Dollars And Sense: How We Misthink Money and How to Spend Smarter

Dan Ariely & Jeff Kreisler, “Dollars And Sense: How We Misthink Money and How to Spend Smarter,”  Harper Collins, 2017, 258 pp.

This book is about how we think about money and the mistakes we make.  It’s about the gaps between our conscious understanding of how money works, the way we actually use money and how we should rationally think about and use money.  I have read and reported on this issue many times in the past and I did not find any new concepts in this book.  However, it is a good introduction to the subject.

We most often do not consider the concept of opportunity costs when making purchases; i.e., what do we give up when we make one choice over another. What if, instead of buying a big-screen TV or new clothes, we thought of what we might do with the hours we don’t have to work in order to procure them or of the other things we might buy in their place? 

Contemplating opportunity costs brings into consideration other economic concepts such as the endowment effect, whereby we give more significance to things simply because we own them, and our generally risk-averse economic behavior, whereby the pleasure taken in gaining something is vastly overshadowed by the pain caused by losing it—twice as much, in fact.

Ariely and Kreisler, allow that money has its uses as a symbolic system of fungible, storable, accessible value. However, the real consideration should always be that “spending money now on one thing is a trade-off for spending it on something else,” a calculation that is not often reckoned simply because it’s more difficult than fishing out a credit card or some other means of delaying the recognition that spending money now has future, downstream effects.

My Notes:

Pg. 7:  Money represents VALUE.  Money itself has no value.  It only represents the value of other things that we can get with it.  It’s a messenger of worth. (However, unlike bitcoins, it does have the ‘full faith and credit’ of the associated government behind it.  Sometimes this country is one like Argentina).

Pg. 9:  When we take the special features of money into account—that money is general, divisible, storable, fungible, and especially that it is the common good—it becomes clear that we really can do almost anything with money.  But we cannot do everything, we must make choices; we must choose things not to do.  That means, we absolutely must, consciously or not, consider opportunity costs every time we use money.

Pg. 216f:  Consider what we can do, individually, to avoid, correct, or mitigate each of the valuation mistakes we make:

We ignore opportunity costs:  We should think about what we are sacrificing for what we are getting.  Example: buying new cars rather than saving for retirement.

We forget that everything is relative:  When we see a sale, we shouldn’t consider what the price used to be or how much we’re saving.  Remember J.C. Penny’s.

We compartmentalize:  Splurging with ‘house money’ for example.

We avoid pain:  Charging rather than paying with cash for example.

We trust ourselves:  Trusting our past decisions contributes to the problems of anchoring, herding, and arbitrary coherence.

We overvalue what we own (endowment) and what we might lose.

We worry about fairness and equate fairness with effort.

We believe in the magic of language and rituals.

We make expectations a reality: