Duke Professor Dan Ariely Lecture - The Psychology of Money and Opportunity Cost

Summary

In this engaging lecture by Duke Professor Dan Ariely, the psychology of money and the complexities of financial decision-making are explored in depth. Ariely emphasizes the concept of opportunity cost, illustrating how difficult it is for people to consider what they are sacrificing when making purchases, whether small like a coffee or large like a car. He discusses common biases such as thinking in relativity and the pain of paying that often derail sound financial decisions. Ariely provides practical strategies to counteract these biases, like budgeting and reflecting on past spending habits. His insights aim to help individuals optimize their financial happiness and decision-making by understanding their spending patterns and the psychological triggers that influence them.

Highlights

• Opportunity cost is a fundamental concept in understanding financial decisions. 💡
• People rarely consider what they give up when they spend money. 🔄
• Biases like relativity and pain of paying can cloud judgment. 🌫️
• Strategies such as budgeting and reflection can improve financial habits. 📊
• Understanding personal spending patterns enhances financial happiness. 💰

Key Takeaways

• Understand the concept of opportunity cost and how it affects financial decisions. 💸
• We often fail to consider what we sacrifice when buying things, be it a coffee or a car. 🤔
• Relativity and the pain of paying are significant biases in our spending habits. 🧠
• Implement strategies like budgeting on a weekly basis to make better financial decisions. 🗓️
• Reflect on past spending to identify and reduce regrettable purchases. 🔍
• Become your own financial expert to maximize joy from your spending. 😊

Overview

Dan Ariely, a Duke University Professor, delves into the psychology of money in a captivating lecture. He begins by discussing the intrinsic nature of money and its critical role in society, likening it to an invention on par with the wheel. As he unravels the concept of opportunity cost, Ariely highlights how complex it is for individuals to grasp what they are trading off when buying items, big or small.

Ariely points out common psychological biases like relativity and the pain of paying, which often skew financial decision-making. These cognitive shortcuts influence how we perceive and spend money, often without us realizing it. Through anecdotes and experiments, he illustrates how these biases manifest in everyday scenarios, complicating our financial choices.

To combat these biases, Ariely offers actionable advice, such as conducting weekly budgeting or reflecting on past financial decisions to avoid future regrets. His focus is on teaching individuals how to be financially astute by becoming aware of their subconscious biases. By mastering these strategies, he argues, people can make better decisions that align spending with personal happiness and life satisfaction.

Chapters

• 00:00 - 01:30: Introduction and Importance of Money Chapter Title: Introduction and Importance of Money In this chapter, the discourse kicks off with a light-hearted mention of essential beverages like water and coffee to set a casual and engaging tone for the session. The main focus shifts quickly to the central theme: understanding the psychology of money. Danelli, alongside his co-presenter, introduces themselves to the audience, with Danelli holding the prestigious title of James B Duke professor. The introductory remarks set the stage for an in-depth exploration of how our perceptions and behaviors around money can be optimized for better outcomes.
• 01:30 - 03:30: Dan Ariely's Personal Story and Transition to Discussion on Money Professor Dan Ariely from Duke University, specializing in psychology and behavioral economics, primarily explores ways to encourage better decision-making in health, environmental, and financial domains. As an introductory note before delving into the lecture's main topic, he humorously addresses his unique half-beard appearance, engaging the audience with a personal anecdote.
• 03:30 - 07:00: The Essence and Innovation of Money The chapter discusses the speaker's physical appearance, particularly the scars covering most of their body, including the right side of their face. The speaker clarifies that the appearance is due to a past injury and not a lost bet, as some might speculate. The asymmetry in their appearance sometimes causes confusion among people, prompting them to explain the reason behind their unique look.
• 07:00 - 11:00: Opportunity Cost and Spending Decisions The chapter, titled 'Opportunity Cost and Spending Decisions,' begins by setting a context related to decision-making about money. It emphasizes the significance of understanding the nature of money in our decision-making processes. Money is described as an incredible invention, comparable in impact to the invention of the wheel. The chapter seems to propose that a deeper understanding of money and its implications can lead to better financial decisions.
