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Saving Versus Spending: Why We Are Lying To Ourselves



“The oil men were acting like the peddler who lost money on every sale but tried to make it up on volume.”

            -Paul Mallon

When Filene’s Basement closed, the hordes gathered to pick up the remnants of the bankrupt chain. The bankruptcy administrators held a liquidation sale, and people came to buy. One woman tells her story (approximately 8:30 in here: http://www.npr.org/blogs/money/2011/12/27/144317128/the-undertakers-of-the-retail-industry ) of how she went and bought seven pairs of sunglasses. Her response when asked why? “Because they were 70% off.”  I was listening to this NPR Planet Money podcast while walking the dog and let out a primal groan of angst. My dog stopped, expecting to need to leap into action to rescue me from some unknown assailant – probably one of the neighborhood cats. This woman was victim of a lie we tell ourselves all of the time: we’re saving money when we’re actually spending it needlessly.

How often have you walked past a storefront window, seen something on sale which you didn’t need, thought “Wow! What a great price!” and subsequently bought it? After the purchase, you have a pang of regret – called buyer’s remorse ( http://en.wikipedia.org/wiki/Buyer's_remorse ) – and rather than marching back to the store to return the item, you tell yourself that you saved money.

You’re lying to yourself.

Why do you do this? Why justify buying something you didn’t need with sophistry? The answer has to do with a mental coping mechanism called loss aversion ( http://en.wikipedia.org/wiki/Loss_aversion ). Loss aversion means that you would rather lose less than gain more. The classic example is when you’re presented with a sure thing versus a chance to double your money. Let’s say I offer you $1 or a coin flip where heads gets you nothing and tails gets you $2. Even though both of these scenarios are equivalent, most people will choose the $1 sure thing. Now, let’s say that you owe me $1 and I give you the chance to do a double or nothing coin flip. Heads means you owe me nothing, and tails means you owe me $2. Most people will now choose the coin flip. If we take this example further, the higher the stakes go, the more people are willing to leave money on the table. You might take $1 or a coin flip, but wouldn’t take $0.99. However, if you were offered $95 or a coin flip for $0 or $200, you might take the $95. Raise the stakes to a coin flip between $0 and $1,000,000, and you might take $400,000 as a guaranteed payment. That’s why the banker on Deal or No Deal never offers even odds ( http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9639.2009.00390.x/abstract;jsessionid=8F86D570FAE4B77D80D47B88C65F8771.d01t02 ).

How does this relate to the item on sale that you just couldn’t resist?

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Jason Hull is a Fort Worth fee only, hourly financial planner who serves clients in Fort Worth, TX and Dallas, TX as well as serving clients nationwide.

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Hull Financial Planning is a Fort Worth, fee-only hourly financial advisor. The cities we serve in the Dallas-Fort Worth area include: 

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Hull Financial Planning, 2939 Crockett St. #315, Fort Worth TX 76107, (817)476-0584

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