Every day we are faced with value-based decisions. It is remarkable, however, how often we make poor ones based on the specific context and end up removed from the absolute value of the decision. After reading Dan Ariely’s Predictably Irrational I realized that I, along with everyone else, make irrational decisions all the time and that it’s due to relativity.
Let’s explore this via an example. It’s Saturday and you’re excited. You’re going to the mall to purchase two gifts — a pencil and a three-piece burgundy suit. You’re the kind of person who takes care of your money and tend to plan expenditures. The first stop is the pencil, for which you’ve allocated a budget of P250. You find the perfect pencil in your price range and begin the triumphant walk to the check-out when you’re intercepted by a stranger who informs you that “that exact pencil is on sale in the store down the street for P150”. You decide the 40-percent discount is worthwhile in exchange for a ten-minute walk. Delighted with the discount you then make your way to the suit store. Your budget is P3,000 and you find the perfect suit. You’re waiting in the queue, scrolling through your phone’s screen when you receive the following message “Patrick! MAJOR SALE NEXT DOOR, show this message and receive P50 off all suits priced at P3,000”. You quickly dismiss the idea and decide that you’re not interested in a 1.66-percent discount in exchange for a five-minute walk.
Reviewing the decisions in isolation allows the irrationality to go unnoticed but reviewed in tandem it stands out as much as a three-piece burgundy suit does in a finance article. A ten-minute walk to save P100 equates to the same savings per minute ratio as a five-minute walk to save P50. However, they don’t feel the same because of the perceived discount relative to the price. Reflect on your spending in this context. What is important to you and your business? A commonly cited metric is value for money. The subjective nature of the word “value” needs to be analyzed by you for your business as only you know what brings true value. One business may benefit from saving P10,000 on a lease negotiation while a comparable company could get the same sense of value by extending the Christmas party budget by P10,000. This is where your perception of value comes into sharp focus as neither scenario is more appropriate—it depends on what you decide your business needs.
The overall point of relativity doesn’t just apply to the business world but also forms a huge part of personal finance. The aim of marketing psychology is to sell you a better version of yourself and at the same time take away your ability to compare the value of comparable products. Take the classic example of buying a bar of soap.
Purchasing soap, in a rational world, would be based on the merits of the ingredients relative to the price. When you step into a supermarket, you’re faced with a product on the bottom shelf, priced at P50 with a cartoon bee on the front with the slogan “Bee Clean”, and another product on the top shelf costing P250 with Brad Pitt stamped on the front, which essentially represents the narrative “buy this soap and be me”. Comparing the quality of ingredients in soap relative to price is a simple equation compared to deciding if you’d like to be a household name or an animal that flies around searching for nectar. Always consider the value a product adds relative to price—this is the first step to help decipher the complexity of everyday spending.
The focus of this article is not to impress you with the level of interest I take in buying soap but to impress upon you the importance of awareness when it comes to spending your money. Be conscious of relativity. It is up to you to decide what you enjoy and the value it brings — nobody else can do that for you. While highlighting irrationality is quite straightforward, staying rational when spending money is anything but. Embrace irrationality, put your money where it matters and enjoy the Brad Pitt-branded soap. I would.
Patrick McCarthy is a chartered account who previously worked as an Associate with KPMG Dublin, Ireland. Patrick is a Business Studies graduate from the University of Limerick, Ireland and is the Head of Finance at First Circle, a fintech start-up on a mission to improve business opportunities in the Philippines. To discuss how First Circle can help businesses with financing, visit www.firstcircle.ph or contact Patrick at email@example.com.