I spoke to Dan Ariely, the author of Dollars and Sense: How We Misthink Money and How to Spend Smarter, about why he decided to focus on money for his book, why the world of personal finance is illogical, why people make irrational financial decisions, some of the hidden motivations around money, how to improve money habits and his best career advice.
Ariely is the bestselling author of Predictably Irrational, The Upside of Irrationality, and The (Honest) Truth About Dishonesty. He is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University and is the founder of the Center for Advanced Hindsight. His work has been featured in the New York Times, the Wall Street Journal, the Washington Post, the Boston Globe, and elsewhere. In 2013, he was named by Bloomberg to "Top 50 Most Influential Thinkers". In October 2015, Ariely launched the educational card game Irrational Card Game in order to teach us how we make irrational mistakes and how we can make them better, in a fun and interactive way.
Dan Schawbel: Why decide to focus on money in this book?
Dan Ariely: I became more interested in saving after the financial crisis and of course saving and spending go hand in hand. I just felt it is an important time to try and figure those things out. This is the era for electronic money and when it comes to physical money we are kind of limited. What could we do after all? Not that much, but when it comes to electronic money we can do lots of things so now we have this opportunity to do all kinds of things and that’s quite exciting if we do it right. If we do it wrong not so exciting.
Schawbel: Why is the world of personal finance so illogical?
Ariely: Partially, it is really hard to think about money. Money is all about opportunity but every time you buy a cup of coffee, you should be thinking 'what can I do better with four dollars, what is the best possible use of something else?' Money requires that we think about opportunity cost and opportunity cost is incredibly difficult to think about. Technology is actually making it worse. Think about what technology is making us do with money. What technology is doing is that it blurs the boundaries of money so if I gave you money every day or every week for the week you will understand what is going on but if I had credit cards and mortgages and student loans now it will be incredibly complex. Saving is hard, spending is hard, and we have the general problem of delayed gratification. We have the problem of not being able to think about money and technology is making it difficult.
Schawbel: Why do people make irrational financial decisions on what they purchase and how to invest your money?
Ariely: Purchasing is largely because our tools get us to spend. Our financial tools are designed to get us to spend. That’s what they are designed to do and of course, they do a good job in what they are supposed to do which is to get us to spend. That’s one and then investing is tough for multiple reasons. One is that it's a big decision and when people face big decisions, we often just kind of collapse. We don’t know what is the right thing to do and just give up so that’s very sad but that’s also true and the complexity confuses us. It's actually amazing how little we know about how much other people are saving and we don’t think about it enough.
Schawbel: What are some of the hidden motivation driver chosen around money?
Ariely: Spending requires that you think about opportunity costs but thinking about opportunity cost it is very tough so what do we do? We don’t think about opportunity costs and instead there is all kinds of other things that drive us. Relativity is one of them. We don’t think about money in an absolute way, we think about it in a relative way. Relative to what? Relative to previous prices is what sales are or relative to the overall size of the purchase. If you buy a house, everything that we buy with it looks small in comparison. When look at fairness, we look at value cues such as what does it go with. The same item in an expensive store might feel to us very different. We look at all kinds of value cues. Language is another one. When language describes something in great detail, we appreciate it more, have heightened anticipation of something, and expectations actually change.
Schawbel: How can we improve our money habits?
Ariely: We can hope to improve our money habits. Think about the big decisions like buying a house and that’s a good opportunity to stop and think and maybe make better decisions. There are little decisions like stopping and buying ice cream or something, and those things I don’t think we can get much better or don’t think people should stop obsessing about every one of those small decisions. But habits are important because habits are something that happens once in a while but it stays with us and that’s very important to try and improve. So, how can we do that?
The first thing is to take advantage of the fact that money has this amazing feature which is that there are some things which you could do with money that just stays with you and are automatic like deductions. You can maximize your 401K and you are going to maximize your 401K for a long time. Habits in eating are very tough habits to change. Money is easier because there are some things you could do like automatic deductions, maximizing 401K, automatic deductions, and things like that.
Schawbel: What are good things to do?
Ariely: One thing is to set up a system that would help you behave better. One example is to take all your discretionary spending, all the things you could live without, make a budget for that and put it on a prepaid debit card and don’t do it once a month do it once a week. Why once a week? Chance are once a month is too much time and if you have it on the month you will basically finish it very quickly, you would look in the beginning of the month, you will say, oh my goodness, I have so much money. Two weeks later you will have nothing left. Doing it for a week is about the right timeframe and also start your week on Monday and not on Friday. If you start your week on Friday, you are likely to spend too quickly. If you start it on Monday and you start it on Friday you have the weekend and the temptation to spend on the weekend is very high.
One thing to do is pick your discretionary budget once a week, a Monday prepaid debit card. The second one is from time to time, once a year maybe, at the end of the year look at your spending backward. Look at all the things you have spent, go over your credit card statement and say 'what kind of things did I buy that did not give me the happiness that I expected'. We have done this and one of the categories that people came up with is being disappointing on average is going out. It is not because going out is a bad thing, but when we go out we are at the mercy of the restaurant and we often end up eating too much, drinking too much, spending too much and then we regret it. Like most people, you are the kind of person who ends up eating too much and drinking too much and all then the right approach is to say how do you control that? You basically vow to eat either an appetizer or dessert or share a main course or not having more than two glasses of something. You create a rule for yourself. But the important thing is from time to time look backwards on what we spend on and try to analyze and find our mistakes and then do things differently looking forward.
Schawbel: What are your top three pieces of career advice?
Ariely:
1. Think about every next step in your career as an opportunity to learn. It is not about reaching anything, it is about getting better, it is about learning something new and if you get to learn something new, you will be better off.
2. Do things that challenge you. If you have been at the workplace for six months, and you are not better than you were six months earlier, you are not doing the right thing. You need to continuously feel that you are learning new things and if you are not, challenge yourself to learn something new.
3. Make sure that you do something that you feel has a sense of purpose. There are lots of ways to get meaning in life but you certainly want to do something that gets you the feeling that you are doing something that is worthwhile. At the end of the day, a lot of our identity comes from work and if you don’t do something that you find purpose in you are not going to truly enjoy if you are not going to truly take value from this. We live in an incredible time where we cannot only make a living but we can get satisfaction from it. For many years most of the jobs were things you did money in order to enjoy outside of work, but now we have this unprecedented time where you can actually do things and enjoy them at the same time. We should make sure that we are indeed living in that way.
