I recently started reading Dollars And Sense: How we misthink money and how to spend smarter, by Dan Ariely. 

What caught my eye about the book was first the author. Dan Ariely is pretty well-known in the behaviourial economics circle and his work on human irrationality and behaviour. Basically, updating—or breaking—the whole economic assumption of man being a “rational agent”.

I’m fascinated by the intersection of money habits (knowledge of which I’d been hungry for recently) and human irrationality. I’d been reading a lot about how money mindsets and blueprints shape how we see, manage and get money. But learning about the cognitive biases we might unknowingly hold when it comes to money was a new lens I had not yet touched upon. 

Reading the first few chapters made me realise we might be more cock-sure than we should be when it comes to our own grasp about how we handle money. There’s a lot more cognitive biases we all have about money than we realise. 

Sharing them here as reference for myself, and for anyone who might find it useful. This is not a book review, just raw notes lifted directly from the book, with some minor edits, interpretations and categorisations of my own.

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Dollars And Sense: How we misthink money and how to spend smarter

by Dan Ariely

By understanding money’s impact on our thinking, we will be able to make better nonfinancial decisions. Why? Because our decisions about money are about more than just money. The same forces that shape our reality in the domain of money also influence how we value the important things in the rest of our lives: how we spend our time, manage our career, embrace other people, develop relationships, make ourselves happy, and, ultimately, how we understand the world around us.

Our implicit money biases

1. Mental accounting

 - having separate mental ‘accounts’ when spending. George (our fictional character to illustrate money biases) is worried about his finances—as evidenced by his decision to save money on coffee in the morning—yet nonchalantly spends $200 at the casino. This contradiction occurs, in partm because he puts that casino spending into a different “mental account” than the coffee. This trick helps him to feel differently about the two types of spending, but they’re all really part of one account: “George’s money.”

2. The price of free

 -  George is excited to get free parking and free drinks. Sure, he’s not paying for them directly, but these “free” things get George to the casino in a good mood and impair his judgement. These “free” items, in fact, extract a high cost. There is a saying that the best things in life are free. Maybe. But free often ends up costing us in unexpected ways.

3. The pain of paying

 - George doesn’t feel like he’s spending money when he uses the colorful casino chips to gamble or tip. He feels like he’s playing a game. Without feeling the loss of money with every chip, without being fully aware that he’s spending it, he becomes less conscious of his choices and less considerate of the implication of his decisions.

4. Relativity

 - A $5 tip feels like relatively small amounts of money, and because he is thinking about them in relative terms, it is easier for him to go ahead and spend. On the other hand, a $4 coffee earlier felt too much.

5. Expectations

 - Surrounded by the sights and sounds of money—cash registers, bright lights, dollar signs—George fancies himself a James Bond, 007, inevitable, suave victor over long casino odds 

6. Self-control

 - George influenced by his stress and surroundings, the friendly staff, and “easy” opportunities, has a hard time resisting the immediate temptations of gambling for the distant benefits of having $200 more when he retires.

Summary

All these mistakes may seem like they’re unique to the casino, but in truth, the whole world is a lot more like a casino than we’d like to admit.

Although we don’t all blow off steam by gambling, we do all face similar decision-making challenges in terms of mental accounting, free, the pain of paying, relativity, self-control, and more. The mistakes George makes in the casino happen in many aspects of our daily lives. These mistakes are fundamentally rooted in our basic misunderstanding of the nature of money.

Although most of us probably believe we have a decent grasp of money as a topic, the surprising truth is, we really don’t understand what it is and what it does for us, and, more surprisingly, what it does to us.