Some time ago I listed to a radio presentation by an economist regarding “Relativity” in spending and saving habits. It stuck with me and I frequently call it to mind in making certain money decisions.
Imagine that you have entered a store to buy a $20.00 pen as a gift for a friend. You have selected the pen and as you approach checkout you learn that a few blocks away that very same model pen is on sale for $10.00. Research suggests that the great majority of shoppers would leave the first store in favor of saving $10.00 by purchasing the pen at the sale price elsewhere.
Here’s the kicker: Imagine instead that you are at a store preparing to purchase a $1,500.00 flat screen TV. Before checkout you learn that the same model is on sale down the street for $1,490.00. Research suggests that the majority of shoppers would not leave the first store in favor of saving $10.00 by purchasing the TV at the sale price elsewhere.
Same $10.00, but opposite behavior. The economist theorized that for most people, financial decisions are made in a relativistic fashion. However, the most successful managers of money (their own and others) see the $10.00 as a stand-alone quantity without regard to the value of the underlying purchase. They would evaluate whether to buy or not at the first store solely on the basis of whether the $10.00 saving was justified by the cost and inconvenience of proceeding to the second store.
Just some food for thought.
Peace Everyone. Pete
Pauline Schloss. says:
This analysis is too deep for me. I would save the first ten dollars forget the other in the large item amount.
Pete Schloss says:
Which is what most people would do, but why?… it’s the same ten dollars either way. What makes the first ten dollars “more valuable” than the second ten dollars?
Liz says:
Hmmmmm… I think it feels like you are getting the item for half price with the first purchase. Yet only getting ten dollars off on the TV. However – it is true $10.00 either way.