• 11:00 - 20:00: Challenges of Understanding Opportunity Cost The chapter discusses the concept of opportunity cost and the complexities involved in understanding it. It starts with a hypothetical scenario where the speaker has money to raise chickens while another person would grow broccoli. The illustration underscores the challenges in evaluating the worth of different goods, such as chicken versus broccoli, and the tough negotiations that would ensue in bartering situations. The speaker also notes the difficulty in sustaining professions that require long-term learning or specialization, like being a university professor, in a barter economy. This reflects the broader complexities and opportunities missed in such economic systems.
• 20:00 - 26:00: Relativity in Financial Decision Making The chapter elaborates on the concept of relativity in financial decision-making, highlighting the significant role money plays in society. Money facilitates trade, value storage, future planning, and saving for retirement. The narrative briefly touches upon the traditional school setting, where students might have brought apples for teachers, symbolizing the appreciation and exchange beyond monetary transactions. Ultimately, the essence of money in fostering wealth and societal values is underscored.
• 26:00 - 31:00: The Pain of Paying and Its Implications The chapter discusses the role of money as a universal medium of exchange, allowing people to trade various goods like chicken and broccoli with money rather than bartering directly. It highlights money as an 'umbrella good' that facilitates complex transactions over time, enabling savings and deferred purchases, thus illustrating the innovative essence of the monetary system.
• 31:00 - 35:00: Effort, Fairness, and Perceived Value in Pricing The chapter explores the concept of money as a universal metric that can transform various goods and services into numerical values. It delves into how money equates to opportunity cost, where each dollar symbolizes potential economic choices. Examples mentioned include buying or selling commodities like water or coffee and acquiring items like smartphones. The discussion emphasizes how monetary value impacts decision-making and perceptions of fairness and effort in the context of pricing.
• 35:00 - 39:00: Conclusion: Strategies for Better Financial Decisions The chapter explores the symbolic exchange value of money by comparing it to the bartering system, like trading broccoli for chicken. It emphasizes that a dollar can represent various goods ranging from minor items like chewing gum to substantial purchases such as parts of a car. Money's versatility as a symbol for trade and its impact on financial decisions is highlighted, reflecting its significance as an ingenious invention.

Duke Professor Dan Ariely Lecture - The Psychology of Money and Opportunity Cost Transcription

• 00:00 - 00:30 hello hello we have water more importantly we have coffee and we're ready to start the discussion about the psychology of money and how we can use money in better ways so first of all hello my name is danelli and I'm James B Duke professor
• 00:30 - 01:00 of psychology and behavioral economics at Duke University and mostly I study the question of how do we make people act in a better way how do we get people to act in a better way in the domain of health and the environment and also in our financial decision making H before I dive into the topic of the lecture for today you might have noticed that I have half a beard a beard on this side and nothing on this
• 01:00 - 01:30 side and maybe you wondered what kind of bet I lost so I didn't lose a bet many years ago I was badly injured uh most of my body is covered with scars including uh the right side of my face so I just don't have hair on this on this side so it was not intentional it looked sort of symmetrical but I learned that unless I explain it people stay confused and they keep on wondering what's the the point
• 01:30 - 02:00 of this half a beer so there's no point it's just how the accident happened so let's talk about money now if we want to make better decisions about money the first thing we might want to do is to understand the nature of money what is money and money is actually an amazing invention it's an amazing invention at the scale of the wheel think about how the world would look like if we didn't
• 02:00 - 02:30 have money H I would raise chickens and you would grow broccoli and we would meet and we would argue about the value of chicken P broccoli and how much you would get and how much I would get and it would be very tough to negotiate and not only that there's lots of professions that we couldn't have profession that need a long time to learn or to train or a specialization I'm a university Professor I don't know how that would work out if if we all had to to barter
• 02:30 - 03:00 all the time but PE kids would come and bring an apple to the teacher I don't know how it would work so money created tremendous value for society it allows us to trade and to store value and to plan and to save for retirement lots of wonderful things um so once we've said good things about money now the question is what is the essence of money that allows it to
