More Ways Your Brain Tricks You

Today I came across a great article about more ways your brain tricks you into making bad financial decisions.  The article, Why You're a Big Sucker, explains how a few blind spots in cause us to make bad consumer decisions and cost us money.

Two examples resonated with me personally.  The first is how the word FREE tricks us into doing some very stupid things.  In short, when a marketer or sales person is giving you something for free there is always a catch.  In my case, I called a toll free number advertised on the radio to collect my "free" trip to Las Vegas.  Of course, I found out when the marketing materials arrived there was indeed a free trip, except for the $29.99 handling fee, the $79.99 conditional cancellation fee, and the mandatory 2 hour time share presentation.  Oh, I also forgot that my wife and I could only collect our plane tickets if we were flying from a designated airport (all on the West coast) or were willing to pay a $200 travel destination upgrade to allow us to fly out of Atlanta (still a 3.5 hour drive from our house).  I also learned that by giving out my person information I landed myself on direct mailing list for every scam under the sun; I was a big sucker.

The next example that hit home is the idea that prices are relative to your surroundings.  When I am in Best Buy looking at televisions, the $1,500 42" LCD TV seems like an absolute bargain when it is put up next to the $2,700 50" LCD and the $3,300 55" Plasma.  A sneaky merchant will add a moderately priced set into a lineup of pricey sets and then tack on a "free bonus."  Of course, $1,500 for a TV is a lot more expensive when considered in a vacuum, but when it is sitting next to a whole row of more expensive options it can seem like a great deal.  Amusement park food also comes to mind when I think about the relative cost of available options.  When it costs $8 for a hamburger and $4 for a 20oz Coke a frugal person will pick the $4 hot dog and a $2 bottled water.  The situation has induced you to spend way too much money, but still get the illusion of being responsible with your money.  In other words, be sure to keep costs in their true perspective and keep the situational bias at bay.

I am regularly fascinated with the ideas behind Behavioral Finance.  A few days ago I wrote another article on the topic that you should check out as well titled, Your Brain Makes Building Wealth Hard.  Thanks for reading.