5 Ways People Are Dumb With Money

Not only do we as humans make financial mistakes, our mistakes are predictable! Here's the story of how we learned that we can predict our mistakes and 5 of them you can avoid.

Two Cents on Twitter: @twocentspbs

--

Two Cents was created by Katie Graham, Andrew Matthews, Philip Olson CFP® and Julia Lorenz-Olson and is brought to you by PBS Digital Studios. We love dropping some knowledge on all things personal finance and helping you make better money decisions.

Two Cents is hosted by Philip Olson, CFP® and Julia Lorenz-Olson
Directors: Katie Graham & Andrew Matthews
Written by: Andrew Matthews & Julia Lorenz-Olson
Produced by: Katie Graham & Amanda Fox
Images by: Shutterstock
Music by: APM

--

If you want to hear more examples of “dumb stuff people do,” check out Richard Thaler’s Misbehaving: The Making of Behavioral Economics.

[ytyt]

The example of finishing a meal you dislike it not a sunk cost. Finishing the meal, even if you dislike it, means you won’t have to buy something else to eat to compensate.

[kittzy]

This should be part of a Highschool economics class. They'll actually learn something.

[kavinkvels]

1:23 Endowment effect (A product whether you are looking to purchase or already own is of same value)
2:51 Sunk Cost Fallacy (Needn't get your money's worth of something that you don't need or enjoy just because you paid for it, the money is already lost and isn't coming back)
4:08 Transaction Utility (just because it's a good deal doesn't mean you need a product, all that matters is what it's worth to you)
5:31 Mental Accounting (fun money = free money = expected money = serious money)
7:00 Conclusion (Knowing the mental shortcuts used by our mind, it's less likely to rely on them)
7:21 Book Suggestion (To know more about behavioral economics)

[One.Zero.One]

I love your personalities. Financial talk is usually pretty boring but you guys make this very accessible.

[markvelasco]

“If it’s on sale but you don’t need it, it’s still expensive.”

Edit: Wow! I just realized how many likes this comment got! Thanks! And I hope most of you didn’t spend too much on things you don’t need last Black Friday.

[WilliamLevasseur]

I once bought a scratchcard to pass the time while waiting for my laundry to finish at the laundry mat. I won 5$, which paid for the lottery and the laundry. That made me feel like the boss!

[PeaceOfMake]

It's sad that there isn't a Nobel prize for psychology. Behavioral economics really is psychology, much more than economy.

[renedanielmendezlopez]

-"Mom, I want to watch Ryan Gosling in the big short"
-"We have Ryan Gosling and economics at home"

[edd]

A bargain is something you don't need at a price you can't refuse

[_Burka_]

Ive always been ‘good with money’ and never really thought about why, but watching this I realise that I generally avoid mental accounting, if I get given £100 I treat it the same as if Id worked a full day for it

[darkfuji]

2:19 these scenarios are entirely different if your bank account isn't infinite though. The marginal utility of money goes down as you have more, so there's a point where it makes sense to keep an object worth 3k, but not to buy one.

[snowman]

Did not expect this level of quality writing. The staff really understand script writing, epic!

[porters.]

Whoa, whoa, whoa. A pack of Pokemon cards you forgot to open?? That's the mistake right there.

[John_-]

2:32 Endowment effect
2:50 Sunk cost fallacy
4:08 Transaction utility
5:32 Mental accounting

[MineCartable]

The first one feels a bit off the mark, now that I'm looking back at it.

The situation isn't really a fair comparison. The decision is constrained by the implication that there are limited resources to spend, being compared to a situation were those limited resources aren't a factor in the decision.

Finding a card doesn't take any skin off your nose financially, where as buying it does. If you're financially stable, then having the card doesn't affect your basic needs and only what your desires are. If your desires include having a $3000 card, then it'd be the same as finding $3000 at the store where the card's being sold.

[pb]

My sister-in-law talked a traffic warden out of giving her a ticket (by playing 'silly me' and flirting with him) and decided she 'saved' € 63. She used that money to buy shoes.

[vintagetears]

I’d walk 10 minute for those headphones. Not only I get it, I burn calories too.

[MattZiggy]

I think this is part of the issue. IMO, I think it's more so what I call, the microtransactions that add up over time that get people in trouble. For example, I once had a coworker who every day went to the store in the morning to buy water and/or coffee, something to eat etc. Costing anywhere from $5-$15 just in the morning. That's just talking about his morning routine. Times that by 5-6 days a week. All that guy did was complain about never having any money. Yet, when I explained the reasoning to him it didn't register in his head what I was saying. He justified the purchases as "it's only like $5." (let's go halfway down the middle and say $10/morning. That's almost $3000 a year just for water/coffee/snack lol) He only sees the instant charge not thinking instead of going to the grocery store to purchase food and filling up a reusable water bottle with something that's FREE instead of paying for it was the root cause of his money problems. Use that in any of person's budget. Just look at your local Starbucks in the morning, etc. All these people spending thousands a year on things you can easily do at home by waking up 30 mins earlier, etc. It's these compounding charges that end up adding up over time and causing people not to have money. It not only compounds to food/routine, it all adds up with charges everywhere else, from Amazon, cell phone charges, etc. It pushes that mentality, of it, 's okay it's only this much more. Exactly what these companies want you to think. Just as saving works, saving a bit here and a bit there routinely for an extended time compounds your savings. The same to does spending a bit here and a bit there. It all adds up over time. Money management is only taught in college to people who plan to go into careers in finance. Hmmm...why do you think that is?

[PvblivsAelivs]

People value different things. It is useful to try to construct a model for why apparently disparate (yet predictable) actions are, in fact, rational (given a set of values.) The rare card the person finds cleaning the garage has a connection to his past that he may value. The one on offer for sale has no such connection.

The problem in the "sunk cost fallacy" is that people are assigning value to not admitting they made a mistake. But that is saying their desires are irrational, not how they go about achieving them.

[miguelz]

I think my biggest one is probably mental accounting. The way it was explained made perfect sense. If a friend or family member gives me money I’m more likely to go and spend it on something I want even though if I had made that extra money on my own I would probably not think about spending it.
It’s really interesting how psychology plays into economics