• 03:00 - 03:30 have all of these things and it's the idea that money can be traded with everything it's not that we trade chicken with broccoli we trade chicken with money and broccoli with money and money is kind of like the common good think of it as an umbrella good that everything in life almost everything can be mapped into money and because of that we can buy chicken now and save the money and buy broccoli later we can do all kinds of things but the the essence of the innovation of
• 03:30 - 04:00 money is that money is the common good and lots of things almost everything can be mapped into money I can uh sell water or buy water sell coffee or buy coffee I can um I can get a a smartphone all kinds of things now that idea is called the opportunity cost of money and the notion is that every dollar represent presents
• 04:00 - 04:30 lots of things we could buy you know if if I trade broccoli with chicken the broccoli is representing an amount of chicken and the chicken is representing an amount of broccoli but if we think about the common good it means that a dollar represents lots of things I could buy chewing gum I could buy 1,000 of a phone I could buy 140th thousands of a car there's all kinds of things that that I could buy so so money wonderful as an invent mention
• 04:30 - 05:00 its value comes from the fact that it's the common good we can map it to lots of things and this is called the opportunity cost of money and the idea here is that when we come to spend money we should be thinking about opportunity cost we should be thinking is this the best decision to make me with my money or is there a better decision to make with my money so um we go to buy coffee and we should ask ourself is this the best way to spend
• 05:00 - 05:30 $4.50 or is there a better way to spend $4.50 now or in the future or is it part of something else for example you could say if I save that money for 20 years it will be $20 and maybe then it will be the difference between the stereo without the radio and the stereo with the radio something like that so so money relies on the notion of opportunity cost but the reality is that we think about it we have to admit that
• 05:30 - 06:00 we don't think about opportunity cost very often um so so if I go to buy coffee I rarely think about what else could I do with this money if I didn't buy this coffee and by the way it's not just about small purchases it's also about big purchases a few years ago we went to a Toyota dealership there were people who were about to buy a new car and we asked them we said hey if you if you buy the new car today you go ahead and you spend the money on the new car on the already knew how much it would cost them what
• 06:00 - 06:30 are you giving up what would you not be able to do and you know what people told us nothing why because they never thought about it they never thought about the opportunity cost in the same way that you and I don't think about opportunity cost when we buy coffee they didn't think about this opportunity cost when they bought a car but when I pushed them I said hey something has to give up if you buy a new car something has to give up what would you give what would give up you know what most people told
• 06:30 - 07:00 me the most common answer was if I buy a Toyota I can't buy Honda now strictly that's true of course but I wanted an answer that would reflect if I buy this new car I'm Giving Up 3 weeks of vacation every year when I'm giving up 20 lattes and 15 books some inter temporal substitution over time and across different categories and here's the point
• 07:00 - 07:30 while thinking correctly about money requires that we think in the right way about opportunity cost it's a very very hard thought it's a very hard thought to think to think about all the different things we could do with this with the money it's difficult when we buy something small like coffee and it's difficult when we buy something big like a car but the problem actually gets worse and it gets worse because Society is making it even harder to think about
• 07:30 - 08:00 money the right way so if we're saying that thinking about money the right way is thinking about opportunity cost Society is making it harder to think about opportunity cost what do I mean imagine that I met you every morning and every morning I gave you $100 say here's $100 that's your money to spend for the day no more no less you can't save you have $100 to spend today what would be your opportunity
• 08:00 - 08:30 cost if you have a very large breakfast you might not have money for dinner if you spend money and you sweater you might not have money for medications you will have some tradeoffs and the trade-offs will be quite clear you would you would get $100 in the morning and you would realize that if you spend a lot of money on a cab you would not have money for a drink later on opportunity cost would become quite clear if you worked with cash on a daily
