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Summary of notes and ideas


So, opportunity costs are what we should think about as we make financial decisions. We should consider the alternatives we are giving up by choosing to spend money now. But we don’t think about opportunity costs enough, or even at all. That’s our biggest money mistake and the reason we make many other mistakes. It is the shaky foundation upon which our financial houses are built.

The results showed that the Sony stereo was a much more popular choice when it was accompanied by $300 of CDs than when it was sold without them. Why is this odd? Well, strictly speaking, an unconstrained $300 is worth more than $300 that must be spent on CDs because we can buy anything with the unconstrained money – including CDs. But when the $300 was framed as being dedicated to CDs, the participants found it more appealing. That’s because $300 worth of CDs is much more concrete and defined than just $300 of “anything.”

This is just one more example of how when we represent money in a general way, we end up undervaluing it compared to when we have a specific representation of that money.

That surprise suggests that people don’t tend to naturally consider alternatives, and without considering alternatives, we can’t possibly take opportunity costs into account.

This tendency for neglecting opportunity costs shows us the basic flaw in our thinking. It turns out that the wonderful thing about money – that we can exchange it for so many different things now and in the future – is also the biggest reason that our behaviour around money is so problematic.


In essence, value should mirror opportunity cost. It should accurately reflect what we’re willing to give up in order to acTuire an item or experience. And we should spend our money according to the actual value of different options.


We often cannot measure the value of goods and services on their own.

The difficulty of figuring out how to value things correctly makes us seek alternative ways to measure value. That’s where relativity comes in.

If we compared everything to all other things, we would consider our opportunity costs and all would be well. But we don’t. We compare the item to only one other (sometimes two). This is when relativity can fool us.

Not when, like Aunt Susan, we use relative value to compare the current price of an item to the amount it used to cost before the sale (or was said to cost) as a way to determine its value. This is how relativity confounds us. JCPenney’s sale prices offered an important value cue to customers. Not just an important cue, but often the only cue. The sale price – and the savings JCPenney touted – provided customers context for how good a deal each purchase was.

The endless-soup-bowl recipients didn’t get their cues for satisfaction from how much soup they’d consumed or how hungry they felt. Rather, they judged their satisfaction by the level of reduction they saw relative to the bowl.

Their price skyrocketed. A year earlier, they were worth nothing – probably less than the oysters they came from. Suddenly, however, the world believed that if a black pearl is deemed classy enough to be exhibited next to an elegant sapphire pendant, it must be worth a lot.

Why do we care about what it used to cost? It shouldn’t matter what the cost was in the past since that’s not what it costs now. But because we have no way of really knowing how much this precious widget is worth, we compare the price now to the price before the sale (called the “regular” price), and take that as an indicator of its high current amazing value. Bargains also make us feel special and smart. They make us believe we’re finding value where others haven’t.

Had Albert Einstein been an economist rather than a physicist, he might have changed his famous theory of relativity from E = MC 2to $100 > Half Off of $200.

When relativity comes into play, we can find ourselves making Tuick decisions about large purchases and slow decisions about small ones, all because we think about the percentage of total spending, not the actual amount. Are these logical choices? No. Are they the right choices? Often not. Are they the easy choices? Absolutely. Most of us take the easy choice, most of the time. That’s one of our big problems.

Relativity is built on two sets of decision shortcuts. First, when we can’t assess absolute value, we use comparisons. Second, we tend to choose the easy comparison.

It seems that discounts are a potion for stupidity. They simply dumb down our decision-making process.


A curious finding about the way we categorize money is that people who feel guilty about how they got money will often donate part of it to charity. 2Let that sink in: How we spend money depends upon how we feel about the money.

Jonathan and Pete call this EMOTIONAL ACCOUNTING. Emotional money laundering can take many forms. We might cleanse badly tainted money by first spending it on serious things like paying off debt, or on virtuous ones, like buying ice cream – for an orphanage. When we do something we think is good, it eliminates the bad feelings associated with the money, making us free to spend.

That’s a fairly accurate statement about how we handle money in many situations: We don’t handle it in a way that makes sense, we handle it in a way that feels good.

Just as some companies exploit loopholes with “creative accounting,” so do we with our flexible spending logic. We mismanage our money when we don’t use any categories, but even when we do use them, we then tweak the classification of our expenditures. We change the rules and we make up stories that fit our whims.

Social scientists call this type of creative bookkeeping MALLEABLE MENTAL ACCOUNTING. We play with malleable mental accounting when we allow ourselves to classify expenses ambiguously and when we creatively assign expenses to different mental accounts. In a way, that helps us trick the account owner (ourselves). If our mental accounting weren’t malleable, we’d be strictly bound by rules of income and expenses. But, since it is malleable, we manipulate our mental accounts to justify our spending, allowing us the luxury of overspending and feeling good about it.

Another way we engage in creative accounting is known as INTEGRATION. This is when we rationalize that two different expenses are actually one by basically assigning the smaller expense to the same category as the larger one. This way, we can fool ourselves into believing we’re suffering just one big purchase, which is less psychologically draining than one large and one small purchase.

By combining purchases this way we feel we haven’t incurred two losses…

One of the most interesting characteristics of the way we classify our financial decisions relates to the mental account into which we put a purchase, and the feelings we have about it, which often have to do with the amount of time between when we bought it and when we consumed it, rather than the actual value of the item.

…we spend money on a bottle of wine, but depending on the timing of the purchase and the time gap between the purchase and the consumption, we think about the cost very differently.


When we elLmLnate the paLn oI payLnJ, we spend more Ireely and enMoy consumLnJ thLnJs more. When we Lncrease the paLn oI payLnJ, our spendLnJ Joes down as our control Joes up.

