$150 more than one I’d priced a few weeks before. But after reading page after page about the advantages of their “FEQ” (First European Quality) teak and genuine Honduras mahogany and how they only used
“true mortise and tenon joinery” (unlike those other sleazebags who, I assume, fake their mortise and tenon), I started feeling that only a com- plete loser would buy anything cheaper. Asking my family to sit on knotty pine furniture would be like feeding them Spam on their birth- days. The catalog propaganda was, in other words, unfreezing my pre- vious anchor point. This unfreezing is a critical first step when selling to reluctant buyers. The sale was halfway home.
Then the company destroyed it. Upon turning to the order form—
and still feeling quite tentative about the purchase—I was confronted with a loose insert informing me that because of rising production costs, all catalog prices were now 10 percent higher. The Adirondack chair would cost on the order of $40 more than I’d been considering.
Note that this wasn’t the often-effective technique of warning that prices would be higher if the customer didn’t order soon. The cutoff date had already passed.
The momentum I’d been building stopped dead. That the chair was initially priced $150 more than the company’s competitors had been nicely framed as an opportunity for gain. I could file it both as a desir- able luxury and a sensible long-term investment. In fact, if the company had listed it as $190 more in the first place, I probably would have paid that, too. But this $40 late fee was framed as pure loss, and this I couldn’t accept. Never, ever overexceed the buyer’s reference point.
The never-exceed rule has wide applications. When I first began teaching, for example, experienced colleagues offered me all sorts of advice. I heard tips about everything from how to explain difficult con- cepts and motivate a class to dealing with discipline problems. But the most useful bit of wisdom I received was from an eighteen-year-old sit- ting in the back row. Midway into the semester I’d assigned an article that was not on the original syllabus. The article described a great piece of work that I was certain would become a significant contribution to social psychology (which it has). I explained to the class with some pride that I’d been fortunate to obtain a preprint of the article, which would not be published for another week. They held in their hands cutting- edge research. I thought they’d be excited. But I looked up to a room- ful of Sylvester Stallone sneers. I was confused. Was it because they
didn’t like the article? That was when the eighteen-year-old patroniz- ingly explained to me, “You don’t add to the course requirements, you only take away.” Sound mental arithmetic.
The quirks of mental accounting are deeply ingrained, mindless, and highly susceptible to manipulation. But once you recognize your habits, there are ways to minimize losses.
First, remember that a dollar is a dollar is a dollar. A few years ago, I was serving as department chairperson at my university, which is funded by the state of California. Just as I began my term, California went into a severe economic crisis that led to the deepest budget cuts our university had ever known. We were short of everything.
With a few months remaining in the fiscal year, our department had spent virtually all of its annual budget. About then I got a call from a man in charge of building maintenance at the university. He informed me that the carpeting we requested for our offices, two years earlier, had suddenly been approved for funding. When the gentleman read the list of offices approved for new carpets, I noted that a few of them didn’t need new carpets. This was fortunate, I told him, because we desper- ately needed the extra money for other items. A few days earlier, in fact, I’d been begging our dean for funds to purchase basic office supplies, but he told me that his office was broke, too. Maybe, I told the build- ing maintenance man, we could now trade a little unneeded carpeting for some paper and pencils?
The man looked at me like I was an embezzler. These funds came out of a special office renovation account and were untransferable to other accounts. They were approved for carpets and carpets only, he told me. And, he emphasized, we needed to get the work done quickly, because if the money wasn’t spent before the end of the fiscal year, it would automatically revert to the state. Anyone who has dealt with gov- ernment budgets knows what that means: we’d not only lose our car- pets but would send the powers that be a signal that our department could survive without the extra money. This would lead to a reduction in next year’s budget, not only for our own department but, perhaps, for other departments like us. Those reductions would become the baseline (anchor, if you will) for the following year’s funding, which meant the cuts could spiral for many years to come. Ever the patriots, we accepted all the carpeting.
Mental accounting can be just as idiotic. Watch out when anyone frames a dollar to look like anything but what it is. Don’t think like the government.
Second, you should always consider financial matters in the context of your total needs and resources. What is the absolute value of a dol- lar to you? Recognize when the sales pitch is appealing to your psy- chological needs rather than your fiscal sensibility. Face it, on an emotional level you’re mush for a good salesman. But at least in the upper chambers of your cerebrum, try not to corner yourself with mechanical questions like “Are they taking advantage of me?” or “Is this an offer I better jump on before it’s too late?” Many times, of course, these are the very questions you should be asking. But not always.
When the wrong frame dictates your arithmetic, it may lead to self- destructive decisions. Try to be aware of your larger fiscal picture and how your decision accords with these resources.
To define your own criteria of fiscal sensibility, I suggest a two- question self-test.
Question 1: Is it a good value NOW? Not compared with the price it was yesterday or what your friend paid for it. Not whether it con- cedes a loss on your investment. The question is whether the entity you’re considering is worth its asking price. Period. “If you invest in a lousy company at a low price,” a successful stock investor observed, “it only means it will take a little longer for you to lose your money.”
Question 2: Is it worth the cost to YOU? To answer this question, you might consider the “What’s it worth to Bill?” scale of measure- ment. I base this criterion on an enlightening analysis of Bill Gates’s wealth conducted by the Internet journalist Brad Templeton.19As of January 2002, Gates’s personal net worth was estimated to be an astounding $73 billion.20If we presume that most of this money was earned in the approximately twenty-five years since Gates founded Microsoft and that he’s worked, say, twelve hours a day, six days a week since then, Gates’s average earnings figure out to a staggering
$9,000,000+ per day, $780,000+ per hour, and $215+ each second.
If we assume it takes about five seconds to bend down and pick something up, this means it wouldn’t be worth Bill Gates’s time to retrieve a $1,000 bill if he dropped it on the ground. The “too-small- a-bill-for-Bill” index has risen dramatically over the years. When Microsoft went public in 1986, the new multimillionaire would have
lost out by leaving behind anything but $5 bills. In 1993 his time was clicking away at $31 per second.
And what is your own “too-small-a-bill” index? Imagine you’re in a store buying a new $1,500 computer and your companion whispers that you can get the same computer across town for $15 less. Would you make the drive? Probably not, studies show. But let’s say you’re in that same store buying a $30 calculator and somebody tells you a store across town is selling it half price, for $15 less. Now would you take the drive? Most people would.21Psychologically speaking, this is normal mental accounting. But economically, if one drive across town exceeds your “too-small-a-bill” index, shouldn’t the second?
What’s it worth to you, Bill?