Scan barcode
A review by sunsun886
Dollars and Sense: How We Misthink Money and How to Spend Smarter by Dan Ariely
3.0
""We've all undoubtedly heard a lot about ' value'. Value reflects the worth of something, what we might be willing to pay for a product or service. In essence, value should mirror opportunity cost. It should accurately reflect what we're willing to give up in order to acquire an item or experience. And we should spend our money according to the actual value of different options."
"We have always assessed valued in ways that are not necessarily connected to value at all."
"Happiness too often seems to be less a reflection of our actual happiness and more a reflection of the ways in which we compare ourselves to others."
"In some ways, the concept of regret is itself just another version of comparison. With regret, we compare ourselves- our lives, our careers, our wealth, our status- not to other people, but to alternative versions of ourselves. We compare ourselves to the selves we might have been, had we made different choices. This too, is often neither healthy nor useful."
"Emotional Accounting. Emotional money laundering can take many forms. We might cleanse badly tainted money by first spending it on serious things like paying down debt, or on virtuous ones, like buying ice cream- for an orphanage. We we do something we think is good, it eliminates the bad feelings associated with the money, making us free to spend.This type of emotional money laundering is certainly not rational, but it makes us feel good."
"Malleable mental accounting. When we allow ourselves to classify expenses ambiguously and when we creatively assign expenses to different mental accounts. In a way, that helps us trick the account owner (ourselves). We manipulate our mental accounts to justify our spending, allowing us the luxury of overspending and feeling good about it."
"The end of an experience is very important. Think of closing prayers at religious services, dessert at the end of a meal, or goodbye songs at the end of summer camp. Ending on a high note is important because the end of an experience informs and shapes how we reflect back on, remember, and value the entire experience. "
"The pain of paying is the result of two distinct factors. The first is the gap between the time when our money leaves our wallet and the time we consume the good for which we've paid. The second factor is the attention we give to the payment itself. The formula is: pain of paying = time + attention. "
"These 'advances' certainly make paying easier. Frictionless. Painless. Thoughtless. If we don't even know something's happening, how can we feel it? How can we understand the consequences? "
"Herding and Self-Herding. Herding is the idea that we will go with the crowd, that we assume something is good or bad based upon other people's behavior. If other people like it, or review it well, or beg to see it, do it, or pay for it, we'll be convinced it's good. We assume something is of high value because others appear to value it highly. (ie: yelp).
Self-herding is the second, more dangerous part of anchoring. Self- herding is the same fundamental idea as herding, except that we base our decisions not on those of other people, but on similar decisions we ourselves have made in the past. We assume something has high value because we valued it highly before. We value something at what it 'normally' or has 'always' cost, because we trust ourselves with our own behaviors. We remember that we've made a specific value decision over and over, so without spending the time and energy to evaluate that decision over and over, we assume it was a good one."
" People like Gregg Rapp, a restaurant consultant, say the highest- priced items actually generate revenue by getting people to buy the second - highest priced items. This is decoy pricing using anchoring and relativity."
"The less we know about something, the more we depend on anchors."
"An anchor price can be any figure, no matter how random, so long as we associate it with a decision. That decision gains power and influences our future decisions moving forward. Anchoring shows the importance of early decisions about pricing, that they establish a value in our heads and affect our own value calculations going forward."
" Anchors gain their long-term impact with a process called ARBITRARY COHERENCE. The basic idea is that, while the amount that participants were willing to pay for any item was largely influenced by the random anchor, once they came up with a price for a product category, that price students in the above experiment were asked to bid on two products within a category 2 wines an 2 computer accessories. Did the decision about the first (wine or keyboard) affect the second in the same category? The answer is yes. "
"Endowment effect is deeply connected to Loss aversion. The principle of loss aversion, first proposed by Daniel Kahneman and Amos Tversky, holds that we value gains and losses differently. We feel the pain of losses more strongly than we do the same magnitude of pleasure. And it's not just a small difference- it's about 2x."
"Imagine that right now you were not married to this person, and you knew about her everything you now know, but you've just been friends for the last 10 years. Would you now propose to her?"
