Bank Deal: Earn 1.00% APY on an FDIC-insured savings account at Barclays Bank.
We’re just back from an end-of-summer trip to the beach. A good time was had by all, and the kids headed back to school this morning. While on the road, I had an interesting experience with the concept of relative price evaluation, and I wanted to share a few thoughts here.
How people evaluate purchase prices
For a bit of background, I recently finished reading Predictably Irrational by Dan Ariely. In case you’re not familiar with it, this is a fascinating book on behavioral economics that’s written for “everyman,” and which has graced both the NY Times and Wall St. Journal bestseller lists.
In his book, Ariely talked about a variety of topics, including our tendency to view prices in a relative context. As an example, he talked about the purchase of a pen vs. the purchase of an expensive suit. If you could drive 15 minutes across town to save $7 on a $25 pen, would you do it? Many would. But what if you could make the same drive to save $7 on a $495 suit? Many wouldn’t bother.
Ariely then asks:
“Is 15 minutes of your time worth $7, or isnâ€™t it? In reality, of course, $7 is $7 â€“ no matter how you count it. The only question you should ask yourself in these cases is whether the 15-minute trip across town, and the extra 15 minutes it would take, is worth the extra $7 you would save. Whether the amount from which this $7 will be saved is $10 or $10,000 should be irrelevant.”
My own experience with this came when we arrived at our destination. We stayed in a beachfront hotel, but the parking deck was across a busy street with no crosswalk. We could park there for free, or we could opt for valet parking for $10/day.
Given the amount of money that we were already spending to stay at the hotel, I was tempted to go with the valet parking. After all, what’s another ten bucks per day? Just a drop in the bucket. But then it hit me…
If we had been staying at a cheaper hotel, there’s no way I would’ve willingly spent $10/day (plus tips) for valet service. After all, we only needed the car about once per day. Why should I spend ten bucks to save an extra three minute walk across the street to the parking deck?
I think the lesson here is that you need to boil your buying decisions down to their most basic level. Look at the actual dollar amounts involved instead of viewing things in a relative context. If you don’t, then your high dollar purchases will almost certainly wind up costing you even more.
This isn’t to say that you should automatically drive across town to save a few bucks. Rather, you need to consider the value of your time and the added cost (gas, wear and tear, etc.) vs. the actual amount to be saved and make an informed decision.
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math (693)
- Dish Network Customer Service SUCKS (536)
- $8,000 Homebuyer Tax Credit (429)
- Pay Off Mortgage Early or Invest? (424)
- How to Claim the First-Time Homebuyer Tax Credit (352)
- Termite Control: Sentricon vs. Termidor (329)
- How Much Should You Pay a Babysitter? (288)
- Ethanol Blended Gas = Lower Mileage? (272)
- Reduced Credit Limits? Share Your Experience (256)
- $15,000 Homebuyer Tax Credit (242)
- Buying Furniture off the Back of a Truck (237)
- Will Mac OS X Lion Kill Quicken 2007? (191)