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

This next chapter is fascinating. If we think of money as a product, what are its features? What’s useful about it? It’s general, divisible, fungible, storable, and a common good. But these 5 features that makes money useful as a product, as a medium of exchange of value, are also the bugs when it comes to our problematic relationship with money. 

To explain it in developer terms, money adds a layer of abstraction to our exchanges of value. Layers of abstractions like frameworks, libraries and languages help make development easier, more efficient, faster, etc, just as money does. But layers of abstraction can bring about more limitations, and an overall poorer understanding of the fundamentals. That’s exactly how money is affecting/limiting our understanding of value. To make things worse, add on multiple more layers of abstraction in the form of credits cards, mortgages, loans, stocks, shares, and other financial instruments, and we’re all truly lost…at the hands of commercially-minded entities who designed it to be so. Case in point: You glaze over when an insurance agent explains the finer details of the coverage to you, and you just sign for the insurance plan anyway because you ‘trust’ him/her. That’s how we often get duped, whether by others or my ourselves.

It makes me shudder when I think about how these layers of money abstractions are everywhere and how we are all hopelessly enmeshed in them. Worse: these abstractions are often the ONLY mechanisms that helps entities make money, instead of offering true value. 

More notes below. 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

What is money?

Money represents value. It’s a messenger of worth. Money is extra useful because it is:

 - general: you can exchange with almost everything

 - divisible: applied to any item, large or small

 - fungible: any $10 bill is as good as any other $10 bill

 - storable: it doesn’t age unlike cars

 - a common good: anyone can use it for almost anything

Opportunity costs

Opportunity costs are alternatives. They are the things that we give away, now or later, in order to do something. These are the opportunities that we sacrifice when we make a choice. 

The way we should think about the opportunity cost of money is that when we spend money on one thing, it’s money that we cannot spend on something else, neither right now nor anytime later.

Our biggest money mistake

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.

Example: When buying a car, do you ask yourself what you would give up if you bought a car? What other things could you spend on? What specific products and services would you not be able to get if you went ahead and bought the car?

Most people were seemingly unable or unwilling to think of the money they were about to spend as their potential ability to buy a sequence of experiences and good over time in the future. This is because money is so abstract and general that we have a hard time imagining opportunity costs or taking them into account.

“Opportunity cost neglect”

Our inability to consider opportunity costs, as well as our general resistance to considering them, is not limited to car shopping. We almost always fail to fully appreciate alternatives. And, unfortunately, when we fail to consider these opportunity costs, the odds are that our decisions are not going to be in our best interests. Aka opportunity cost neglect.

The feature itself is also the bug

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. While we should be thinking about spending in terms of opportunity cost—that spending money now on one thing is a trade-off for spending it on something else—thinking this way is too abstract. It’s too hard. So we simply don’t do it.

To make matters worse, modern life has given us endless financial instruments, such as credit cards, mortgages, car payments, and student loans, which further—and often purposefully—obscure our ability to understand the future effects of spending money.