• 08:30 - 09:00 basis what would happen if instead of giving you $100 per day I gave you $700 per week and I gave you all the money for the whole week on Monday on Monday you would get $700 and you would think to yourself oh my goodness I'm rich and you would spend a lot and by Thursday you would not get you would not have much left but you would get stuck you would be stuck with not enough money so opportunity cost thinking about opportunity cost can really work well on a daily level on the weekly level it's a
• 09:00 - 09:30 little tougher we end up spending too quickly what if we do it on the monthly level what would happen if I gave you $3,000 $100 per day for 30 days in the beginning of the month now you would feel very rich in the beginning of the month but quickly you would run out what if I added on top of that student loans and credit card payments and retirement spending and a mortgage
• 09:30 - 10:00 now understanding the opportunity cost will be really tough if you live in a world in which you get a monthly salary and you have a mortgage payment and a student loan payment and a car payment and a credit card and I say to you if you're going to buy a new bicycle today for $1,000 what would you not be able to do impossible to think about this you just have no idea where the money is coming from so what is the point of all this the point of all of is is that
• 10:00 - 10:30 there is a way to think correctly about money it's to think about opportunity cost but thinking about opportunity cost is very tough it's very tough and what do we do when we can't think about the right thing in the right way we think about it in the wrong way and that's what we do with money instead of thinking about it the right way we developed all kinds of tics all kinds of shortcuts all kind of strategies to think about money in the wrong way not making ideal decisions but getting us to
• 10:30 - 11:00 think at least that we're making good decisions so let's think about one of those the first one is relativity relativity and consider the following example you go into a store to buy a pen and you find a pen that you like and the pen cost $15 and you go to the cashier and you show the cashier the pen and the cashier said wait wait wait before you buy
• 11:00 - 11:30 I have to tell you we have a sister store identical to our store four blocks down the street only 10 minutes walk they have a sale today on this pen on this exact pen they have a sale instead of $15 it is $8 I don't mind if you want walk to the other store 10 minutes walk four blocks really nice day outside and you could save $8 on a $15 pen
• 11:30 - 12:00 now think to yourself how many of you would say okay I'll take the walk and I'll I'll do this for $8 case number two you're buying a jacket it's an Armani Armani jacket very expensive very beautiful it's $1,015 you're about to check out from the kashir and the kashir tells you wait wait before you buy it we have a sister's store four blocks down the street only 10 minutes walk beautiful day outside if you want you can go there and buy the
• 12:00 - 12:30 same jacket on a discount they're selling it we're selling it for $1,015 they're selling it for $1,077 $8 less how many of you would now walk the 10 minutes in a beautiful day four blocks to save $8 now my guess is that very few of you would say yes now that's the results of the experiment
• 12:30 - 13:00 and even those of you who would say yes I would go in both cases you would feel very differently about both of these cases in the first case it would almost feel morally wrong not to walk the 10 minutes to save $8 in the second case you probably feel that you're foolish and Frugal and stingy you probably don't want to tell your friends that you're walking 10
• 13:00 - 13:30 minutes to save $8 in the second case why is that it's because we think about money in relative terms now your bank account doesn't care where the $8 came from It came from15 it CES from 15 it doesn't care $8 is $8 and walking 10 minutes is walking 10 minutes so rationally speaking it's is $8 worth 10 minutes but that's not how we think we think about it in relative
• 13:30 - 14:00 terms this is why when we buy something big like a car it will be very easy to spend more you buy a car and the person says hey you know for $500 for only $500 more you could get a better stereo you're already spending a lot of money in the car $500 looks small in comparison but if you bought the car 6 months ago and you came to the dealer and they said hey would you like to install a stereo for $500 it wouldn't be relative anymore
• 14:00 - 14:30 you're not buying them together it wouldn't look relative to each other and now it will feel to you incredibly expensive so relativity is an interesting case it tells us something about how we think about money the algorithm that works in our mind it also tells us how to be worried that if we're spending a big amount we might be tempted to make mistakes and maybe we should think about it in a different way so if you're buying a car and somebody