"How much of his conflict came from thinking about the past, from overvaluing the time and energy he'd already sunk into his marriage, rather than looking forward, to the time and energy he'd use in the future, regardless of the previous investment?"
"Ownership changes our perspective. We adjust to our level of ownership and it becomes the baseline by which we judge gains and losses.
One way to overcome the traps of ownership is to try to separate ourselves psychologically from the things that we own, in order to more accurately assess their value. We should think abut where we are now and what will happen going forward, not where we came from.This is of course, much easier said than done, especially when we tend to put so much emotion, time, and money into our lives and into our possessions- our homes, our investments, and our relationships."
"Language can shape how we frame our experiences. Language can make us pay extra attention to what we consume and direct our attention to specific parts of the experience. It can help us appreciate our experiences more than we might otherwise. "
" The physical thing itself hasn't changed, but our experience of it has and so has our willingness to pay for it. Language is not just describing the world around us, it influences what we pay attention to, what we end up enjoying and what we don't."
"This use of language creates what author John Lanchester calls 'priesthoods' - using elaborate ritual and language that is designed to bamboozle, mystify, and intimidate, leaving us with a feeling that we are not sure what's being talked about but that as long as we use the service of these qualified people we will be in expert hands."
"Rituals connect a single experience to many other past and future experiences just like it. That connection gives the experience extra meaning by causing it to become part of a tradition that extends back to the past and forward into the future."
"Rituals make food seem tastier, events seem special-er, and life seem life-ier. They make experiences feel more valuable. Like consumption vocabulary, rituals make us stop and focus on what we're doing. They enhance our enjoyment of consumption because they give us greater involvement in that consumption. But rituals go a step beyond consumption vocabulary because they also involve some activity on our part, and they also involve meaning. In the process they can enhance almost any experience."
"The difference between our choice about now and our choice about the future is simply that decisions made in the present involve emotion, whereas decisions made about the future do not. "
"Money is a curse and a blessing. It's a wonderful thing to have money as a medium for exchange, but as we've learned, it often misdirects us and influences us to focus on the wrong things. For an antidote, a bit of moneyless reframing helps from time to time. Consider the underlying trade-offs between things and other things instead of between things and money. If you're happy with the trade-off go for it. If you're not, think again, and again. And again.
No matter our station in life, we believe it is important that instead of thinking about life decisions in terms of money, we think about them in terms of life."
"When it comes to making financial decisions, what should matter are opportunity costs, the true benefit a purchase provides, and the real pleasure we receive from it compared to other ways we could spend our money.
What should NOT matter in a perfectly rational world?
-Sale prices or 'savings' or how much we're spending at the same time on something else (relativity)
-Classification of our money, where it came from, and how we feel about it (mental accounting)
-Ease of Payment (pain of paying)
-First price we see or previous prices we've paid for a purchase (anchoring)
-Sense of ownership (endowment effect and loss aversion)
-Whether we give in to the temptations of the present (self-control)
-Ease of comparing the price of a product, experience or widget.
Remember: those things do not affect the value of a purchase (even if we think they do) there are other factors that would not change value if we were perfectly rational, but since we are full of quirks, they end up changing the value of our experiences. These include:
-words describing something and what we do at the time of consumption (language and rituals)
-How we anticipate the consumption experience, rather than what its true nature is (expectations) "
"Remember, our lack of self-control is due to discounting the future - because we are not emotionally attached to it- and to our willpower's failure to overcome the temptations of the present. So how can we increase self- control? By connecting to our future and resisting temptation."
"Use simple tools to help us imagine our future self more vividly, specifically, and relata"bly. It can be as simple as having an imaginary conversation with an older 'us'. Or we can write a letter to an elderly version of ourselves. We can also simply think about what our specific needs, desires, greatest joys, and toughest regrets will be when we're 65, 70, 95, 100. "
"The struggle to improve our financial decision-making isn't just a struggle against our personal flaws; it's also against systems designed to exacerbate those flows and take advantage of our shortcomings. Consequently, we must fight harder. We must individually adapt our thought processes to think more wisely about how we spend our money. And, as a society (assuming we want the people around us to make better money decisions), we must also design systems to be compatible with how we think about money so that our choices benefit us, and society, not those who might exploit and abuse our flawed thinking."
