We all try hard to save money by catching good deals but at the end of
the month we still cannot save, why that happens? All because of mental
accounting. How the mental accounting works and affects us? The examples below
help to understand that people with good awareness of saving does
not help them
to really save money.
Imagine that a customer
goes to a store to buy a bedroom rug, which sells for $100. At the store the
customer discovers that the same bedroom rug is on sale for $70 at another
branch of the store, which is six blocks away. Will the customer go to the
other branch to catch the lower price?
Now imagine that the
same customer goes to the same store to buy a bed room set, which is sell for
$1400. At the store he discovers that he can buy the same bed and side tables
set for $1370, at another branch of the store. This other branch of store is
also six blocks away. Will that same customer go to the other branch for lesser
money to pay?
The studies shows that
more customers will go to the other branch to save money. However, they are not
really saving money because to save $30, they won’t walk six blocks but will
spend that money on car gas. Some stores provide free delivery if the customer
lives in their local area. If the customer will buy the furniture from a store
which is six blocks away, he also will pay for delivery charges.
The main culprit, of
course is mental accounting as $70 for the rug and $1370 for the bedroom set
seems less, but at the end of the day the customer spends the same amount and
could not save at all. People are cost-conscious when making large financial
decisions such as buying a house or car but mental accounting makes customers
relax when making small purchases. The cost of small purchases get lost among larger
expenses, such as groceries, clothes and movie refreshments every week or every
day. Being cost conscious when making little purchases is where spenders can
often make big savings. Spenders does not realize that they should be more
cost-conscious in decisions and can make more savings, in long run while making
small purchases.
Belskey, Gary, and Thomas Gilovich. NOT ALL DOLLARS ARE CREATED EQUAL. New York: SIMON & SCHUSTER, 1999. 37-41. Print.
I hope after doing all of this research and readings I can become cost-conscious in small purchases as well.
ReplyDeleteI think you make some really interesting points here. But six blocks is less than a mile--so it shouldn't be that much of a hit on the gasoline wallet. And how many people don't get delivery of bedroom furniture? Maybe consider a stronger example? For example--I went to the Woodbridge IKEA and bought a table and two benches--but one of the benches wasn't in stock and I had to drive to the Maryland IKEA--which was about 40 miles away. Had there been a "deal" difference, then you could calculate how many miles per gallon (this car gets 38 mph), so I spent about $4.50 more to go that far. To go six blocks or about half a mile? I think the savings would be worth it, right?
ReplyDeleteI like how you're using specific examples: but think through the calculations...and make sure to name the author right in the paragraph where used.