There’s a not-so-strange tendency for people make really poor financial decisions when there’s a lot of money involved.
If you’re buying a $50,000 car that comes with 17″ aluminum wheels, but the salesman offers you the fancy 18″ chrome wheels for only $500 more, a lot of people would accept. After all, you’re getting the better product for only $500. What’s an extra $500 when you’re already spending $50,000?
People do this with colleges as well. The fancy private school is going to charge you (or your parents) $250,000 for a diploma. The State school one county over will sell you an equivalent diploma for free, on a scholarship. And yet, thousands of people choose to spend a quarter of a million dollars for the fancy private school degree. What’s going on?
There are a couple different things at play here, but here’s two of the most interesting.
First, we have a problem with large numbers. What is $50,000? What is $250,000? None of us have ever held that much cash in our hands before. We have a vague idea of what it could buy, but it’s not a relatable amount of money. It’s just a number.
Second, we have a problem thinking in terms of percentages. And extra $500 on a $50,000 purchase is a lousy 1%. Who cares right? When we abstract it, it becomes meaningless. But it’s still $500. It’s still an amount of money you wouldn’t ordinarily spend on Amazon without doing some serious research about whatever it is your buying. But, in the context of the $50,000 purchase, it’s pretty easy to justify the 1% impulse buy. Dealerships are counting on it.
The easiest way to avoid these money traps is to break the amounts down into relatable figures. The $500 chrome wheels aren’t 1%, they’re $500. They’re that super fancy new espresso maker you’ve been wanting, or that weekend in San Francisco you’ve been planning. That $250,000 isn’t a number in a bank account. That’s your own Subway franchise, a brand new BMW, and three years rent. That’s two and a half years of traveling around the world, spending $250 each and every day.
If you keep this in mind, you won’t be left struggling to decide between what you think you want and some abstract number in a bank account. You’ll be deciding between one version of the thing you want with another version.
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