Dollars and Sense summary

Money is an abstract concept. What a piece of paper with some writing on it can buy you today could very well change tomorrow. Even though its value may fluctuate, there’s no doubt that you need money for just about everything it takes to get by in day-to-day life.

While everyone knows money is important, that doesn’t stop us from routinely making bad spending decisions. So what gives?

One reason is that when we get an urge to buy something, we rarely stop to think about what else we could be spending that money on. In economics, all the other things we could buy are known as opportunity costs, and our failure to consider these alternatives is one of the biggest financial mistakes we make.

A few years ago, Ariely, one of the authors, talked to customers at a Toyota dealership and asked them what purchases they were giving up to buy a new car. What he mostly got back in return were confused looks.

After explaining his question further, a lot of people said they were giving up the chance to buy a different car. Only a few made the connection that they were sacrificing opportunities such as taking vacations or treating themselves to meals in expensive restaurants. Ariely realized that for most people, considering alternatives just didn’t come naturally.

Another reason behind irrational spending is an overreliance on value cues. These are external hints and signs suggesting an item’s real value.

If we behaved in a perfectly rational manner, we’d determine an item’s value through opportunity costs by weighing up one purchase against another. Instead, we go the less rational route, relying on value cues and paying attention to signs that say something is “a bargain” or “a limited-time offer.”

At car dealerships, the language of the salespeople is filled with these sorts of value cues, designed to get customers to buy now or miss out on a “spectacular opportunity.”

While there are helpful value cues that can give you a better sense of what something’s worth, they’re often misleading, as companies routinely use deceptive practices to skew your sense of value and take your money.