INTO M Y WALLET When consumption and payment coincide, enjoyment is largely diminished. When they are separated, we don’t pay as much attention to the payment. We sort of forget about it, and as a conseTuence, we can enjoy our purchases much more.

In short, because of the pain of paying, we’re willing to pay more before, less after and even less during consumption of the very same product. The timing of payment truly matters. It can even get us to read postmodern literature.

(There are countless studies about all the irrational ways we discount future outcomes.) 6When we plan to pay in the future, it hurts less than when we pay the same amount now. And the further into the future we pay for something, the less it hurts now. In some cases, it feels almost free right now.

Credit cards also make us value purchases differently. They seduce us into thinking about the positive aspects of a purchase, in contrast to cash, which makes us also consider the downsides of the purchase and the downside of parting with our cash. With credit card in hand, we think about how good something will taste or how nice it will look on the mantlepiece…

The intensity of the pain of paying does not increase linearly with the amount that we pay. We feel badly when we pay for our meal. We do not feel four times more distraught if we pay for ourselves and three friends.


In other words, the asking price changed how everyone valued the property, but most of them had absolutely no idea it was happening.

Anchoring might not seem too worrisome if we think that numbers don’t pollute our decisions very often. But the second, and more dangerous, part of anchoring is that this initial, irrelevant starting point can become the basis for future decisions from that point forward.

What this reminds us of is that when we don’t know the value of something…

We’re especially susceptible to suggestion, be it from random numbers, intentional manipulation or the foolishness of our own minds.

Self- herding is the same fundamental idea as herding, except that we base our decisions not on those of other people, but on similar decisions we ourselves have made in the past. We assume something has high value because we valued it highly before. We value something at what it “normally” or has “always” cost, because we trust ourselves with our own behaviours…

This finding – that anchoring has a weaker effect when we have some rough idea of value versus when we have no idea – is important to keep in mind. When we start with an established value and price range in our minds, it’s harder for outsiders to use anchors to influence our valuations.

What was so interesting about the results was that the amount the students were willing to pay was correlated to the last two digits of their Social Security number. The higher the number, the more they’d pay. The lower the number, the less.

arbitrary coherence is that, while the amount that participants were willing to pay for any item was largely influenced by the random anchor, once they came up with a price for a product category, that price became the anchor for other items in the same product category.

If our Social Security numbers, 7 and 5, randomly get us to pay $60 for a bottle of wine, we price the second bottle of wine relative to the $60 bottle, but independent of the 7 and 5. We are moving from anchoring to relativity. Of course, the anchor still factors in, because it got us to $60 instead of $40, for example, and if we determine that the second bottle is worth half the first, we’re spending $30 (half of $60) instead of $20 (half of $40).

In many ways, initial anchors are some of the most important price markers in our financial lives. They determine a baseline of reality – what we consider real and reasonable for a long time.


The idea that we value what we have more simply because we own it was first demonstrated by Harvard psychologist Ellen Langer and later expanded by Dick Thaler. The basic conceit of the endowment effect is that the current owner of an item overvalues it, and because of that will want to sell it at a price higher than the future owner will be willing to pay for it.

Typically, in experiments testing the endowment effect, selling prices are found to be about twice as high as buying prices.

The more work we put into something – a house, a car, a Tuilt, an open floor plan, a book about money – the more attached to it we become. The more we feel we own it.

They found that people who held a coffee mug in their hands for more than thirty seconds were willing to pay more to buy that mug than were those who held it for fewer than ten seconds or not at all. 5Think about that: Thirty seconds is all it takes to establish a sense of higher ownership, strong enough to distort our valuation of an item. That’s impressive!

Imagine we bid on a Mickey Mouse watch on eBay. It’s near the end of the auction and we’re the highest bidder. We’re not the owner yet because the auction isn’t over. Nonetheless, we feel like we’ve won and we’re the owner. We start imagining owning and using the product – and are often Tuite upset if someone swoops in at the last second to outbid us. That’s virtual ownership.

The principle of loss aversion, first proposed by Daniel Kahneman and Amos Tversky, 6holds that we value gains and losses differently. We feel the pain of losses more strongly than we do the same magnitude of pleasure. And it’s not just a small difference – it’s about twice as much.

helping families decide whether or not to try heroic measures, medical professionals have found the answer depends on how the decision is framed. People are much more likely to pursue long-shot procedures when they’re proposed focusing on the positive…

The mobile phone approach is known as aggregating losses and SEGREGATING GAINS and it plays on loss aversion, giving us just one painful loss against many pleasurable gains. When a product has many features, it’s in the seller’s interest to highlight each one separately and to ask one price for all of them. To the consumer, this promotional practice makes the whole seem much more appealing than the sum of its parts.

Sunk cost is finding that once we’ve invested in something, we have a hard time giving up on that investment. Thus we are likely to continue investing in the same thing. In other words, we don’t want to lose that investment, so often we throw good money after bad, adding a dash of wishful thinking.

The metaphor for investing in many things in life should be the same: We shouldn’t think about how much we have already invested in a job, a career, a relationship, a home or a stock; we should focus on how likely it is to be valuable in the future. But we’re not that rational, and it’s not that easy.

The point is that in many aspects of life, the existence of a past investment doesn’t mean we should continue on the same path; in fact, in a rational world, the prior investment is irrelevant. (And if the prior investment has failed, that’s a “sunk cost” – we’ve spent it no matter whether it’s failed or succeeded. It’s gone.) What is more relevant is our prediction of value in the future. Sometimes looking just at the future is the right thing to do.

Ownership changes our perspective. We adjust to our level of ownership and it becomes the baseline by which we judge gains and losses.

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There are a ton more notes but I’ll leave it at this right here. Please pick up a copy and enjoy.

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