5 Ways People Are Dumb With Money
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5 Ways People Are Dumb With Money

Imagine a person who always makes the right
financial decisions. Let’s call her “Penny.” Penny approaches every money problem with
perfect logic and reason. She never gets emotional or impulsive and
always knows what’s in her own best interests. You’re probably thinking that Penny sounds
imaginary (and kind of obnoxious). But for over a hundred years, most economists
believed that the world was made up entirely of Pennys. That you and I and everyone you know always
made the best decisions to maximize our happiness. As crazy as that sounds, that was the conventional
wisdom… until a small group of economists and psychologists started to question whether
Penny actually existed at all. One of them, Richard Thaler, won the Nobel
Prize last year for proving that not only do humans make financial mistakes, they make
predictable mistakes. He joked about calling his research “Dumb
Stuff People Do,” but today it’s called behavioral economics, and it has changed public
policy across the world. Thaler showed that humans can’t quite remove
their emotions from the decision-making process, but being able to predict these money mistakes
might help YOU avoid them. [MUSIC] Let’s say you’re helping your mom clean
out the garage and you find a pack of Pokemon cards that you must’ve bought when you were
a kid and forgot to open. So you go through them and HOLY COW there’s
a first edition Charizard in mint condition! Even though you could easily get $3,000 on
ebay for it, you decide to buy a frame and keep it on a shelf in your apartment. Okay, let’s rewind and consider a different
scenario: Instead of helping your mom clean the garage, you decide to go to the comic
book store. There in a glass case you see a first edition
Charizard card priced at $3,000. Even though you used to love Pokemon, you’d
never dream of shelling out that kind of dough for a playing card, and you leave the store. This may seem like understandable behavior,
but it’s completely irrational. In the first scenario, you’re deciding that
a Charizard card is worth giving up $3,000 for, but in the second scenario, you’re
deciding a Charizard card is not worth giving up $3,000 for. To a perfectly rational being like Penny,
whether or not you already own the card should be irrelevant when judging its value, but
clearly to humans like you and me, it’s very relevant. Thaler called this the “endowment effect,”
our tendency to assign more value to the things we already own than the things we could own. Any time you refuse to sell something for
an amount that’s more than you’d pay for it, you are experiencing the endowment effect. Ugh, this movie is awful! I know. Let’s watch something else. We can’t. Why not? Because I paid 6 bucks to rent this movie! We can’t just throw that money away! Ugh! You burned the popcorn! Well, we have to finish it. That bag cost 89¢. Have you ever watched a movie you hated all
the way to the end or finished a meal you weren’t enjoying, just because you paid
for it and you wanted to get “your money’s worth”? If so, you have fallen victim to the SUNK
COST FALLACY. It’s not like sitting through the Emoji
Movie will magically refund the rental price–that money is sunk, and it’s not coming back,
so why put yourself through the extra pain? Most of us keep an emotional balance sheet
in our head, which is less concerned with actual gains and losses than the feeling of
gains and losses. Even though watching the movie makes you less
happy, at least if you sit through it you don’t have to count that $6 as a loss in
your mental checkbook. Our fear of sunk costs is so great that businesses
can use it to squeeze even more money out of us. Many retailers sell “memberships” that include perks like discounts and free shipping. They know some many people will buy extra
stuff they don’t really need, just to make sure they get “their money’s worth”. Imagine that you’re shopping for some headphones
and you’re about to buy some for $15, when you find out that the store down the street
is selling the exact same pair for $10. It’s just a ten minute walk. Would you do it? Now, same scenario, but this time you’re
shopping for a laptop. The first store has the model you want for
$675. The second store $670. Now do you take the walk? Many people will answer these two questions
differently, even though they are essentially the same question: Is it worth $5 to take
a 10-minute walk? All other context should be irrelevant. Yet people are more likely to say yes to the
first scenario, because it feels like you’re getting a better deal. This is called transaction utility, the amount
of mental pleasure or pain we get from feeling like we paid less or more than something’s
really worth, and it’s often totally disconnected from the happiness you get from the thing
itself. Stores have been exploiting transaction utility
from time immemorial, like the notoriously inflated “manufacturer’s suggested retail
price,” which makes it look like every item is always on sale. And some shoppers are so addicted to transaction
utility that they’ll fill their houses with stuff they don’t need and will never use
just to chase that bargain high. Of course, it’s always important to shop
around to find the best deal, but remember that when considering any purchase, the only
thing that matters is what it’s worth to you. If you won $100 on a lottery scratcher, what
would you do with the money? Buy an expensive pair of shoes? Go out for a fancy dinner? Most people say that they’re more likely
to spend unexpected income on something indulgent or frivolous, because hey, it’s not like
I worked for that money. It was free! Thaler called this kind of thinking mental
accounting, which means separating money into imaginary categories in your mind. Mental accounting violates the rule that money
is fungible–that is, totally interchangeable. Once you own a dollar, it’s the same as
any other and shouldn’t be treated differently just because of where it came from. For Penny, that pair of shoes is either worth
giving up 100 dollars, or it’s not. Just because some money unexpectedly showed
up doesn’t make the shoes worth more. Mental accounting can be helpful in making
monthly budgets and sticking to them, but even then it can lead us down irrational roads. One study focused on how consumers reacted
to a drop in gas prices from 4 to 2 dollars a gallon. This was at the beginning of the 2008 financial
crisis, so you’d think most families would’ve had a lot of use for that extra 40 bucks a
week. Instead, researchers found that people were
surprisingly likely to squander those savings on a higher grade of gas! It’s as if in their minds they had budgeted
a certain amount a month to gas, and so it had to be spent on gas. They couldn’t treat the money as fungible. Mental accounting exists for the same reason
a lot of fallacies do: because our brains aren’t perfect supercomputers and we use
a lot of mental shortcuts and emotional instincts just to get by. But knowing what those shortcuts are will
make you less likely to rely on them in the future. You may not ever be as wise as Penny… but
being pennywise is pretty good, too. And that’s our two cents! If you want to hear more examples of “dumb stuff people do,” check out Richard Thaler’s Misbehaving: The Making of Behavioral Economics. It’s a funny and fascinating history of Thaler’s research, full of surprising studies that will inspire you to think differently about money. [MUSIC]

