something like what you just described about credit purchases not feeling like "real money", but also adding that my own money perhaps gets less "real" to me the longer it's been in my bank account.
 

DavidPF

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I would take the $400 cash.

And I would do it 3-4 times.

And then I would use the accumulated cash to buy a knife.
This is sort of like that test where the little kids tried to not eat the marshmallow. Except there's no kid and no marshmallow, so only in a limited sense.
 

boomchakabowwow

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my wife and i have an experiment going.

i have an adult allowance. **** you not. i get a set amount at the beginning of the month. no wiggle room. if i dont have enough cash, i have to save some and wait till the next month. you have no idea how often that "cooling off" period will totally eliminate the want at the moment. it just fizzles out. the power of "instant gratification" is strong in humans. think about how many times you buy something only to feel "meh" about it later.

i am on the radar of retirement. i couldnt have done it without my wife. i learned finances thru her. my retirement will be fairly "easy street". buy the occasional new car, home repairs, travel.....to death.
 

MarcelNL

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A IMO great read on this is 'Irrationality' by Stuart Sutherland, the title is a bit of a spoiler but still ;-)
 

DavidPF

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A IMO great read on this is 'Irrationality' by Stuart Sutherland, the title is a bit of a spoiler but still ;-)
The title doesn't spoil anything for me. But the actual book probably shows me a hundred other ways I'm irrational and didn't think of before.

I have this feeling I shouldn't read it. 🙃
 

MarcelNL

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the nice thing about this book (and some similar ones) is that it provides insight in the mechanisms behind irrationality, which in turn provides the opportunity to discover your own irrational actions/thoughts and prevent them from happening...sometimes, in principle, well...
 

Luftmensch

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But now change the offer: Here's the same knife again, and beside it is four $100 bills. I can take either but not both. I easily choose the cash.
In your scenario you stand to gain $400 through either choice. To me, the more interesting question is how payment medium affects your willingness to spend. It is a subtle reversal of your scenario. Does handing over $400 in notes change your perceived value of the knife compared to $400 on credit or tap & go?


My initial guess was something like what you just described about credit purchases not feeling like "real money", but also adding that my own money perhaps gets less "real" to me the longer it's been in my bank account.
I think this is a huge component. At least in my tweaking of the question... it is the only component.

If you are fortunate enough to live comfortably, digital transactions dont require you to follow your purchases closely. With cash you actually have to count what is in your wallet. Do you have enough coins and notes? You don't want to be embarrassed at the cashier! If you dont have enough money... could you really be bothered going to an ATM and withdrawing more? Are you going to write a check for that carton of milk? The extra friction and constraints in those 'physical' transactions make you scrutinise your impulses more - particularly for small purchases.

If you do use pay-wave flippantly for small purchases, I think that affects your relationship with money over time. The first is that 'small' probably creeps up to larger and larger amounts. The second is that you probably start to make purchases with a gut intuition based on an imprecise estimation of your wealth. So long as you aren't overdrawing your account and the purchases are an insignificant proportion of your wealth, you aren't required to think about your purchases. Of course the fallacy of that behaviour is death by a thousand cuts.

When I'm considering a non-essential purchase, I assign too low a value to the money I already have, just because I already have it.
Again, I am going to keep hammering the payment medium. I know you didnt really focus on this in your original post - nor did you say how you consume.

It could be related to the framing effect. When you use physical currency you are literally giving something up - you are losing something to gain something. When you use digital transactions of course you are similarly draining money from your account. Rationalising that loss requires more mental gymnastics. What do those rather abstract numbers in your account mean?? How accurate is that accounting in your head? Did you even look at them recently? If you get mentally exhausted and skip that process, the money just magically disappears. The transaction might approach a framing where emotionally it feels like you just gained more than you lost (a.k.a you did not properly rationalising that you also just lost something).


Something is not calculating properly in my brain.
Behavioural economics is a dark-art not a science 😈😜
 

LostHighway

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Behavioural economics is a dark-art not a science 😈😜
IMO economics broadly is more a dark art than a science (politest possible phrasing) and the neoclassical guys that dominate academia and public policy positions are among the most dangerous, whether by intent or incompetence matters little to the consequences.
 

tchan001

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Let's pose the scenario slightly differently.

You see $400 dollars on one end of the table and the same nice knife you spoke of on the other end of the table and you are standing in the middle. Only this time there are lots of people waiting for you to make your decision so they can take up the offer as well. You notice that most of the people lined up seem to be glancing at the knife and that the knife seems to be the last one available for this type of deal. All the other deals do not include nice looking knives.

Would you still pick the $400?

Let's make it even more practical. If you have just received your stimulus check from the government and you happen to be able to put a Yanick Puig knife into your webshop basket, would you buy the knife or keep the money by emptying the basket so someone else could buy it? Let's say you are guaranteed that if you buy the knife while it is in your basket, it will not be sold to someone else for say an hour. If you don't like western knives, let's say you were able to choose something like a Konosuke Kaiju.
 
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