Motley Fool Hidden Gems Investing - Why You Make Bad Decisions About Money

Episode Date: September 1, 2020

Ok, it’s not just you. It’s all of us. Why do human beings tend to make bad decisions when it comes to spending money? According to Dan Ariely, best-selling author and professor of psychology and behavioral economics, a lot of it comes down to the environment we face as consumers.   Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. With The Motley Fool Money Extra, I'm Chris Hill. Spending a lot of time thinking about money would be fine if it led to better decisions, but generally it doesn't. So why do we make bad decisions with money? Dan Ariely is a professor of psychology and behavioral economics at Duke University. He's also the author of several bestselling books, including Dollars and cents, how we misthink money and how to spend smarter. According to Ariely, a lot of our bad decision making is fueled by the environment of our spending. So there are mainly kind of two types of ways in which we're bad. The first one is that money is all about opportunity cost, right? Every time you spend $5 on a cup of coffee, you should be thinking to yourself,

What else wouldn't I be able to buy if I spent $5 on a cup of coffee? But the reality is it's really hard to think about. Just think to yourself, when was the last time you thought about opportunity cost? You know, money is a wonderful thing. And being about opportunity cost is part of the wonderful thing that money is. But it also means it's really, really hard to think about money. So that's the first problem. Money is all about opportunity cost, but it's hard to think about opportunity cost.

The second thing is that many of our decisions are about now versus later. And when it comes to now versus later, we often make bad decisions. And this includes decisions about overeating and under-exercising and texting and driving and you name it. So what happened is that we're just not designed to think about money the right way. And then maybe the final thing is that the environment around us doesn't necessarily want us to think carefully about money. The environment around us often wants us to spend without thinking. So there's something called the pain of paying.

And the pain of paying is the idea that when we pay with cash, we feel bad and we don't spend as much. When we pay with a credit card or Apple Pay or Android Pay, we don't feel as bad and we're likely to spend more. And if you think about where the payment industry is going, it's going in the direction of getting us to spend more, thinking less, and therefore saving less. So all of those things together mean that it's really, really hard

to think about money the right way, and the environment mostly doesn't help us. We talk a lot on this show about the war on cash. It's been a rewarding trend for investors, but it might also have a downside for us as consumers. I'm Chris Hill. Thanks for listening. We'll see you next time.