"We have always assessed valued in ways that are not necessarily connected to value at all."
"Happiness too often seems to be less a reflection of our actual happiness and more a reflection of the ways in which we compare ourselves to others."
"In some ways, the concept of regret is itself just another version of comparison. With regret, we compare ourselves- our lives, our careers, our wealth, our status- not to other people, but to alternative versions of ourselves. We compare ourselves to the selves we might have been, had we made different choices. This too, is often neither healthy nor useful."
"Emotional Accounting. Emotional money laundering can take many forms. We might cleanse badly tainted money by first spending it on serious things like paying down debt, or on virtuous ones, like buying ice cream- for an orphanage. We we do something we think is good, it eliminates the bad feelings associated with the money, making us free to spend.This type of emotional money laundering is certainly not rational, but it makes us feel good."
"Malleable mental accounting. When we allow ourselves to classify expenses ambiguously and when we creatively assign expenses to different mental accounts. In a way, that helps us trick the account owner (ourselves). We manipulate our mental accounts to justify our spending, allowing us the luxury of overspending and feeling good about it."
"The end of an experience is very important. Think of closing prayers at religious services, dessert at the end of a meal, or goodbye songs at the end of summer camp. Ending on a high note is important because the end of an experience informs and shapes how we reflect back on, remember, and value the entire experience. "
"The pain of paying is the result of two distinct factors. The first is the gap between the time when our money leaves our wallet and the time we consume the good for which we've paid. The second factor is the attention we give to the payment itself. The formula is: pain of paying = time + attention. "
"These 'advances' certainly make paying easier. Frictionless. Painless. Thoughtless. If we don't even know something's happening, how can we feel it? How can we understand the consequences? "
"Herding and Self-Herding. Herding is the idea that we will go with the crowd, that we assume something is good or bad based upon other people's behavior. If other people like it, or review it well, or beg to see it, do it, or pay for it, we'll be convinced it's good. We assume something is of high value because others appear to value it highly. (ie: yelp).
Self-herding is the second, more dangerous part of anchoring. Self- herding is the same fundamental idea as herding, except that we base our decisions not on those of other people, but on similar decisions we ourselves have made in the past. We assume something has high value because we valued it highly before. We value something at what it 'normally' or has 'always' cost, because we trust ourselves with our own behaviors. We remember that we've made a specific value decision over and over, so without spending the time and energy to evaluate that decision over and over, we assume it was a good one."
" People like Gregg Rapp, a restaurant consultant, say the highest- priced items actually generate revenue by getting people to buy the second - highest priced items. This is decoy pricing using anchoring and relativity."
"The less we know about something, the more we depend on anchors."
"An anchor price can be any figure, no matter how random, so long as we associate it with a decision. That decision gains power and influences our future decisions moving forward. Anchoring shows the importance of early decisions about pricing, that they establish a value in our heads and affect our own value calculations going forward."
" Anchors gain their long-term impact with a process called ARBITRARY COHERENCE. The basic idea is that, while the amount that participants were willing to pay for any item was largely influenced by the random anchor, once they came up with a price for a product category, that price students in the above experiment were asked to bid on two products within a category 2 wines an 2 computer accessories. Did the decision about the first (wine or keyboard) affect the second in the same category? The answer is yes. "
"Endowment effect is deeply connected to Loss aversion. The principle of loss aversion, first proposed by Daniel Kahneman and Amos Tversky, holds that we value gains and losses differently. We feel the pain of losses more strongly than we do the same magnitude of pleasure. And it's not just a small difference- it's about 2x."
"Imagine that right now you were not married to this person, and you knew about her everything you now know, but you've just been friends for the last 10 years. Would you now propose to her?"
"How much of his conflict came from thinking about the past, from overvaluing the time and energy he'd already sunk into his marriage, rather than looking forward, to the time and energy he'd use in the future, regardless of the previous investment?"