• 14:30 - 15:00 says hey would you like to spend $500 more on a stereo you could ask yourself what if I was not going to buy a car what if somebody just offered me that stereo by itself would I still buy it if the answer is yes then maybe it's okay to buy it with a car but if the answer is no maybe you say maybe I shouldn't I shouldn't buy it so relativity tells us something about how we think but also a way to protect ourselves now relativity shows up a lot
• 15:00 - 15:30 in sales here's a t-shirt or a sweater it used to be $100 now it's 50 why do we care what it used to cost it used to be 100 so what now it's 50 is it worthwh at 50 or not why is the 100 relevant the 100 is relevant because it shouts at us saying hey relatively speaking this is a good deal it's 50% off now rationally speaking of course we should look at it and say is this worth
• 15:30 - 16:00 $50 or not regardless of what it used to be cost in the past but that's not how we think we think in relative terms so one bias we have is thinking in relativity another interesting bias we have is what we call is called the pain of paying the pain of paining imagine that you're going to dinner expensive dinner two people
• 16:00 - 16:30 $200 and you can pay in cash at the end of the meal here's $200 or you could pay with a credit card which one feels worse which one feels worse feels Less Pleasant the act of payment and most people say it's the physical payment that feels worse the the act of paying feels worse than just the act of signing and if you think about the psychology of
• 16:30 - 17:00 this when you pay you part with money when you sign on a credit card when exactly are you going to pay you're not paying now it adds to a Big Bill relativity makes it look smaller and it's going to be then different time later but you're not feeling like you're paying now and the idea is that when we pay our joy decreases the act of payment decreases our joy and if we sign with a credit card doesn't decrease it to the same
• 17:00 - 17:30 degree to to to elaborate on this consider the following case imagine I have a restaurant and I learned over the years that people on average eat 100 bites and pay $100 100 bytes $100 and I come and I say to you look you're a really nice person I like you I'll give you a discount I'll give you 50 cents per bite most people pay a dollar per bite I'll give you 50 cents per bite and not only that I'll only charge you for the bites
• 17:30 - 18:00 you eat the bites you don't eat you don't need to pay here's your dish I stand back with a little notebook and every time you take a bite I Mar a little notebook a little note a little note not and at the end I charge you 50 Cents Only for the bites you eat how much fun will that meal be most people say it will be terrible why because everybody do will think is this worth 50 cents is this worth 50
• 18:00 - 18:30 cents in fact sometimes when I teach about the psychology of money I bring pizza to class and I charge the students 25 cents per bite 25 cents per bite what do you think happens huge bites they sit there with a pizza and they push a little bit too much at the end of the day they really don't enjoy the whole process they eat bites that are way too big it's unpleasant to chew but it's a good deal
• 18:30 - 19:00 but the temptation to push a little bit too much is too high now the pain of paying is not always bad if we understand it it can some sometimes work in our favor for example if you look at Energy bill uh some people write checks at the end of each month they write a check to the utility company to the electricity company and some people have it directly coming out of their checking
• 19:00 - 19:30 account it turns out that in the US the people who sign the checks if they start the automated process their energy consumption goes up by almost 5% over the next few months why is that it's because when you get the bill you're pissed off you look at you say why did we spend so much money on energy you write the check and you're really upset about this you feel like you're paying the money it's not like cash but but you feel like you're paying the money and you shout at your
• 19:30 - 20:00 kids and you shout at your significant D you say close the lights and do this and do this and do this it's because it is Salient we think about it we see it and we we get upset about it when it comes automatically out of our checking account we don't even remember what it was we don't pay attention to it we don't have that moment in which we think about it and terrorize our family members now understanding this we might say hey sometimes we wanton want more pain of pain sometimes we might want less pain
• 20:00 - 20:30 of pain it really is up to us last example imagine you go on a cruise it's a beautiful cruise to somewhere beautiful 5 days [Music] Cruise very expensive $2,000 and you have two ways to pay for the Cru you can choose do you pay 6 months in advance or do you pay the moment you get off the ship 6 months in advance and the moment you get off the
