Personal Finance 

Diminished Sensitivity: Why We Care More About $1 Than $100

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Watch out… psychology and money collide once again on the streets of Bargaineering! This time, the subject is diminished sensitivity and it’s the reason why some people will, in splitting a check, divide down to the dollar but think nothing of dropping a hundred on a new pair of jeans. It explains why people will happily drive across town to save a few pennies off a gallon of fuel, which usually translates to savings of less than fifty cents!

The idea is that our minds focus on the relative differences, rather than absolute differences. Our sensitivity to this diminishes as the numbers get larger. When we buy something for $20, a savings of $1 is 5%. In our minds, saving 5% is significant. From a relative perspective, saving 5% is significant. From an absolute perspective, $1 isn’t much if it takes you clear across town to do it. If it’s a few more clicks on Amazon, then it’s probably worth it. If it takes an hour of research, it’s probably not worth it.

What this means is that we’re spending our time focusing on saving the $1 instead of the 5%. Instead, we should be looking at our bigger purchases and spending our time there. Instead of looking for a few cents off gasoline, we should be looking for a better deal on a television, on a vacation, or something where the amount being spent is much higher.

Is there a way to overcome this? Dan Ariely suggests that you think about the savings and what else you could get with it. I prefer to think of the time you’d spend and whether you’d work for that period of time to get that amount of savings (if it takes you 15 minutes to save $1, would you work for someone else for that rate?). Either way, once you start thinking about it, you’ve already rebooted your natural tendency.

It’s all about time.

{ 12 comments, please add your thoughts now! }

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12 Responses to “Diminished Sensitivity: Why We Care More About $1 Than $100”

  1. Much of the diminished sensitivity is a result that the pain of losing money is hidden in larger purchases, such as buying a car. For example, if you were looking into buying a car and it came with a navigation system would you spend the extra money the navigation if it were compartmentalized? Let’s say the navigation system was an additional $1800 to the price of the car. Would you be willing to spend $1800 on repairing an old car? With the way our minds are wired, we can hide the pain of $1800 in a $25,000 price tag, then if we separated it…ouch! Just my two cents. Good post to get people to think!

  2. Great post! Our psychology is our worst enemy when it comes to money. Rather than wait to buy a house when prices are in the toilet and save $50,000, we focus on saving $1.53 on the next trip to the grocery store and buy the house when it seems everyone else is doing it… at top dollar. Just ask the 25% of all mortgage debtors whose house are underwater on those loans.

  3. Jim M says:

    I have been aware of this for a long time and it is one of the reasons I refuse to purchase a new car.

  4. JP Adams says:

    Thanks Jim. I think another angle that is necessary to consider is the emotional relationship the person has to the object.

    Jeans are a status symbol. They make you cool (hypothetically). Same things with cars and houses, they give you social proof.

    One experiment I like proved that if a stranger asks you for a large favor and then a small one, that your response rate is higher than if they just opened up with the small favor.

    Ramit Sethi writes a lot about this topic:

    What’s one of the best ways to avoid the psychological trap of relative purchasing?

    Make an educated decision and automate it.

  5. I never really had thought of this although it does make sense. Sounds like something I need to be more conciliation about in the future.

  6. The one that gets me every time is watching someone spend hours in the grocery store with all those coupons, trying to save a few pennies, and then promptly put the purchase on a credit card, where they’ll probably pay at least $20 in interest before they’ve paid off this particular purchase!

    • Anonymous says:

      And how do you know they wont pay off their credit cards? I put everything I can on a Credit Card, earn TONS of points, and *knock on wood* havent paid alate fee in 20 years! Last year, I made $786 in cash back!

    • Dj Hams says:

      And how do you know they wont pay the card off? I put everything I can onto my Credit Card, and pay it off at month end. I have NEVER paid a late fee in 20 years. Last year, I earned $786 in Cash Back!

  7. Russell Wydra says:

    Diminished capacity, oh how true it is. My wife and I owned a general store and I would see customers who literally lived across the street from our store, coming out of Wawa with a gallon of milk, because, as one of them said to me later, “your milk is too expensive”. (our milk was 6 cents more). I calmly asked that person how much gas they thought they burned to run the 8 mile round trip to Wawa, to save 6 cents. He got mad and said, “That’s not the point!” I wanted to scream, “That’s exactly the point!” but I just said that we had to pay more for milk than Wawa sells it for. Now to really prove your point of diminished sensitivity this guy was wearing a real leather jacket, had $100+ sneakers on and was driving a classic muscle car. How’s that song go?: “The things you think important I don’t understand” Go figure!

  8. John Allen says:

    This diminished sensitivity applies to an individual year as we get older. It helps explain why time seems to pass that much faster as we age. A year at age 10 is 10% of your life; a year at 50 is 2%.

  9. Lisa says:

    It’s a really important concept to grasp(took me a while) don’t spend dollars to save pennies.

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