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

Posted By Jim On 09/27/2012 @ 7:19 am In Personal Finance | 12 Comments

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 [3] 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 [4].


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[3] Dan Ariely: http://danariely.com/2012/08/31/just-ask-dan/

[4] time: http://www.bargaineering.com/articles/thoughts-time-movie.html

Thank you for reading!