• 20:30 - 21:00 ship now what's the more rational Choice the more rational choice is to pay later you get to keep the money you can get interest on it and so on but how will that impact your joy from the trip and the idea is that if you pay 6 months in advance the pain of pain is gone and now you just enjoy the cruise but if you know that you have to pay at the end of the cruise think about the
• 21:00 - 21:30 last day of the cruise knowing that tomorrow morning you'll have to pay $22,000 you'll probably feel so bad about the whole thing you'll spend the whole day in the buffet trying to eat your way out of this trying to amortize your investment the reality is that the the moment we had payment like in a meal like if you had to pay for every bite like my students the joy we get from experience can get diminished by the pain of paying
• 21:30 - 22:00 sometimes it's okay like paying for gas for for electricity we say maybe maybe it's okay if it's less enjoyable we will spend less but sometimes we might not want we might not want to use it now I mentioned the opportunity cost and I said you know um oh sorry so so when we think about the pain of paying we should make sure that we make the right decisions and they're not driven by the p of paying
• 22:00 - 22:30 for example you could ask yourself would I still buy this if it was with cash or would I still not buy this if it wasn't with a credit card we can ask ourselves these questions okay so we talked about the pain of paying and then we said it's really hard to do and we do relativity and we do pain of paying it's it's different approaches um but while thinking about opportun Unity cost in a general way is very
• 22:30 - 23:00 tough there are some ways that we can think about opportunity cost and the way to do it is not to compare something to everything like the rational thing is to say oh these $4.50 that I spent on this coffee what else could I do with it across my whole range of experiences that's too tough but I could take coffee and I could compare it to something else I like so for example I could say you know what
• 23:00 - 23:30 um 400 300 cups of coffee 300 cups of coffee a cup of coffee a day is equivalent to a smartphone a cup of coffee a day for a year equivalent to smartphone which one is better for me now 300 is a lot but I could say you know what 10 cups of coffee equal two tickets to a movie so when we think about opportunity cost
• 23:30 - 24:00 the right way we compare everything that's too tough but one of the things we can do is we can compare specific things to take specific things we like and try to figure out how they map onto each other okay um there's of course lots of ways in which we think wrong about money and lots of ways to fix it and one of the things we did to try and figure out how much room there is for fixing is we did
• 24:00 - 24:30 the following thing we asked people to look back at their credit card statement and to tell us what things they regret imagine that I showed you each of your credit card items everything you bought and for each of them you would say this was not a good decision this was a good decision not a good decision was a good decision you see when we buy things when we spend it's always forward looking what will make me happy what would be good for me we rarely look back
• 24:30 - 25:00 at things and say what was a mistake now across people we found quite a few categories that were mistakes the biggest mistake we found by the way this was preo was that people said that they spend too much money going out now by the way it's not that going out is a bad idea it is just that when people go out we eat up we end up eating too much drinking too much and then regretting it the next day going out is
• 25:00 - 25:30 a great idea but we need to make sure we don't eat too much drink too much and spend too much if we just decrease it to some degree things would be much better so another trick is to try and be reflective about our purchases yes it's good to to think in advance what would make us happy or not but if we look backward we can say do we have any systematic mistakes are there categories of things that we say oh I remember spending this but it didn't
• 25:30 - 26:00 give me any happiness it ended up that I thought at the moment it was a good idea but at the end of the day it was not a good idea at all there was nothing uh nothing valuable in it for me okay um so so being reflective is one good strategy uh to think about where we make mistakes another interesting approach is
• 26:00 - 26:30 to think about budgeting and you see reflective approach is to say after you spend something but after you spend something it's good for the next month but but it doesn't help us for the past month budgeting is a kind of a rough tool and by the way it's not an easy tool to use but it's a kind of a rough tools that helps us plan so it doesn't just reflect after the fact but we can we can plan say how much do we want to
