Learning to let go (a trap for frugal people)
One of the most annoying psychological traps out there is a tendency to double down on decisions that aren’t working out. It feels bad in the moment, it feels worse in retrospect, and it drives our friends nuts.
Regina George in the film Mean Girls delivers the iconic line “Stop trying to make ‘fetch’ happen.”
The desire to “make it work” because we’ve already put in so much has us wasting our time energy and goodwill on people, jobs and other organisations that do not deserve it and throwing good money after bad.
Ever read a story about a six-month-marriage where one partner only went ahead because the big expensive wedding was all arranged? Cringe! Yet it happens. Why? Because “We’ve come so far we can’t back out now.”
Yes, yes you can!
This phenomenon is the sunk cost fallacy. A cost you can never get back is a sunk cost (all time wasted is a sunk cost). The sunk cost fallacy is when we make the sunk costs a factor in our future decisions, instead of purely looking at the future costs and benefits. The sunk cost is irrelevant, what’s gone is gone.
Some reasons why we end up falling for the sunk cost fallacy:
Pride - we try to style it out - “No, I love my (expensive but impractical) marble kitchen work surface! Sorry, please don’t put the turmeric down there… or there…”;
A sense of responsibility - “Others have put their trust in me, they will feel bad if we don’t finish what we started”;
We look at what we’re getting compared to what we paid, when we should just ask “what is this worth to me now?” This happens a lot in investing, people resist selling underperforming shares because they don’t like having made a lost compared to the purchase price.
Over-optimism bias - “We can make this work!”
Hatred of waste - to cut our losses is to admit we have made a wasteful decision.
If you’re a frugal type, that last one is the killer. It’s easy to keep doing something inconvenient, boring, tiresome etc because you don’t want to have wasted your money and efforts so far. Realising that you’re better off admitting to the waste and finding ways to avoid it in future is a huge relief but it can be an emotional struggle to get there.
One way to get around the sunk cost fallacy is to imagine someone else had paid the cost. We can ask ourselves, “What would I say to a friend who was in this position?” (Honestly, this is in the top three clarifying questions of all time.)
I’m deeply grateful to my late great aunt Sonia (great as in “fantastic” as well as in “my mother’s aunt”). When my sister and I were in our early teens she took us out to a West End play. We stood up at the interval and she turned to us. “Well, that was boring,” she said, “Let’s go for dinner.”
So we did.
We didn’t stay because “otherwise we’d waste the cost of the tickets” that money was already wasted. We left because staying would also waste the rest of the evening.
Now I always walk out of boring entertainments, and I always raise a mental glass to Auntie Sonia as I do. I encourage you to do the same.
We also did an episode of Squanderlust on the sunk cost fallacy.
No regrets! Using cognitive bias to achieve your goals
One of the most famous ways human beings are fundamentally irrational is our reaction to the possibility of regretting a decision. We really hate the idea that we might have future regrets. So much so that shops only have to put up a “sale” sign or mark something “limited edition” and we rush to buy in case the items we want become unavailable. Never mind that these items are often extremely generic and easily found elsewhere, or soon to be out of fashion and abandoned. Yes, I am speaking from experience.
So, regret aversion, as this phenomenon is called, has a bad name in the personal finance community. We’re encouraged to step away from the sale goods and give ourselves 24 hours to reconsider whether there’ll really never be another reasonably priced plain white t-shirt or if we’d actually find life meaningless without an avocado slicer like the one that influencer uses. (What even happened to avocados? Are they still a thing? I’m too old to know.)
I think, however, there are ways to make regret aversion work for you. Don’t get me wrong, it’s possible to make many silly choices from trying to avoid the possibility of regret. It’s a major cause of procrastination as we try to reconcile mutually exclusive options. Done right though, regret aversion can be harnessed to help us get motivated in the face of fear, self-doubt, boredom, frustration and plain old slog.
I have an image on the desktop of my computer that says “Turn ‘I could have’ into ‘I did’”. It’s there to remind me that I don’t want to look back on my life with regret. I don’t want to say “I had these gifts and opportunities and I didn’t use them”.
You can use this method for all sorts of goals including financial ones. Tell yourself “It might suck giving up my time to budget and meal plan, but if I can’t afford to spoil my partner on our anniversary, that’s going to suck even more”. Or perhaps, “I might feel uncomfortable negotiating my salary, but I’ll regret feeling I could have earned enough to save a deposit for my own home”. Or even, “It may feel awkward to ask the adviser to explain my pension to me yet again, but I don’t want to get to retirement and find I’ll be living on beans on toast instead of ”.
This is why it’s important to be really clear about your goals. The more you can visualise what you’re working towards, the more you can use the potential regret of not getting it to motivate you.
Exercise:
Imagine one of your personal goals very clearly, something you think you could do, with a bit of effort. Go on. I’ll wait.
Now picture the regret you would feel if you didn’t do everything you could to achieve it.
It feels horrible right? So, what can you do to make sure you never feel that way? What steps can you take towards that goal?
Comment below, what do you not want to regret?
Understanding the poppadom effect
Who loves poppadoms? I know I do. Crunchy savoury appetisers are my favourites.
You know who else loves poppadums? (Or olives or prawn crackers or bread baskets or whatever…)
Restaurants. You know why?
Because they cost almost nothing compared to the sale price and almost everyone orders them, even customers who intended not to.
In fact, we quite often order little extras we hadn’t meant to buy. Going to the till with a new sweater we see some earrings that would go with it and think we might as well have them. We get a screen protector to go with our new phone. We buy the upgrade, the insurance, the add-on.
Why?
The poppadum effect.
Once you’re already paying for a whole meal, the cost of poppadoms seems trivial in comparison, so why not? The poppadum effect is a type of mental accounting; a way our brains trick us into making unwise decisions by using a cognitive shortcut that doesn’t take us where we really need it to go.
Once you’re committed to purchasing a new tablet (say), adding the cost of a case seems negligible. Shops know this and they play on it. Salespeople are trained to offer the extras after you’ve decided to buy and there are always tempting small items at the till.
The truth is these little extras are often the poorest value for money in the store and if we were thinking clearly, we wouldn’t have bought them at all, but in the moment of purchase we’ve already overcome the resistance to spending and the part of us that always wants more can take its chance and add to basket.
Being aware that this is a common phenomenon can help you make better decisions. I, for example, will always want poppadums, but only one, thank you.
Take a minute when a shop offers you an extra or an add-on and remember you almost certainly don’t need to make a decision about it straight away. Say you’ll think it over, because nine times out of ten you can come back for it. You might even get a discount.
I did a podcast episode on our weird irrational responses to prices. You can listen here.