Intellectual Imprints #005 - Money often costs too much

It’s been a bit tough to stick to the schedule I promised you this month. The thing is, I started with two books and was halfway through both books when I fixed and shared my schedule. 

So I then decided to start focusing on one and finish it by the end of the month. The book I decided to complete is 'Small Change: Money Mishaps and How to Avoid Them.' by Dan Ariely and Jeff Kreisler.

Okay so there may be parts of this book that will be reminiscent of what you have read in other books from Dan or in other books on Behavioural Economics but there are still a good number of reasons that I would highly recommend this book for.

To start with the style of writing is light yet very insightful. The authors have managed to, rather effortlessly, bring in humour into the serious topics of money and human behaviour. That aside I think they have shed light on both these complex topics in a simple manner for anyone to comprehend.

What you will find below is how I have decoded the contents of this book. This is not exhaustive and you will need to read the book to get a complete picture. These are the things which stayed with me.

The book shed light on the concept of money and our willingness to use it for a product or service through two lenses. 

1. The consumption of a product or service 

2. The payment for that product or service that we are consuming

I will start with the consumption part of it. Here there are three very interesting aspects that impact our consumption experience.

1. The consumption vocabulary or the language associated with the product or service

2. The ritual surrounding the consumption 

3. The expectation we have from this consumption 

Let me tell you a little about each of the three. 

The first aspect is the consumption vocabulary, it is really the way in which the product or service is described that heightens our consumption experience. Let’s take the example of a fine dining restaurant... In the menu, you see the explanation around where the products are sourced from, how they are made, how they bring together tastes you would seldom expect to find in one dish and so on and so forth.

Now when you consume this dish with all this content around it - the experience is very different from if you had consumed the very same dish while sitting in office trying to complete work for a deadline... And quite simply a heightened consumption experience correlates to our acceptance to pay a higher price.

The second aspect which is the ritual is best explained in the way the authors have, which is with the way in which we consume wine.  A bit of the wine is poured into our glass, we swirl it around and hold it against the light, we take a sniff of the wine before we actually take a sip and only after we approve is more of it poured and thereafter we start drinking the actual product.

Just like the consumption vocabulary the ritual enhances the consumption. Here are some other examples - when you enter a hotel for your vacation stay, you have the entire welcoming ritual or drinking tequila or Oreo's Twist-Lick-Dunk ritual. Each of these make the consumption experience special and unique.

The last aspect that we are going to talk of in the context of consumption is the expectation. Now let's look at this in the context of a 10 day vacation that you are about to take. How long do you plan for that 10 day vacation? 

The entire period of anticipation is adding to your consumption whether it is the beaches or the snowcapped mountains you’re thinking about or plans that you’re making for that vacation. Or even the reviews and videos that you are painstakingly collecting to make sure you make the right choices before you actually travel.

Now instead of just the 10 day vacation your consumption experience suddenly has this entire period of anticipation added to it. Would any of you avid travellers disagree with this?

Moving on to the payment aspect... Now this part has nothing really to do with the experience itself but with other facets of the way in which we think and behave. Here are the points that I could relate to.

1. We forget about opportunity cost - this means we don't consider the alternatives that we are giving up by choosing to spend our money now or for a particular product or service.

2. We ignore the fact that everything is relative - ever bought a lot of small stuff in your supermarket check out line, or an expensive drink during your five star vacation. Compared to the big monies you are paying these small add ons seem relatively small... viewed independently however, we may think twice about buying them...

3. We avoid pain - paying actually causes pain - so if we pay for something in advance, like an all inclusive vacation package, we will enjoy it much more than paying as we consume. Paying by credit card is also relatively preferred as we do not feel the pain at the time of purchase but at a later date.

4. We worry about fairness - Every decided not to take an Uber in surge pricing when it is raining torrentially - we feel we are being charged unfairly and hence are not okay paying that extra money even if it may actually be the best way for us to get home... 

5. We pay more for effort - Think about this - your refrigerator breaks down and let's envisage two scenarios... A. The repairman spends a few minutes and rectifies the issue... B. The repairman tells you this is a complicated problem and after many hours of work is able to finally sort it for you... Which one are you likely to be willing to pay more money to... naturally the second one with the complicated issue... But what if it is the skill of the first repair man that caused the quick service... We still believe repair man 2 put in more of an effort and hence deserves more money...

The book sheds light on many more biases like the Endowment Effect which makes us value what we own more...to the Loss Aversion Bias - that makes us feel the pain of loss more strongly than the same magnitude of pleasure. 

The book also suggests ways to avoid these biases but since my focus is on understanding how and why consumers behave the way they do, I will end my post here... Hope this helps you understand some of your inexplicable interactions with money... it surely did help me...

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I am sharing my posting schedule herewith... do look out for topics that might interest you:

Tuesday: Regular posts under Intriguing Insights and Inexplicable Influences

Thursday: To BE or not to BE - Behavioural Economic (BE) terms and their popular explanations or definitions.

Sunday: Weekend Wrap-up where I select an event or incident from the week that was and analyse some aspect of it.

Last Saturday of every month: My monthly post in the Intellectual Imprints section