• 26:30 - 27:00 spend on category X Y or Z now it turns out that if you have a budget with lots of categories it's a category for taxes and categories for coffee and category for beer and category for restaurants and category for grocery shopping and categories 4444 drives people crazy it drive people crazy so much they end up not not
• 27:00 - 27:30 recording anything and and you know sometimes the enemy of good is the perfect a good strategy for budgeting is to think about discretionary spending so we don't think separately about beer and coffee and restaurants and movies we think about all the amounts that we want to spend on all the things that are discretionary things we could do without so we can't do without our rent and we
• 27:30 - 28:00 can't do without our insurance and we actually can't do without grocery shopping we can change a little bit but we can't do completely without grocery shopping but there's lots of things that are discretionary yes beer no beer yes um movies no movies yes going out no going out and and for those kind of categories it's good to Bunch all of them together and to say here is how much I want to spend on this questionary spending for the
• 28:00 - 28:30 month and that ends up being a good strategy but you can make it better you remember we talked about what happens when you get money paid per month per week per day it turns out that for budgeting a weak strategy is much better what happen is if I give you let's say let's say it's a $1,000 a month let's say I give you $1,000 a month for discretionary spending what happened people spend a lot up front and they get left with
• 28:30 - 29:00 nothing if we do it on a week people can see the opportunity cost like we said before and budgeting gets better by the way let's say we do $1,000 a month we say not so good people spend up front or $250 a week much better is it better to give the $250 on Monday or on Friday what do you think it turns out Monday is better why if you
• 29:00 - 29:30 get the money on Friday you the weekend happened and people spend too much if you get the money on Monday you wait for the weekend you save her you save some of the money to the weekend you see during the week we don't have we don't spend that much we we have the capacity much more on the weekend so during the week you hope you're waiting for the weekend you save some of the money and then when the weekend comes you enjoy the weekend more but also if you messed up you can shrink
• 29:30 - 30:00 it during the week we have less latitude on the week and we have a bigger a bigger latitude so good to have a budget good to have the budget for all the discretionary things by the way you want to write specifically what's in the budget and not the budget you could say grocery store is not in the budget grocery store things are not in the budget or you could say a restaurants Transportation you want to do specific
• 30:00 - 30:30 this closing yes or not in the budget it's important to say what's in the budget having a budget for all the discretionary spending is important having not as a monthly as weekly and start on Monday not on not on Friday um the final topic I want to talk about on the psychology of money is the notion of
• 30:30 - 31:00 fairness and it turns out that many times when we think about paying we don't think about how much value we're getting something we think about how fair it is to charge this amount and I'll tell you a story about this imagine that you come to visit me a Duke where I work um you park by my office there's a parking meter for quarters you look in your pocket as you
• 31:00 - 31:30 have no quarters somebody passes by and you say excuse me do you have a quarter and that person says no I have no uh quarters but that person says if you want I'll run really fast to the bank change a dollar for quarters run really fast back it will take me 10 minutes to run there and back and I'll give you um I'll give you a quarter but if I do that
• 31:30 - 32:00 how do you feel about paying me a dollar for my trouble most of you would probably say that's fine you're running there and back I'm fine with that case number two parking parking meter you don't have a quarter in your pocket somebody passes by and you say excuse me do you have a quarter and that person says yes I have a quarter I'll sell it to you for a dollar how do you feel now now you feel like you're being t taken for granted what's the difference between
• 32:00 - 32:30 the first case and the second case in the first case somebody ran there and back they worked very hard but you had to wait it wasted your time it was in every possible way less efficient the second case somebody saved you all the time and just gave you a quarter for a dollar but in the first case somebody ran somebody did an effort and when people do an effort we feel much better about paying them for that when people
• 32:30 - 33:00 don't have any effort we don't feel like it and by the way the internet world is full of effort that we don't see online banking lots of effort we don't see it Google work a lot we just don't we just don't see it but it's important to understand that our willingness to pay is often driven not by the value of what we're getting but by the sense of fairness one more story about this one
