When it comes to spending money, people don't always do the logical thing. If they did, most people would be a lot better off financially than they are.
Some illogical spending decisions people make are due to some very clever marketing tricks, such as the Two Vending Machines example, which I've shared in a recent blog. Other times it is due to some biases that we have. This latter point is the purpose of this blog.
Empowering Good Spending Decisions
Before I share the Pen and Suit Experiment, I want to expand on that last point about developing good spending habits.
I recommend that parents talk to their kids about different spending habits but not tell them how to spend their money. Ultimately, parents should want their kids to have the knowledge to make their own spending decisions.
If parents control their children's spending choices, there's a concern that it might result in poor financial decision-making in adulthood. This could stem from a desire to rebel against parental restrictions, leading to overspending, or from a lack of confidence in managing finances independently, as they're accustomed to relying on parental guidance for spending decisions.
I hope you share the experiment below with your kids and it should help them make more positive spending decisions as they grow up.
The Pen and Suit Experiment
A group of researchers asked people:
"If you were in a store and looking to buy a pen for $25 and then I told you that you could get the same pen for $7 less in another store 15 minutes away. Would you go to the other store?"
The vast majority of people said "Yes!" - They would travel 15 minutes to the other store to buy the pen and save $7.
The group of researchers also asked people:
"If you were in a store and looking to buy a suit for $455 and then I told you that you could get the same suit for $7 less in another store 15 minutes away. Would you go to the other store?"
In this case, the vast majority of people said "No!" - They wouldn't travel the same 15 minutes to the other store to buy the suit and save the same $7.
This is illogical as it is the same $7 that is being saved for the same 15 minutes.
This highlights that people look at money relative to what they are spending, i.e., $7 is a 28% saving for the pen and less than a 2% saving for the suit.
Impact on future spending decisions
After hearing about the Pen and Suit Experiment, I certainly started to think about money in absolute terms rather than just relative to other things. I believe I have saved a lot of money as a result.
Don't get me wrong, there will be times when I won't go to the other store just to save a small amount of money. I do value my time but the important thing I ask myself is 'Would I make the effort if I were buying something else?', if yes, then I do make the effort.
I hope my daughters will ask themselves the same question when making spending decisions and end up saving more of their money.
On the topic of things that seem illogical, learn how marketing companies get us to do things that seem illogical by checking out my Two Vending Machine blog.
Don't forget to subscribe, share and check out our Wealthy Kids Program.
Thanks for reading,
Will
P.S., Do you want to hear something else that is illogical? Some parents want their kids to learn about money but haven't yet bought them a copy of Grandpa's Fortune Fables! Available on Amazon