"Ownership changes our perspective. We adjust to our level of ownership and it becomes the baseline by which we judge gains and losses.
One way to overcome the traps of ownership is to try to separate ourselves psychologically from the things that we own, in order to more accurately assess their value. We should think abut where we are now and what will happen going forward, not where we came from.This is of course, much easier said than done, especially when we tend to put so much emotion, time, and money into our lives and into our possessions- our homes, our investments, and our relationships."
"Language can shape how we frame our experiences. Language can make us pay extra attention to what we consume and direct our attention to specific parts of the experience. It can help us appreciate our experiences more than we might otherwise. "
" The physical thing itself hasn't changed, but our experience of it has and so has our willingness to pay for it. Language is not just describing the world around us, it influences what we pay attention to, what we end up enjoying and what we don't."
"This use of language creates what author John Lanchester calls 'priesthoods' - using elaborate ritual and language that is designed to bamboozle, mystify, and intimidate, leaving us with a feeling that we are not sure what's being talked about but that as long as we use the service of these qualified people we will be in expert hands."
"Rituals connect a single experience to many other past and future experiences just like it. That connection gives the experience extra meaning by causing it to become part of a tradition that extends back to the past and forward into the future."
"Rituals make food seem tastier, events seem special-er, and life seem life-ier. They make experiences feel more valuable. Like consumption vocabulary, rituals make us stop and focus on what we're doing. They enhance our enjoyment of consumption because they give us greater involvement in that consumption. But rituals go a step beyond consumption vocabulary because they also involve some activity on our part, and they also involve meaning. In the process they can enhance almost any experience."
"The difference between our choice about now and our choice about the future is simply that decisions made in the present involve emotion, whereas decisions made about the future do not. "
"Money is a curse and a blessing. It's a wonderful thing to have money as a medium for exchange, but as we've learned, it often misdirects us and influences us to focus on the wrong things. For an antidote, a bit of moneyless reframing helps from time to time. Consider the underlying trade-offs between things and other things instead of between things and money. If you're happy with the trade-off go for it. If you're not, think again, and again. And again.
No matter our station in life, we believe it is important that instead of thinking about life decisions in terms of money, we think about them in terms of life."
"When it comes to making financial decisions, what should matter are opportunity costs, the true benefit a purchase provides, and the real pleasure we receive from it compared to other ways we could spend our money.
What should NOT matter in a perfectly rational world?
-Sale prices or 'savings' or how much we're spending at the same time on something else (relativity)
-Classification of our money, where it came from, and how we feel about it (mental accounting)
-Ease of Payment (pain of paying)
-First price we see or previous prices we've paid for a purchase (anchoring)
-Sense of ownership (endowment effect and loss aversion)
-Whether we give in to the temptations of the present (self-control)
-Ease of comparing the price of a product, experience or widget.
Remember: those things do not affect the value of a purchase (even if we think they do) there are other factors that would not change value if we were perfectly rational, but since we are full of quirks, they end up changing the value of our experiences. These include:
-words describing something and what we do at the time of consumption (language and rituals)
-How we anticipate the consumption experience, rather than what its true nature is (expectations) "
"Remember, our lack of self-control is due to discounting the future - because we are not emotionally attached to it- and to our willpower's failure to overcome the temptations of the present. So how can we increase self- control? By connecting to our future and resisting temptation."
"Use simple tools to help us imagine our future self more vividly, specifically, and relata"bly. It can be as simple as having an imaginary conversation with an older 'us'. Or we can write a letter to an elderly version of ourselves. We can also simply think about what our specific needs, desires, greatest joys, and toughest regrets will be when we're 65, 70, 95, 100. "
"The struggle to improve our financial decision-making isn't just a struggle against our personal flaws; it's also against systems designed to exacerbate those flows and take advantage of our shortcomings. Consequently, we must fight harder. We must individually adapt our thought processes to think more wisely about how we spend our money. And, as a society (assuming we want the people around us to make better money decisions), we must also design systems to be compatible with how we think about money so that our choices benefit us, and society, not those who might exploit and abuse our flawed thinking."