• 33:00 - 33:30 day I locked myself out of my house I called the locksmith he came did something like this for like 45 seconds opened the door and said that will be $125 and I paid him and I said you know how do you come up with the price and how does it work for you you work for so few minutes for $125 and the guy said you know I used to be a bad locksmith training I would come I would work a card it would take me a long time I would sometimes break the
• 33:30 - 34:00 door break the lock and when they broke the lock I would charge people for a new lock so I charge him not 125 I would charge him 150 but it would take me sometimes an hour sometimes half an hour and he said then people paid me and they were happy he said now I'm so quick I charge less because I don't break the lock and nobody tips me anymore and everybody argues about the price it's exactly about this point we don't
• 34:00 - 34:30 understand value we understand fairness now it's not about fairness fairness is is an important feeling but the value we're getting from it is disassociate from from the sense of of of value um there's a story that Picasso was sitting on the bench woman passed and said oh Picasso I love your work would you draw me and Picasso had his paper out and he looked at her and looked at Page look her and did
• 34:30 - 35:00 something like this and gave it to her and the woman said you captured my essence you captured the essence of me amazing how much do I owe you he said $500 no I don't think it's a true story but nevertheless he said $500 he said $500 for 30 seconds he said no no no it's 30 years and 30 seconds now the reality is that a drawing by Picasso is drawing by Picasso whether he spend 30 seconds on it or 5 days um a lockmith opening the door
• 35:00 - 35:30 is a locksmith opening the door and in fact if they open the door faster they deserve more money but but that's not how we think about life we often think about life in terms of how much effort has gone into something and that's our willingness to pay okay so let me summarize our discussion money is all about opportunity cost it's an amazing invention but to think about money the
• 35:30 - 36:00 right way we have to think about opportunity cost can we do it no so what do we do we find tricks we find tricks like relativity we find tricks like relying on effort we find tricks like relying on the pain of paying and in those cases we act as if our financial decision makes sense even when they don't but there are some things that we
• 36:00 - 36:30 can do first of all we can learn some of those biases we can learn that relativity is dangerous and we should try and slow down and think when we are buying something big to to make sure that we're not buying another thing with it just because we're already buying something big or if we see a sale sign we might want to look and make sure we would have bought that thing even if it wasn't on a sale if it was the same
• 36:30 - 37:00 price without the fact that it used to cost something else we can try to disassociate the pain of paying um and we can try and think about the value of things without focusing on fairness but there are other things we can do we can try and take our biases like relativity um pain of paying and fairness and override them but there also good good things we could do for example we can understand that budgeting
• 37:00 - 37:30 especially if it's a budgeting that is about all of our discretionary spending once a week on Monday can help us make better decisions we can realize that making tradeoffs between everything like opportunity cost demands is too tough but if we can make trade-offs between specific things coffee or movies the next few months am I going out to restaurants or do I want to buy a bicycle can help us make better decisions and finally from
• 37:30 - 38:00 time to time and don't do it too often but time to time we can go over our credit card spending and we can ask ourselves what did we buy that was a good decision and what kind of things that we buy that we regret not one here one there but is there a category of things that we say oh we always hope that this would work out well but eventually it's not and we ended end up regretting it and if you can find those categories maybe those are categories to
• 38:00 - 38:30 to reduce so lots of things to do and each one of us need to basically become an expert um money is the energy we have to buy happiness in life it's not the only way to buy happiness in life but there is you know we buy water and coffee and and flowers we buy all kinds of things and the question is how do we want to take the amount of money we haven't allocate them between all those
• 38:30 - 39:00 things to try and get to the highest possible joy in life and we all have to become experts in it we all have to become good at it we have to understand how do we spend to make ourselves the happiest that we can okay so with this I will say thank you for your time and attention and uh all the best and to good money spending bye [Music]