About Ralph Robinson

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100 thoughts on “5 Ways People Are Dumb With Money

  1. It's weird… I've always been overly concise about money since I was a small child. At times I also regretted small spendings like buying some Pokemon cards. It's not as bad anymore… Otherwise it'd be hard to live. You need to least buy groceries 😅. I am still happy about it now though because I am still thinking a lot about weather or not I should buy something. Most of the time I am not doing it and to be honest it doesn't hurt me. Some might say that I am somewhat living a frugal life style but it really isn't hard for me at all. I always try to avoid buying coffee eating out. The food I take in doesn't make much of a difference and I just love to cook. Why spend 5-15 Euro on a meal when I can use that money and cook for a week! Why drink beer or soda if you have somewhat free water from the drain that doesn't make you fat. Living like this really allows me to just do what I want when I want simply because I can afford it.

  2. I disagree with the Pokémon card theory completely. It's like saying a business is spending money by not selling its building because the value of the building has increased. This theory only discounts someone's hobby because you don't agree with it. If I want to own a particular item but don't want to pay full price, paying 3k for it is way different than $3. I didn't LOOSE 3k by not selling. I just didn't gain 3k from something I already own. This then becomes an asset as opposed to stock. Opportunity cost. If this person decided instead to tear the card then that would decrease the value from full to 0, that's different.

  3. I am voting for you as the best channel on YouTube. Far more worth my time than watching 20 minutes of some "make up artists" paint their faces or "investigation" of YouTubers drama.

  4. YES. When I was trying to crane my tiger. I spent a bunch of money to get it towards the edge. Can let someone else have it. All in all it cost me $30+

  5. Finishing a meal you weren't enjoying isn't (or at least shouldn't be) an example of the sunk cost fallacy. If a meal is primarily for sustenance, abandoning a meal you don't like means you'll either have to buy another meal (spend more money) or you prepare yourself a meal (spend more time). Again, if food is for sustenance you eat the meal and get on with it… In a few hours you'll need another meal anyways and then you have another chance to get something you like! With the number of meals a person will have in their lifetime it is a little unrealistic to assume that they have to love (even like IMO) every single meal.

