Behavioral Economics

Greetings and Salutations
  So lets talk about a few of these terms to help increase your awareness of why you do what you do when you are making choices about how to spend your money. Mental Accounting (first named by Richard Thaler)-- basically how do you decide to justify certain expenditures and where you group them. Lets say I asked you right now would you go to Upstairs Audio and spend $550 on a new CD player for your current car and you said no. Then lets say a year from now your car craps out and you go buy a new one and you can get either the standard  issue player OR an upgraded CD player for $550. You say "sure what the heck...whats $550 more when I am already spending $23,000".That is mental accounting and framing at work. Its the same $550 dollars and isn't any cheaper because it is hidden the big numbers. Here is another example- would you be willing to go 4 blocks to save $25 on a $100 lamp? of course you would. Now...would you be willing to go 4 blocks to save $25 on a dining room suite that was $1600? of course you wouldn't.
   Mental accounting and framing dictates that your mind will see the savings of 25% on the purchase price of the lamp worth the short distance but the savings of 4% of the purchase price of the dining room suite as not worth the hassle. The point of this really isn't if you would or would not go the 4 blocks. Its to make you acutely aware of how you size things up and rationalize how you see the dollar.  $25 bucks saved is $25 bucks saved. Period. Do that over and over in the course of a year for various purchases and put the difference aside. You would be amazed at how much money you would have at the end of that year.
  Loss Aversion is another key concept in understanding how our brains work with money. It is our strong tendency to prefer to avoid losses even over acquiring gains. Simply put it is more painful to pay for a $5 surcharge than receive a $10 or even $20 bonus. Here is a great example. I want a new phone. I can get one from Sprint for $29.99 and I really like it. Even though all it will do is text and make calls (exact same as what my phone does now)I will pay $36 for an "upgrade". I'd really rather Sprint just tell me that it is $66 (+tax) for the phone. The thrill of the phone being cheap at $30 bucks is way offset by the fact I have to pay $36 bucks for the upgrade/surcharge.                            
  Here is another example of loss aversion that hits the old elusive savings account in the kisser. When you asked to put aside money today for a upcoming bill in the future..lets say you have $100 and you take $50 and put to the side--you feel as if you have "lost" $50 dollars. You haven't. You are planning on spending it in the near future-but your brain tells you that you now have $50 less spending power, despite the fact that you now either have a bill paid for or have a good contribution saved to lessen the amount owed.
  I hope that while driving the point home that in order for you to make sound financial decisions and raise your financial intelligence I have kept you interested. Remember it is only through behavior modification that real and solid life changes can be made. Go to the dollar store and get a basic calender in what ever size you choose. How is your reading going? Will someone please ask a question? or something?? Feedback is very welcomed and encouraged!!
Tootles :)

Heather