Dan Ariely is trying to develop an iPhone App to make spending decisions easier. The behavioural economics professor and author of Predictably Irrational says it's hard to think about what we are giving up, or gaining, when making spending decisions, because money is so abstract. An App that simplifies the trade-offs would help us make decisions more in line with our likes and our goals.
Let's say your goal is to go to Hawaii, get a new digital camera, and take scuba diving lessons. When tempted to spend on something else, the App informs you that the purchase you're about to make is equal to one day on the beach and two scuba lessons. Would you think more about your purchase? I would.
Until the App arrives, however, we'll need to adopt other strategies to help us determine our trade-offs when spending. My less-technical approach is using the "rather factor." It's an idea born from a girlfriend's story of how she spent $100 on a birthday dinner for a friend of a friend. She sighed and said she'd rather have put that money toward a trip to Paris. We then jotted down the list of material and non-material items we'd rather spend our money on - our priorities - and have been referencing the list (for the most part) when making purchases.
The common story I hear when it comes to the rather factor is couples who say they don't want a large wedding because they would rather put the money toward a down payment. Thinking about how the money we spend (or hold off on spending) affects the bigger picture helps us make concrete decisions. In a recent interview with BigThink.com, Mr. Ariely explains that we shouldn't be focusing on seeing the money we spend in the context of similar purchases, but instead think about what the money means to us in the bigger picture.
For example, let's say you're redecorating and looking for a new couch, and you're not sure how much you should be spending. Instead of setting a budget based on what's out there, comparing couches and thinking that spending more means a better piece of furniture, think about the purchase in terms of all of the other things you could do with that money. That's how you should determine your price point and whether the purchase is worth the money.
If we haven't met all of our savings goals, we have to make choices and trade-offs, so thinking about what you could do with the money you're spending extends to the smaller price points as well. If you were having lunch after furniture shopping and there was a difference between two entrees, $8 and $13, you likely wouldn't consider all of the things you could do with the extra $5. But, if you're being rational, according to Mr. Ariely, that's exactly what we should do.
You should consider what you could buy with that $5, today and weeks from now, and decide to buy the more expensive entree only if the difference between the two entrees is more valuable than the other possibilities, which in this case would be your afternoon latte.
Of course, if we did this at every meal, we'd be annoying our dinner dates and ourselves. It's time consuming and complicated to run all of the possible scenarios. Of course, if we had Mr. Ariely's App we wouldn't have to wonder.
Angela Self is one of the founders of the Smart Cookies money group.