  6. I work in a retail store that occasionally offers members 10% off an entire transaction. They can buy as much as they want and save 10% off everything. We get a huge boom in sales and the store is full of shoppers all day. The thing is, it's not really a big savings. Customers will spend $200 to save $20, but the stuff they're buying is stuff they probably wouldn't have gotten otherwise. The psychology of the discount is really powerful.

  7. Its not the same though is it. You get a card and it happens to be worth 3k you have not spent anything to own it. You want one but can not justify spending the 3k to get one.

    I would keep it.

  8. ok, hold it. why did you have to bring penny wise into this? that just ruined it for me. but lessons learned. thanks so much guys.

  9. The Pokemon card one doesn't work because it's a difference between spending money you have or making money you didn't have before.

    If we say your current account balance is $2000 and you discover an old collectable in your attic worth $800. Keeping it would still leave you with a balance of $2000, meanwhile if you saw that same collectable at a boot sale and bought it then your balance would be $1200.

    One costs money the other simply means not making extra.

  10. One thing to point out with regards to your mental accounting point. When budgeting our normal income, the shoes may exceed our shoe budget, but if we treat these extra 100 dollars as income and budget relevant portion of it to our shoe budget we may find out that we can afford those shoes. In that case it may be perfectly rational to buy the shoes.

  11. Clicked on the video thinking it might be clickbait, but turned out to be quality content! Great informative video guys.

  12. The only difference I see in the pokemon card scenario is that if you were to purchase the car you are now at a loss of $3000 or possibly have broken even, assuming you could immediately turn around and resell it to recoup the money you spent on the card. Now, if you were to find the card while cleaning, it's a similar, but subtly different scenario. You are at no monetary loss, (other than maybe the original purchase price of the pack) if you keep it as you did not spend any money to obtain it. You've instead lost the option of selling it, (under the assumption that no one wants to buy a Charizard in the future). The point is in the cleaning scenario, you start at a net neutral and if you sell it you are at a net positive. In the comic store scenario, you start at a net neutral and if you buy it, you are at a net negative.

  13. If I already own an item and „give up“ GETTING 3000 Dollars for it it is a total different decision compared to NOT owning the desired Item and have to GIVE 3000 Dollars out of my pocket to purchase the item. Only in the second case you consider what the item really is worth to you in Dollars. And this comparison ignores the psychological side effects of having the card found while spending time with his mother or doing something for the family. The first scenario is one to tell grandchildren. The second scenario is just boring (and expensive). It is no wonder, that this thought was developed by a economic nobel price winner (like Keynes – that guys theory’s will soon wreck the whole economy).

  14. Do I want a pair of Beats headphones? Yes

    Do I want to spend the money I have now on them? No

    What if someone gave me a free pair of Beats now do I want them? Of course!

    What if someone gave 250 dollars now would you buy them? Yes

    What's the difference? I might as well have gotten a free pair of Beats head phones. If I wouldn't turn them down for free then why would I turn them down if someone gave me the exact amount of money that it would coast to buy them?

  15. I think the Pokémon situation is a different one as you try to buy Pokémon cards with the intent to get those kind of cards generally so unless your in a financial rut and would be beneficial to sell it or you instead criticized the buying of Pokémon cards in general (even though your comments would implode on themselves) than that example doesn't work too well. I do agree with everything else and actually learned from that 5 dollar walk since I never actually thought of the walk itself being worth it(and image not many of us make 120 dollars an hour :p) rather than the item.

  16. I definitely fall victim to the "sunk low fallacy", and for me, it's a double edged sword… I periodically find myself buying junk food, immediately feeling guilty over it for the health risks and the financial loss, then feeling compelled to binge eat it because I can't throw it out and waste it but I don't want to be eating junk food over the next prolonged period of time. It's as if I think that if I eat it all now, I can sooner get my diet back on track… Completely irrational!

  17. Refusing to sell something for more than you bought it for makes perfect sense.
    How much have you sold on Craigslist?
    Now, evaluate that time, gas mileage, vehicle maintenance, successful sales percentage..
    And you'd likely have made more money playing a banjo on a street corner. Because sales between private but unfamiliar persons go through a small percentage of the time and are a massive headache half the times where the sale was completed.

  18. When you’re poor – and I mean dirt poor – all of those irrational decisions seem to go away because you only have money to spend on bare necessities. I would have sold that Pokémon card in 5 minutes lol

  19. That gasoline example just shows how stupid the general population is. The price drops on all of the gas tiers, but the people buy the "premium" gas because the price matched what the "low grade" was before the price drop even though 99% of all cars on the road only need the "low grade" gas anyway so they waste money two fold.

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  21. Hey there. I'm Barry. I'm a Philosopher of Economics at the University of Nevada. If you want to know more about the thinking that came before Behavioral Economics, look into Rational Choice Theory.

  22. If people were completely logical, people would consume a lot less and the economy would crash. Marketing is all about appealing to emotions.

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  25. Fantastic. Because I’m older and can look back , I can say that all that’s been said here is true. When you younger you aren’t able to see as much. That’s the way it is. We want to do things our way. We do foolish and stupid things at times. For me there were too many foolish decisions and I only learned the painful way. I hope there are some who will not go by their feeling. , listen to those you have gone before you and be wise. The best to everyone.

  26. I have 5 bank accounts recently because one of them is for one purpose each and these reasons may sound stupid but it helps.

  27. That is really true. My father once thought his credit card useless as he doesn't have much use of it.he went to return the card but came home with another card with higher fees just because of perks.corporate rules

  28. I love that book Misbehaving. wonderful book if any of you guys in interested is this video check it out basically a summary of the book

  29. My question is if my workplace paid me 100$ extra by accident, should I paid them back? Assuming there are abusloutely no ways for them to find out.
    By the logic of "mental accounting" since I will never donate any money to my boss guess I should keep it?

  30. This was very informative! I have never heard of the endowment effect, or the sunk cost fallacy! I love learning, especially about finance and economics. New sub and will definitely share this one!

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  32. General dumb stuff people do in deciding beliefs and behaviors psychology in that as well besides finacially.

  33. I was inspired by emotion to buy my pick up because When I used my SUV to transport lumber inside the cab I tore up my upholstery. I had been wanting to get a pick up for a long time previous to that but that was the last straw so to speak. I shopped around for about 3 months to find the perfect used truck. It cost me about $11000 to buy the truck but the utility it gave me has more Implied value than the truck itself. What was an emotional and impulsive purchase has transformed into an in vestment That has made my life much easier in so many ways.

  34. Walked in Chase and took out signature loan for $50k a decade ago. At a $34k balance I noticed a 30 day late mark on my credit report. I did some research an found I was indeed late 17 days. Call them and they stone walled me.
    I told the lady to notate the account. "You will NOT get another fucking dime from me and you can stick the $34k up your ass!"
    They called and called and a few told me that I could not do that? I said listen you just don't seem to understand who owes who. Finally a guy called me and I told him I was not going to explain it any more that they need to remove it from my credit report BEFORE calling me again. They finally did and I brought it current and paid the loan eventually. Good grief. The big banks will jerk you around!

  35. As 08 graduated I went throught high school: did not learn anything money wize :now close to 30 dont know how use credit or build credit : stupid waste time in health class seriously health class shouldnt last a whole year :I hope when my nieces grow up They offer more economy classes :did you know there only 17 states that offer economy classes to high schoolers : California is a gloden state

  36. Thabks for reminding me to cancel my Amazon prime, I've never used it and have already paid over a year of it……

  37. If i followed these rules, i would be naked, alone in the wild with bunch of money dying from hunger. 🤣🤣🤣🤣 it is not all about money.

  38. But in that Pokemon card example, wouldn't it be at least a little different? Cause you aren't losing $3k. You never never got it. Not getting money in the first place is different than losing money you already had. That's why it's easier to not sell something valuable you already own than it is to buy that same thing. I mean it can totally be emotionally driven, yea, but it just doesn't seem like a fair comparison to put not spending money and not earning money in the same camp of thought.

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